Who’s In Charge of Your Retirement?

One of the more alarming retirement statistics you’re likely to read these days is just how unready Americans are to actually retire.

I’ll pick just one as an example: The Center for Retirement Research at Boston College recently pointed out that the average American household had $120,000 in 401(k) or IRA balances in 2010, while their estimate for a reasonable amount of savings outside of Social Security was $363,000 per individual (emphasis mine).

That’s a pretty big leap. Nevertheless, the Investment Company Institute, an industry group which tracks the investment fund business, puts the total U.S. retirement assets pie at $19.4 trillion.

Of that total, $5.3 trillion is in IRAs and another $5 trillion in defined contribution (DC) plans, which are typically workplace 401(k)s and plans like it.

We’ve come pretty far from the worst of the crisis. Back in 2008, our total retirement funds were worth just $14.1 trillion. We’re now ahead of the previous peak in 2007 ($17.8 trillion) but clearly behind where we could have been had the credit crisis not happened.

The interesting part is, about half the money is in our direct control. That normally would be good news, since it means you can in theory make better choices for yourself.

Nevertheless, we are busily doing exactly the wrong things with our retirement nest eggs. The Federal Reserve recently reported that Americans spent down their retirement funds and other savings by $311 billion over the two years from 2008 to 2010. We paid down debts, yes, but at what cost to our future selves?

Even so, the market recovery means we are holding our own, if not exactly roaring ahead, in terms of retirement readiness.

What could you do to improve your numbers? Robert Powell at MarketWatch tackled that issue recently. Among the ideas he mentions is reducing the level of control people have over their investments.

I can see his point. Many people fall into the trap of concentration risk (too much of their own firm’s stock, for instance) or simply get sucked into the siren song of trading their accounts, only to founder on the rocks.

Powell’s sources suggest several standardized options for folks who use retirement plans, including target-date funds and fixed portfolios for long-term savers.

Laudable, but the idea we would like most to become “normal” practice is the last on his list: Wider use of inexpensive index funds.

A retirement solution that works

Too many 401(k) plans offer up only expensive mutual funds. You can poke around in their grab bag of funds and find a pretty good asset mix, but the costs are uniformly high, sometimes 2% or more. Crazy.

Index funds will give you exactly the same exposure but offer the tremendous advantage of extreme cheapness. They match the market and that’s all, but over the long term, that’s enough.

Taking charge of your own future is key. Simple compounding offers you wealth-building power, irrespective of the ups and downs of the market.

Because of compounding, all you really need to do to retire well is save more, save cheaply, and invest intelligently in a mix of asset classes.