Dear Mr. Berko: I’m 44. My wife and I have no savings and $11,200 in two individual retirement accounts. We want to retire at 62, when we can take Social Security. We have three children (ages 6 to 12), and including my wife’s part-time job as a bank teller, we make $68,000 a year and clear $53,000 after Federal Insurance Contributions Act payments, health insurance and taxes. We have a mortgage, two cars and the usual debts and realize we must get serious about retirement. The company for which I’ve worked for nine years has a new defined-contribution pension plan. I’ve enclosed the investment choices, and we’re ready to participate after making some reductions in our family spending. But I’m scared we won’t have enough to retire. We figure I could deduct $250 from my monthly check, and then, after paying off other debts, I might be able to contribute $350 to $500 a month. We want to retire as comfortably as possible. Please pick the best mutual funds in this list.
— D.S., Bloomsburg, Pa.
Dear D.S.: Well, buy me a zoot suit and call me Scrooge; you and millions of delusional Americans will be in panic mode in a dozen years because you can’t afford to retire. You won’t like what I’m telling you, but at age 44 — assuming your balance sheet is reflective of the average American family’s — you’re 20 years too late to get serious about retirement planning. There is no way you guys could retire comfortably in 18 years. Considering the stinky performance and high annual mutual fund fees, even if you invested $1,000 a month, you’d need more than a miracle to retire at 62. They’re just not selling miracles anymore. Even if you could invest $500 monthly beginning today and it earned 8 percent annually (which is high), it’d be worth only about $216,000 when you’re 62. That sum is a joke because in 18 years, the cost of living will be enormously higher than it is today.
So plan on learning to like canned tuna, ramen noodles and the taste of Alpo, though Eukanuba has better nutrients. You guys will be shopping at The Salvation Army for clothes and hard goods and Dollar Tree for food, toiletries and sundries. Next, be prepared to cancel your cable, participate in church bingo and learn the bus routes in Bloomsburg. Then plan on working into your 70s or as long as your health holds. And be mindful that there are legions of younger workers behind you who are waiting for your job when you retire.
In the past decade, corporate America, to maximize profits, has been squeezing workers from costly defined-benefit programs and pushing them into significantly cheaper and inadequate defined-contribution programs. The DB retirement programs allow workers to define an annual retirement benefit (yearly income). The much cheaper DC programs allow workers to define the amount of contribution to be deducted from their paychecks, which they are supposed to invest knowledgably for retirement. The cheaper DC assumes that American workers are wise enough to make rational investment decisions if given a group of mutual funds for their retirement. What a joke! It’s blatantly obvious that most American workers think a blue chip is a corn tortilla; they lack the knowledge and discipline to make investment decisions. Our public school systems should be required to teach students the basics of investing. It’s so very simple. Now that retirement is becoming a time of hardship for most Americans, Congress may play footsie again with Social Security and, for your benefit, eliminate SS benefits at 62.
Congress is considering a solution to generously increase Social Security payments (for the needy who qualify), to be financed through higher payroll taxes on workers and companies. Creating higher taxes is always Congress’ solution for a financial problem. In the future when you retire, Congress will calculate your SS income and your private retirement income. If the amount falls below the federal benchmark for that year, additional funds will be added to raise your retirement income to benchmark levels. And if your income is above that benchmark, your SS will be cut. DS, don’t worry about saving for retirement; your government will take care of you.
Malcolm Berko addresses questions about stocks.