The Real Doomsday: Less Bang, More Whimper

Allow me to introduce Life Capital Decisions. These are the decisions we can make that change our lives and improve our standard of living. While some of these decisions can, and should, be done while we are as young as possible, others bring the greatest benefits as we approach retirement.

How big can those benefits be? Huge. The benefits are so large that I would like to propose a new measure for them, the Lifetime Savings Equivalent. We are talking about decisions that can be worth as much, or more, to our standard of living as every dime we put away in 401(k) plans and IRAs. We don’t need a President or Congress to make these decisions. We don’t need our employer to make these decisions. These are decisions we can make on our own, whenever we want, without any outside help from the sources that have been so disappointing over the last 10 years.

Skeptical?

I don’t blame you. But I’ve been studying and writing about this for a long time. I now believe that most of us can do as much, or more, for our futures through personal choices that don’t involve saving and seeking good returns as we can through all the hopes we have for our savings.

One reason I can say this with confidence is that the Lifetime Savings Equivalent isn’t a lot of money. According to the latest Retirement Confidence Survey done by EBRI, the Employee Benefit Research Institute, only 22 percent of all workers 55 or older had total savings and investments of $250,000 or more. Another 18 percent had total savings between $100,000 and $249,000. At the other end of the scale, 40 percent had total savings under $25,000. So any life decision with a value between $25,000 and $250,000 should get the attention of the millions of people who still work for a living.

Here are a few examples of some big Life Capital Decisions:

I know I harp on this, but the financial services industry is still spending millions to convince us that high expenses win higher returns and benefit us. That wasn’t true when returns on savings were high. It certainly isn’t true now. High expenses buy brokers lunch and make their Mercedes payments. According to recent Morningstar data, the average balanced fund has a trailing yield of 1.73 percent and a net expense ratio of 1.35 percent. In other words, the managers get 78 percent of the income; we savers get 100 percent of the risk. Like the country and western song, they get the mine, we get the shaft.

Today it is easy to manage our savings for less than 0.20 percent a year. We don’t need to do market timing; we don’t need to have the vaguest idea of what we are doing. We only need some degree of diversification. Simply going from an expensive investment plan to an inexpensive one can increase our lifetime nest egg by about 40 percent— an amount equal to about 15 years of accumulated contributions.

Inexpensive investing, in other words, can make up for years of missed savings, major market losses and other disasters.

Spend Carefully.

Whether it is the miles per gallon of the car we drive or attention to medication costs, careful spending brings good results. Without even considering taxes, every $100 a month not spent eliminates the need for $30,000 of retirement assets, which is more than 40 percent of all workers have in savings.

Make Good Social Security Benefits Decisions.

A page on the Social Security website shows that a person with a monthly benefit of $750 at 62 would have a benefit of $1,000 at 66 and $1,320 at 70. That’s an increase of $570 a month or $6,840 a year. To get the same lifetime income from savings would require as much as $171,000. So most workers will benefit more from deferring retirement for 8 years than they would benefit from a lifetime of saving.

Make Powerful Shelter Decisions.

In my new book with economist Laurence J. Kotlikoff (“The Clash of Generations,” MIT Press) we show that a retiring middle income couple can have lifetime discretionary spending— spending after income taxes, Medicare premiums and shelter— of about $15,000 a year if they stay in their home. They can increase it to $28,600 by selling their home and becoming renters. And they can boost it to $38,800 by becoming fulltime RVers. Just the difference from owning to renting, $13,600 a year is the same as adding about $340,000 to their savings.

If they really wanted to “go the distance,” becoming RVer’s could be like adding $590,000 to their savings.

Unlike all the things that are so frustrating to so many of us today, these choices are ours and ours alone.