Thursday, March 10, 2011

The Next Big Thing?

I read today that Retirement Readiness is the next big thing (buzz word) in the retirement community. With the general demise of private defined benefit (DB) plans and companies providing far smaller benefits in defined contribution (DC) plans than they did in their DB plans, it's no wonder. It's also no wonder because most people are carrying huge amounts of consumer debt.

Think about it -- how can someone be preparing for retirement while carrying large amounts of consumer debt. And, while you're at it, add in a mortgage whose outstanding balance may exceed the value of their house. That's not a pretty picture, is it?

The person in that combination position, though, is left with some difficult decisions. Let's consider an individual earning $75,000 (before taxes) per year. That's $6,250 per month. Let's add in that they have $15,000 in outstanding credit card debt, and that the interest rate on that money is 15% per year. Let's assume that our hero(ine) decides to stop using his or her credit card and pay off the debt in 5 years. That's not too bad. Their monthly payments will be just above $350. But then they realize that they have been deferring 6% of pay to their 401(k) plan and that by redirecting that $375 per month, they could pay off their credit card debt in just two years instead of five. That sounds like a great idea. But their employer matches 50 cents on the dollar on the first 6%, so that's an automatic 50% return on their investment, far in excess of the 15% interest rate on their credit card.

Oh, the decisions!

Bottom line, though, most people don't really consider the two of them in combination. They just act, or they just react. And, they don't stop using their credit card.

So, while retirement readiness is a great new buzz word, it's not a new problem. It's been with us for a while, but people still aren't ready. The circumstances just don't seem to be working.

So, where did it come from? Well, none of the other 'best practice' ideas seem to have accomplished anything, so we now have the new thing to talk about.

And, this too shall pass.

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