together by the World Economic Forum and
they found some good news and some bad
news the good news is life expectancies
are increasing and we’re all living a
little bit longer
it’s what’s bad news life expectancies
are increasing and we’re all living a
little bit longer so why is that bad
news it has to do with what we call the
retirement gap and the retirement gap is
the difference between how much we need
for retirement and how much we have
available for retirement and in 2015 the
World Economic Forum estimated that the
retirement gap in the US was about
twenty eight trillion dollars based on
the population at that time that works
out to a little under $90,000 for every
man woman and child in the United States
now not only is that number large but
its global and it’s growing so that by
2050 the World Economic Forum estimates
that the global retirement gap will hit
400 trillion dollars the US alone will
account for 137 trillion dollars of that
amount based on population forecasts for
2050 that works out to a little over
three hundred thousand dollars per
person in the United States so why do we
have a retirement gap the answer is
twofold one we’re not saving enough into
our retirement safety net Social
Security is facing challenges so if we
look at the personal savings rate in the
fourth quarter of 2017
it was a mere 2.4 percent that’s a third
lowest on record since the 1950s
according to the Federal Reserve and
because of that we have people getting
close to retirement without enough money
saved in their retirement accounts so in
2013 the average family with the head of
household in the 55 to 64 age group
bracket had just over $100,000 saved for
retirement that’s not nearly enough to
last through a potentially 25 plus year
retirement
unfortunately this chart actually
overstates how well-prepared we are
because this is looking at families with
retirement accounts and about 40% of the
population in the u.s. does not have
retirement accounts when we factor that
in the average family with the head of
household in that 55 to 64 age group
bracket those closest to retirement they
have less than one year’s income
available for retirement not only that
but our retirement safety net Social
Security is facing challenges
specifically the retirement trust fund
is expected to be depleted by 2035 at
that point Social Security is going to
be bringing in enough income to pay
about 77 percent of the promised
benefits so what can we do about this
one thing is to start saving earlier if
we take two hypothetical individuals
let’s call Tom and Jerry Tom gonna start
saving at age 23 he wants to retire at
62 so he’s got 39 years to go and tell
retirement he’s gonna save two hundred
dollars per month he anticipates he’ll
earn about an 8% rate of return Jerry on
the other hand he’s got some other
things going on he’s got some debts to
pay down first he’s probably not gonna
get started until he’s closer to 35 at
that point he’ll have 27 years until
retirement he’s not too worried he says
hey Tom’s only got 50 percent more time
than I do so if I save 50% more I’ll
catch up right wrong
Jerry needs to save five hundred and
sixty three dollars a month almost three
times as much to catch up with Tom at
retirement at age 62
so if starting to save early is so
powerful why don’t more of us do it the
answer is because it’s difficult to save
when our incomes are low and expenses
are high in young people today typically
do not have high incomes they also face
higher expenses a lot of college
graduates graduate significant amount of
student loans younger people tend to be
earning families buying houses all those
expenses start to add up also saving
early can look like a fool’s game early
on and what I mean by that is
compounding interest has kind of a
snowball effect it starts out very slow
and really builds power over time so if
we look at Tom over his first ten years
he’s saving $200 a month after that ten
years he’ll have contributed twenty four
thousand dollars to his retirement fund
and he’s going to earn about twelve
thousand six hundred dollars in
investment income over that time compare
that to his last four months in his last
four months have put away another $800
but earn about fifteen thousand dollars
in retirement income so if you look up
this chart back here you can see that
first ten years the yellow bar is how
much tom is contributing the blue bar is
how much he has after that ten years the
entir yellow bar is still contribution
blue bar is how much we have and that
red bar is all the investment income so
early on it can get very frustrating to
save for retirement cuz it doesn’t look
like anything’s happening if you stick
to it makes a difference over time
another challenge we face is that
markets are smarter than we are
if you look at professional mutual fund
managers these people are intelligent
they’re well-educated they have lots of
resources at their disposal and their
job is to find attractive investment
opportunities if anybody can outperform
the market it should be these guides so
how well do they do the answer is not
very well
professional mutual fund managers over
three to five year windows tend to
underperform the market about 80 percent
of the time so if these professional
mutual fund managers can’t outperform
the market what does that mean for the
rest of us
the answer is it’s even worse if you
compare the performance of individuals
investing in mutual funds to the mutual
funds they’re investing in
expect those numbers to be pretty close
they’re not mutual funds earned a
staggering 3.5 percent a year higher
returns than the individuals investing
in those funds how does that happen why
does that make sense
the answer has to do with market timing
investors tend to want to buy stocks and
they’re confident in those companies
they’re confident in the economy and
unfortunately at that time stock prices
tend to be high on stock prices go up
stock prices go down if you’ve been
watching the financial markets over the
last couple weeks you’ve definitely seen
that sometimes when they go down people
tend to invest more by the dip and that
can be a good strategy however sometimes
markets go down and then they go down
and then they go down and finally at
some point people hit their maximum
amount of emotional and financial pain
they say I don’t trust the markets
anymore get me out I can’t handle this
and they sell their stocks
unfortunately that usually is about the
time that markets are bottoming out now
a lot of times people will come back to
the stock market but they don’t do that
until they’re comfortable again and
they’re not comfortable until stock
prices have risen 30 40 50 percent or
more so instead of buying low and
selling high what we tend to do is just
the opposite buy high and sell low now
I’ve just talked about mutual funds and
mutual funds really are a great
investment tool they provide efficient
diversification they save you from
spending your weekends reading annual
reports and analyzing financial
statements and all that other fun stuff
unfortunately mutual funds are not free
and the expenses associated with mutual
funds our primary reason why
professional mutual fund managers
underperform the market the two major
expenses faced by investors in mutual
funds are an expense ratio and a low
charge an expense ratio is a small
percentage of assets taken out on an
annual basis designed to cover the funds
expenses and allow the fun to earn a
profit these expenses can range from as
low as about 0.15 percent a year
to over one percent a year typically at
the low end we’re looking at passively
managed index funds at the high end
we’re looking at smaller actively
managed funds the other primary expense
with mutual funds is called a low charge
that’s a sales commission charged
upfront every time you put new money
into the mutual fund those can range
from as low as 0% what we call a no load
fund all the way up to a little over 8%
now these expenses are not that dramatic
on a year-to-year basis however over a
thirty to forty year window of saving
for retirement they can end up costing
investors anywhere from $40,000 to over
three hundred and fifty thousand dollars
of their retirement assets how do you
stay at that smaller end focus on those
passively managed index funds remember
the professional mutual fund managers
typically don’t out form the market so
there’s no reason to pay for performance
that you’re not going to get now another
leakage to our investment returns is
taxes every dollar that we pay in taxes
is the dollar less that we have in our
pocket at retirement fortunately there
are several tax advantage savings plans
out there designed for retirement one of
the most popular is a 401k plan 401k
plans are offered through your employer
and they usually provide some sort of
match maybe fifty percent are a hundred
percent the most common match right now
is a one to one basis for every dollar
you contribute your employer is gonna
match that with one percent I mean
another dollar
now on these 401k plans usually there’s
limits to how much of that match you can
get maybe it’s five percent six percent
of your income not every employer offers
a 401k plan however individuals can also
take advantage of tax sheltered accounts
called individual retirement accounts
they provide a lot of the same tax
benefits but you don’t get that employer
match now there are two basic structures
for individual retirement account some
401k plans
the first is what we call a traditional
IRA our traditional 401k plan they have
a front loaded tax benefit which means
you get a tax break when you make a
contribution and your money is going to
compound tax-free while it’s in that
fund so you’re not paying taxes on
interest income dividend income capital
gains and that’s gonna allow your money
to grow faster unfortunately once you
retire and start taking money out of a
traditional IRA our traditional 401k the
IRS is going to consider that at income
and they’re gonna tax that the
alternative is a Roth IRA Roth IRAs and
Roth 401k plans have a back loaded tax
benefit so you no longer get a tax break
on your initial contribution however the
money is still going to compound
tax-free so you’re not losing money to
taxes while it’s in that fund and then
when you go to take money out in
retirement every dollar you take out is
yours to keep the IRS does not tax
withdraws from a Roth IRA Roth 401k plan
now there are limits to how much you can
contribute to these tax sheltered plans
that’s $5,500 for an IRA 18,500 for a
401k plan per year how powerful are
these tax sheltered plans
the answer is amazingly powerful your
benefit is going to vary based on how
much you save how long you’re saving
what rate of return you earn what tax
bracket you’re in there’s lots of moving
parts however in one hypothetical
example of an individual with a 25 year
retirement window they were able to
generate an extra twelve hundred to over
twenty-five hundred dollars a month in
retirement income the biggest benefit
coming from the 401k plan due to that
employer contribution now while these
plans are very powerful unfortunately
not everybody has the opportunity to
participate according to the Bureau of
Labor Statistics only about sixty
percent of people are covered by 401k
plans by their employer and only about
forty percent of people participate in
now I’ve been talking about individual
strategies there are also a couple of
systemic fixes we can make to try to
reduce that retirement gap one of those
is education the key measure of how well
people make financial decisions is
something called financial literacy and
there is a relatively short six question
multiple choice true/false quiz that has
been given across the United States for
a number of years to try to measure
financial literacy and the results are
not encouraging the national average is
a little over three out of those six
questions three point one three on
average correct now I’m giving this talk
in the state of Kansas Kansans you can
take a little bit of pride in your
performance you outperform the national
average we still only get three point
three three out of those six questions
right so if we can do a better job of
creating financial education that can
help people make better decisions and
reduce that retirement gap another thing
that we can do to improve the situation
are called behavioral nudges there’s a
field of finance that looks at how
people make psychological mistakes over
and over again and because we are aware
of these psychological mistakes we can
design the system to reduce those and
those are called nudges one of the
problems with 401k plans is most of the
time they’re set up as an opt-in plan
which means when you get hired in
addition to meeting all your co-workers
meeting your boss learning about all the
benefits package oh by the way take some
time and fill out this 401k plan okay
there’s so much going on a lot of people
are like I’ll get to that in a couple
months couple months becomes a couple
years and before long they’ve forgotten
about the 401k plan so a 2001 study said
what if we flip that around instead of
having people opt in let’s have them opt
out we’re gonna automatically enroll
people when they get hired I’m not gonna
force anybody to participate if they
want to get out they can do that so you
can opt out we’re just going to set the
default setting to have you
automatically and
all that make a difference the answer is
yes it increased participation rates
from a little over thirty five percent
to about eighty five percent more than
doubling the number of people
participating in 401k plans
another problem with 401k plans is
people don’t save enough saving rates
are low reason a lot of people start
401k plans when they’re younger we
talked about the problems of saving
while you’re younger and they say you
know what I’ll just put a little bit in
now and then I’ll increase that over
time unfortunately that doesn’t happen
usually we leave it where it is over a
long period of time so a 2004 study said
what if we get people to sign an
agreement that we’re gonna automatically
raise they’re saving rate over a fixed
number of years will that make a
difference the answer again is yes
dramatically it increased savings rates
from about three and a half percent to
almost fourteen percent over a matter of
a few years
so these nudges can not only double
participation rates they can triple part
our savings rates if we can institute
these individual strategies and these
systemic fixes we can have people making
better financial decisions reduce the
retirement gap and how more people end
up with a happy retirement thank you [Applause]