Building Wealth for Retirement: Social Security, IRA’s and a TSP

We have been bombarded for several years by conservatives who believe the only way to “save our country” is to cut back on entitlements.  Many have Social Security in their crosshairs and have suggested various privatization plans.  Meanwhile Senator Elizabeth Warren is saying that there should be no unnecessary cuts or risky privatization schemes (July 2012), that modest changes will save Social Security, not privatization (Apr 2012), and that she opposes investing part of the payroll tax (in the private sector). (Oct 2012).  Senator Warren is not alone in her position.  I mention her specifically because she has been the subject of some op-ed columns on the Social Security question. 

.

I agree in principle with Senator Warren on each of her three points. Certainly we should not be reducing Social Security payments for those who have little or no other income, but Social Security alone is not enough for a dignified retirement.  Until recently most of us thought of retirement income as a combination of Social Security and a defined pension from our employer and, since the late 1970s or early 1980s some income from IRAs and the like.  Now those private pensions are disappearing.  Supposedly they are being replaced by 401(k)s and by Keough Plans and Salary Reduction Simplified Employee Pension Plans (SAR SEPs).  I don’t know anything about SAR SEPs, but everything I’ve heard and read tells me that a 401(k) is not a viable substitute for a defined pension plan.

.

The problem is that very few people understand the importance of making and then managing their private investments.  From what I read, most working people “dump” some money into the 401(k) offered by their employer and then leave it there.  The stocks or funds chosen by the employer are more likely to be for the benefit of the employer than the employee.  When they retire, they find they don’t have much.  That same money invested in index funds over the course of a working career could produce a substantial nest egg and some real income to top off their Social Security checks.

.

Toward the end of my career as a federal employee I had access to the Thrift Savings Program (TSP) which was set up when the federal government changed its whole retirement system.  The TSP offered a limited range of index funds, at first just stocks, bonds or government bonds.  I went all in for the stock fund, got burned in 1987 but had recovered nicely by the time I retired in 1993.  My account continued to grow until I got to be 65 when I had to choose between taking a defined monthly income for life or rolling the whole principal over into an IRA.  I chose the latter and it’s still growing.  (Because I had the option of staying in the old federal retirement system and exercised it, the government did not match my contributions to the TSP, but what I put in from my own income grew to a substantial amount).

.

On her website Senator Warren says she would be opposed to taking funds from Social Security to invest in a government guided fund like the TSP, and I agree.  However, I do think something like the TSP should be offered to everyone who works, either alongside of 401(k)s or as a replacement for them.  As I said above, I don’t know anything about SAR SEPs, so I don’t know if there is the same problem with them that there is with 401(k)s.

.

In the media we hear a lot about personal choice, and how people want to manage their own affairs without government interference, but I don’t think it is arrogant or condescending for me to say that most people do not understand how to handle their financial planning.  It took me my whole life and lots of good advice from friends and, lately, from financial advisors, to figure it out and at nearly 80 I’m still learning.  The sample of younger people I have talked to about financial planning is very small, but it certainly confirmed my view that they need some serious help – and I don’t think they can find it in the private sector.  The people who wrote those mortgages are still out there.

.

Unfortunately everything I’ve said above has no meaning for people working at the minimum wage level or even twice that.  There’s no way they can find the money to max their IRAs or invest in a TSP fund.  Life is only fair to some of us.