“We cannot solve our problems with the same level of thinking that created them.” – Albert Einstein
It’s possible this quote is trotted out too often, but I love this timeless piece of wisdom for two reasons. First, it reminds everyone that how we approach a problem has a major impact on how it is solved. Or not solved, in many cases. Often the solution is hidden from view because of how we have chosen to see the problem. The second reason to love this quote is a bit more snarky. It is the perfect response to virtually any proposed government program. Now the point of this post is not to make a political statement, but to respond to news that the House and Senate are working on bills to “improve the issues with today’s retirement policy.”
The US Senate recently introduced the Retirement Enhancement and Savings (RESA) Act and the House is working on the Setting Every Community up for Retirement Enhancement (SECURE) Act. There are at least two published objectives to these plans, though there may be more hidden beneath the surface.
The first problem these acts purport to solve relates to access to qualified retirement plans. Roughly 66% of Americans currently have the option to contribute to a qualified (401k, 403b, etc.) plan, and legislators feel that is not enough. If only the rest of these employees had the chance to contribute to a retirement plan, they would definitely be saving. So goes the thought process of a governmental bureaucrat. As someone who oversees a qualified plan for a small business, I can assure you this is not the case. Some people have priorities that do not include locking money in a qualified plan. Whether the priority is to save money elsewhere or spend $1.01 for every dollar earned, forcing more businesses to offer qualified plans will not change the behavior.
“Guaranteed” income is the second goal of the new plans making their way through Congress and the short version is that they are trying to make it easier to incorporate annuities in qualified plans. Certain annuities can provide income for life and having this as an option may help participants feel better about their cash flow.
There is much excitement in the press about how these changes to the broken retirement system are bi-partisan, but there is no mention of why the system is broken in the first place. Why is it so expensive for employers to offer these plans in the first place? What is the real benefit to participants who choose to put money into the plans? How have these plans done for current retirees and what issues need to be addressed based on that data? Sadly, these questions are likely not going to be answered by the folks in DC. Just too busy.
What if I told you there was a way to solve both of these issues without making any adjustments to the current 401(k) structure? In fact, the solution has been around for hundreds of years. Start by saving at least 10% of every dollar you bring in. You can do this by opening up a savings account, so no need to involve the 401(k). If you have any “bad” debt (credit cards, student loans, car/boat loans, etc.), negotiate with your creditors so the total spend each month is no more than 20%. If your only debt is a mortgage, increase your savings to 30%. If you are currently spending more than 70% of your income on your lifestyle, examine where the money is going and consider how your future self would feel. Once you have decided where your values and your spending align, adjust your spending to meet the 70% threshold.
If you are leery of keeping your money in a savings account, you have options. The gold standard for this process is a properly designed Participating Whole Life Insurance Policy (PWLIP) that emphasizes growth in cash value. The growth is guaranteed, your capital is accessible to you at any time tax free, there are no IRS-imposed limits on amount of contribution, and the tax free death benefit can be used however your family or charitable organization wishes.