Personal Savings Plans: A possible solution Back to Letters

For many months, various contingents have railed for and against Personal Savings Plans as possible replacements for Social Security, IRAs, 401(k)'s and the like.

Democrats, Republicans, the AARP and their ilk have made statements to assure everyone that PSPs are either very desirable or the worst possible thing that could happen to anyone.

Some of the arguments, such as those appearing in Fortune Magazine, March 21, 2005, report that, when faced by a large number of alternatives, the "average wage-earner" freezes up and is incapable of making any kind of reasonable decision or assessment of where they should put their money, even if forced to save it.

I've worked out a brief plan, spelled out below in table form, to break the ice on this problem. While many investors do have the skills and capability of determining for themselves where their money could or should be invested, it is obviously true that many Americans have not had any such experience in investing, and, in their naivete, might make very poor decisions regarding asset allocation. For the most part, if they're just beginning to invest, starting from "zero-level," it makes perfect sense that their initial investments be extremely conservative and limited in scope. Most financial investment counselors should agree.

Therefore, I propose that, in their deliberations and law-making, Congress consider the following table to specify the maximum and minimum number of investment vehicles [stocks, bonds, mutual funds, money-market accounts, etc.] that participants in PSPs be allowed to invest:

Personal Savings Plans
Single Investments
Max % $
Up To:
Per Investment
$1,000.00 1 1 (100)
$2,000.00 1 1 (100)
$5,000.00 1 3 50
$10,000.00 2 5 50
$20,000.00 4 8 40
$50,000.00 5 13 40
$100,000.00 10 21 20
$200,000.00 15 34 20
$500,000.00 25 55 10
$1,000,000.00 40 89 10
$2,000,000.00 75 144 5
$5,000,000.00 100 233 5
$10,000,000.00 150 377 5

Here's the rationale/logic/"rules":

Why is this important?

Here are some excerpts from a John Mauldin letter, ( starting with the quote:
"Merrill Lynch released a new survey a few weeks ago called the New Retirement Survey, wherein they polled 3,448 baby boomers, both from the general population and the more affluent segment about their views on retirement."

42% of baby boomers do not know how much money they will need to be able to live comfortably in retirement. 60% had less then $100,000 of total savings other than their home, and 46% had less than 50,000. Of course 7% were not sure how much they had saved and 12% decline to answer, so it would be a reasonable assumption to think that 70% had less than $100,000.

26% felt they would need between $25,000 and $50,000 annual income to be comfortable in retirement, and another 27% would need as much as 75,000. (23% were not sure what they would need -- so much for financial planning.)

Let's look at that last group.

To generate $75,000 of income, with a reasonable degree of safety and adding enough to principal to be able to take care of the effects of inflation, you need a portfolio worth about $1.5 million, give or take $100,000.

Even subtracting for Social Security and other pensions, there are going to be a lot of baby boomers who are going to be disappointed about their retirement if they have to live off their savings. To our credit, we seem to recognize that. Thus, less than 20% of us expect to be able to enter retirement without working for pay again.

Don't like those numbers?

Here's a quote from Fortune Magazine, July 12, 2004:

A 45-year-old making $100,000 today plans to retire at age 65.
Depending on his lifestyle in retirement, here's how much he'll need:

% of pre-retirement income
desired in retirement
Nest egg necessary
at retirement
$1.96 million
$2.61 million
$3.27 million
[Assumptions: Life expectancy is 90 years; no pension or Social Security;
annual salary increases and inflation average 3%; post-retirement return on savings is 6%]

Try the retirement income calculator at T. Rowe Price's site.

Now that you've digested this idea, consider what would happen if the exact same kind of plans were created for the following:

First rev: 03.18.2005