I strongly believe in empowering individual investors to take control of their own portfolios and financial futures.

Where there is choice, however, there are challenges. Right now, we are seeing a grand experiment play out. The American retirement system has changed from relying on defined-benefit plans (e.g., pension plans) to relying on defined-contribution plans (e.g., 401(k) plans) to supplement Social Security benefits. This puts workers in charge of their own financial destinies both before and during retirement.

Various organizations and entities have determined how Americans are faring under the defined-contribution system. The Federal Reserve raised some eyebrows last month when it said 19% of those aged 55 to 64 had no retirement assets. Conversely, a study published by the Investment Company Institute (ICI) last month suggested the retirement system is working well for most Americans. A T. Rowe Price survey released in July found that most recent retirees and near-retirees have sufficient savings.

A key reason why analyses and surveys vary about how well workers are handling the retirement challenge is the many variables that assumptions are based on. When does a worker retire? How much does his or her consumption drop, and when does it drop? Is home equity tapped? Further complicating matters are scenarios such as working in retirement and moving to a lower-cost (or a higher-cost) area. Then there are the wildcards of health care and longevity.

Several of these factors can be quantified. Life insurance companies, for instance, have long had actuarial tables to base premiums on. Academics have been studying consumption rates throughout retirement. Statistics exist on housing wealth. So, while there are studies reaching different conclusions, a determination as to how well the present system is or is not working can be made at the aggregate level.

Aggregate measures, of course, are meaningless for the individual trying to figure out his or her way through the retirement planning maze. Among the decisions a worker in a defined-contribution plan has to make are how much to save, what funds to invest in, whether to also contribute to an IRA and when he or she would like to consider retiring. Near-retirees have to determine more specifically when they want to retire, when they and their spouse will begin claiming Social Security benefits and how they should be allocating as they head into retirement. New and recent retirees need to determine how much they can safely withdraw, whether or not they should use annuities, and whether their allocation mix of equity and fixed-income investments should change.

None of these factors even include lifestyle choices such as where to live and whether to continue working in some fashion. They also don’t include other financial decisions such as supporting a child or buying long-term care insurance.

The small margin of error makes matters even more complex. Failing to set aside enough in one’s 20s and 30s means cutting back on spending in one’s 50s and 60s and/or delaying retirement. Bad allocation decisions or fund choices can lead to a significant amount of forfeited lifetime wealth. Claiming Social Security benefits too early causes smaller monthly benefits to be paid throughout a person’s entire retirement. Being too aggressive with retirement savings withdrawals can lead to poverty late in life, while being too conservative can lead to lifetime dreams being unfulfilled.

None of this is to say that proper retirement planning is an impossible goal. There are three articles in this month’s issue with guidance on the subject. Plus, I’ve talked with many AAII members who are handling retirement quite well. But getting through the challenge does require thought and an awareness of to how to properly manage all aspects of your finances.

As a member of Generation X, I’m hoping the baby boomers handle the retirement challenge well. But I also realize that any large change brings unintended consequences. So, it will be interesting to see how the current grand experiment ultimately unfolds.

Wishing you prosperity (both before and during retirement),

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII