“Should we think about pension arrangements as a Lottery?” Define “epic”.

PensionsOldie asks a great, thought provoking question.

Back in the States, nearly three decades ago, this then-rookie retirement guy noticed a significant change in attitude and behavior once accumulated savings in a 401(k) (today’s “long term” retirement savings accounts in the States) reached a “critical mass”. “Critical mass” varied among workers, but it was typically equal to or greater than one year’s gross annual salary.

In the states, most Americans in there 20’s, 30’s and 40’s, the vast majority have incomes below the top quartile, and probably 8 or 9 out of 10 have wage incomes below the median (when you include the $0’s). In other words, most have incomes below $60,000 US. So, retirement looks improbable if not impossible.

And, the TV/streaming ads of very young looking 60 year olds out having a good time actually come across as negatives to most younger Americans when they flip to the next screen showing their own personal negative net worth and another screen showing $38 Trillion (US) in national debt.

Getting people started on saving requires more education than an employer (or a federal or state government) can afford. So, we deploy behavioral economics schemes and default individuals into saving. Sounds good. But to ensure they don’t opt out, you need a second feature – liquidity – because these are often the worker’s first and many times only savings. So, you need to provide the “right” kind of liquidity – liquidity that isn’t leakage, and liquidity that can be accessed at any time along the way to and throughout retirement.

Education/instruction on how much is needed to accumulate for an “epic” retirement is a waste of effort on most Americans in their 20’s, 30’s, 40’s and even some 50 year olds. Anything more than 15 years out is remote – even if you know the time for action to prepare is now, today.

However, at “critical mass”, wealth accumulation and the possibility of retirement (epic or otherwise) becomes a possibility. Once people have 1 x annual wages in the pot (though inadequate preparation), and once they can access it (liquidity without leakage along the way to and throughout retirement) without exhausting their accumulated wealth or derailing their retirement preparation, behaviors change … they don’t cash out when changing employers, and when selecting a new employer, they look forward to the new firm’s 401k plan, etc.

In the states, the financial services industry selling life insurance figured this out a long time ago when they allowed owners of permanent or universal life insurance to borrow money. And, at least here in the States, those creating retirement income products are not targeting all or most or even a majority of Americans approaching retirement ages. They are targeting the mass affluent – those with accumulated savings > $400,000 US. Those of us who are not selling guaranteed, lifetime income products, are designing alternatives (including defaults with opt outs) that would make sense to most Americans where their social insurance incomes are insufficient to maintain their regular, everyday expenses (food, housing, transportation, insurance, utilities, etc.)

Bottom line, it makes no difference what lifetime income products you provide if the individual arrives at retirement age with insufficient accumulated savings. The value of the products, however designed, won’t be realized unless the individual has sufficient savings.

Finally, when it comes to wage-earning workers under age 50, my 45+ years of experience confirms that instruction/education on options for converting a “pot” of savings to a “pension” income are always a waste of time, effort and resources … if only because we will have lots of new products by the time they reach “full” retirement age – at least age 67 in the states for anyone born after 1959.