How to Avoid Retirement Shortfalls

How to Avoid Retirement Shortfalls Morningstar Christine Benz: Hi I’m Christine Benz for Morningstar. Here at the Investment News Retirement Income Summit and I’m joined by David John. David is a Senior Research fellow for the heritage foundation. David thanks for being here? David John: Thanks for having me. Christine: So David we’ve seen a lot of research indicating that today’s pre-retirees have not saved what they need to have saved for retirement and I know that you’re part of several working groups looking at solutions and ideas for helping pre-retirees cover their short falls. Can you talk about some practical solutions that you and your various research groups have come up with? David: Well the most important thing that we’re learning is that people need to actually participate and they need to participate from a young age and continues to save throughout their career. Now the fact of the matter is that especially for a low income workers, younger workers, minority workers and women that if you just leave that and say well I know you can set up your own plan at some point or another. Most people don’t. The number of people who just do their savings on their own is under 10% so what we actually need is a national plan that includes great coverage because right now only about half of workers have a retirement plan at their work and we need to put in automatic features so that you’re participating in your retirement plan. Unless you say no you are investing a certain amount unless you say you want more or less and you’re invested in a particular default investment option unless you decide you want to do something else and we’ve seen numbers already for instance every ransom numbers with this automatic thing and for a lower income worker who is currently 25 to 29 the difference is on the voluntary plan we do it all yourself retire with something like .808 times and that was 8% of their last year’s salary because that’s basically. Christine: Nowhere near. David: Nowhere near. While with retirement that has these automatic features it will be up to 5 times your annual salary which gives them a much better chance for upper income workers that moves from something like 2-1/2 times their final salary to 10 times your final salary so we need to encourage automatic investment and automatic escalation where you save more each time and make that so that this is just an accepted practice. Christine: So I know you too have been a pioneer in this concept of automatic IRAs and it sounds like that idea is still alive can you talk about what it is and why you’re so compelled by it? David: Yes the automatic IRA is something that Mark Avery was known the treasury department and I developed and what it is, is a small business retirement savings plan because as I said about half of workers don’t have the way to save their work. So this is a very simple easy plan. You don’t have to be an MBA for it to work right for you if you’re a worker, you don’t have to be in an insurance company or something like that as an employer for it to work out and it would fit, it would change t he participation rate for in retirement savings from roughly 50%of all worker’s saving to retirement to 9 out of 10 saving for retirement. And we think that this has a major chance to increase the way that retirement saving is handled in the United States. It was endorsed by President Obama. It was endorsed by senator McCain in 2008. Christine: So this is also a portable vehicle too? David: Absolutely. Christine: So if the worker left the employer could take it with them to the new employer. David: Absolutely and that’s a key feature because what realistically what we need to have is a seamless retirement plan where you’re savings follow you from work to work so this is an IRA but if you go to work for a company that has a 401k you can just roll it right in or you can roll it out of the 401k back into an IRA depending on who is employing you. Christine: Okay thanks David compelling idea. Thanks for sharing it with us. David: For having me. Christine: Thanks for watching I’m Christine Benz for Morningstar.