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Staking it all in on the retirement gamble

Ripped off and left to fend for themselves, millions of Americans with no pension provision desperately need tontines.

“My retirement plan is ‘fingers crossed and pray’”, says Robert, a 31-year-old professional who, despite taking home a good salary,  is under no illusion how uncertain his long-term financial future is.

The severity of the unfolding pension crisis is starting to become all too painfully evident for millions of Americans. That’s the message set out in the bleak but compelling PBS documentary “The Retirement Gamble”.

The statistics, it reports, are grim: half of all Americans say they cannot afford to save for retirement, while a third have no retirement savings at all. Demographics give no cause for comfort either. In the next two decades, 10,000 Americans a day will turn 65. This is driving the pensions gap $3 trillion wider every year as it accelerates to a projected $137 trillion by 2050.

A grim fatalism

Canvassing the views of a small cross-section of Americans, the film reveals a general resignation to the fact that the risk of a descent into poverty in their later years is all too real. One doesn't even want to think about it. Crystal, a 32-year-old teacher with $115,000 savings, is trusting to luck that she doesn’t have to continue working and that whatever capital she is able to put by will see her through: “As long as I don’t have too many bills or debts, then I could essentially live off whatever I get. Otherwise I don’t have a plan B”. For 54-year-old unemployed man Mark, however, it’s something he can barely get out of his mind. “It’s hard to imagine even at this time of my life being retired”, he laments as he and his wife steel themselves for a working life that they believe is destined to extend until their mid-seventies.

Even those with a substantial nest egg behind them still cannot afford to relax. Bob, a 67-year-old semi-retiree with $500,000 savings, observes that the paltry income he receives on even that relatively high level of pension investments aren’t sufficient to maintain his style of living as everyday expenses continue to rise.

Americans have been left in something of a toxic limbo since the demise of the defined benefit pension. What we have now, according to one economist, is not a retirement “system” but more a retirement “mess”. So how did we get here?

Decline of the American pension

Back in 1970, 42 per cent of Americans could relax in the knowledge that their guaranteed company pension would give them a comfortable standard of living right up until they died. They could update to the latest model of automobile, take their annual vacation, retain the country club membership, and more. But then things started to change. As the decade progressed, companies gradually began to withdraw these gold-plated schemes as costs were ramped up by people living longer, new accounting rules, global competition and market volatility.  

In 1978, the launch of the semi-occupational pension known as the 401(k) sought a solution by shifting the bulk of responsibility from the employer to the individual. But this came with risks. Participants were expected to figure out how much they needed to save, how to invest it and then how to withdraw so they didn’t outlive their assets. For the many for whom this was their first engagement with any sort of financial product, it was bamboozling. As economist Teresa Ghilarducci notes: “The 401(k) is the one of the only products that Americans buy that they don’t know the price of it. They don’t even know its quality, nor do they know its danger.” 

Mutual fund bonanza

The good news for 401(k) savers in the early days was that they didn’t have to worry thanks to the rampaging performance of the stock market. Their pension pot returns swelled on the back of Reaganomics and market deregulation and then went exponential as the internet/new technology boom took off in the late nineties. And going along gleefully for the ride was the mutual fund industry, which launched a vast array of expensive and often difficult-to-understand products to cater for an exploding pensions market.

Then reality hit. The dotcom bubble burst in 2000 and then eight years later the US housing crisis and subsequent credit crunch plunged the global economy into its worst slump since the Great Depression. This meant that not only had the value of savers’ equity holdings been decimated but the homes that many lived in had also sunk into negative equity. It was a vicious double whammy that put retirement out of reach of great swathes of the US population.

Since then, a long-running equity bull market should have got savers’ 401(k)s back on track, but many have been left disappointed. The mutual funds that comprise the typical 401(k) have generally charged such high fees that much of that value has been eroded. 

The tyranny of compounding cost

The late John C Bogle, the head of low-cost index fund management group Vanguard, then stepped in to offer a chilling illustration of how, over fifty years, 2 per cent charges can eat into a typical portfolio averaging 7 per cent annual growth: “You put up 100 per cent of the capital, take 100 per cent of the risk and get 30 per cent of the return.” And with advisers richly incentivised by the mutual fund companies to keep pushing these rip-off products, savers are being exploited on a biblical scale.  

All this encapsulates what is wrong with today’s pensions. Expensive, overly complicated, and with all the benefits weighted in the favour of the issuer.

Tontine Trust brings the solution

At Tontine Trust, we are only too aware that the structural problems facing the retiring baby-boomer generation are only going to get worse as populations age and investment returns reflect declining long-term rates of economic growth. Our MyTontine pensions sidestep these challenges with a cheap (initial and ongoing fees capped at 1 per cent), easy-to-understand digital-only product that will bring full lifetime benefits without ever becoming unfunded. No broker fees, no exposure to overtly risky investments, no reams of paperwork, just a simple, trustworthy product that does exactly what it promises at an affordable cost. Finally, a pension that’s on your side.   

One scary note on which to conclude is that “The retirement gamble” documentary is now eight years old. Many viewers on YouTube have commented that it really ought to be updated. We agree, but possibly not without an ‘R’ certificate.


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