Financial Goals

Prior to engaging in this discussion, review the following video resource (link to video above), which is a pre-requisite for participation. Can You Afford to Retire? PBS Frontline. This video is 55 minutes in total. The discussion questions included in this module may be answered by limiting viewing to the first 34:16 of the video, however, all 55 minutes are pertinent to this discussion. This PBS video documents the transition from Defined Benefit to Defined Contribution plans and explores the effects on workers’ preparation for retirement. Experts report that, on average, only workers earning more than $90,000 per year tend to have retirement balances that grow significantly beyond the level of contributions for reasons discussed in the video.

According to the U.S. Bureau of Labor Statistics (BLS), about 40% of individuals ages 55 and older were working or actively looking for work in 2019. That number, known as the labor force participation rate for persons in this age bracket, is expected to increase fastest among the oldest segments of the population, including those ages 65 to 75 and older, through 2024. In contrast, labor force participation rates for most other age groups in the labor force are expected to remain stable (Toossi and Torpey, 2017). Since the early 1990s, the Labor Force Participation Rate for workers 55 and over has been steadily rising (BLS, 2019). The Centers for Disease Control and Prevention (CDC) finds that current life expectancy in the United States is 78.6 years (NVSS Fact Sheet, Centers for Disease Control, 2017) and the social security retirement age in the United States is between ages 62 and 67 (Benefits Planner, Social Security Administration). We may conclude from these statistics that many older individuals continue to work beyond an age when they could retire with full social security benefits.

The tendency for more older workers to actively participate in the labor force is related to factors affecting both younger and older workers. Younger workers are typically relatively unprepared to begin saving for retirement, yet experts encourage workers to begin to save early. Younger workers are offered self-managed retirement accounts at a point when they are usually not prepared to manage them. As workers age, given education and income, they remain poor managers of retirement options, when compared to professional managers once employed by firms to manage employee retirement funds.

Growing numbers of older Americans remain in the work force because they lack retirement savings. This situation faced by older workers results from a shift to self-managed retirement plans. It is likely that workers will increasingly remain employed longer. Older and younger workers now routinely manage their own retirement accounts. Individuals are less knowledgeable in managing retirement savings than professional financial managers assigned by firms to manage employee retirement accounts to ensure a defined level of benefits to employees after their retirement from the firm. Older workers continuing to work later in life is related to corporate financial management practices. Across many decades, corporations have led employers in turning away from offering defined retirement benefits to workers who retire after many years of service. Defined contribution plans are cheaper for firms to fund and administer. As of 2019, only 51% of private sector employees and only 4% of private industry workers had access to a defined contribution plan (BLS, 2019).

Nearly half of all working-age families have zero retirement account savings (Morrisey, 2016). One of the important sources of these savings is from retirement benefits offered by an employer. In a recent report on retirement issues, the Government Accountability Office (GAO) noted that federal retirement-related programs including the Social Security Program face financial uncertainty. At the same time:

“… employer-sponsored plan(s) have experienced a shift from traditional defined benefit (DB) plans that generally provide set monthly payments for life, to defined contribution (DC) account-based plans, like 401(k)s. DC plans provide greater portability of savings that can be better suited to the needs of a more mobile workforce, but also require individuals to assume more responsibility for planning and managing their savings. While DC plans can provide meaningful retirement security for many, especially higher earners, lower earners appear more prone to having little or no savings in their DC accounts…and individuals’ savings…may be constrained by economic trends such as low real wage growth and growing out-of-pocket health care costs. Combined with increased longevity, these challenges can put individuals at greater risk of outliving their savings …” (GAO, 2019)

Census Bureau data shows that only 12% of adults in the U.S. have a bachelor’s level or higher education and 88% are high school graduates. The National Center for Educational Statistics (NCES, 2020) reports that only 12% of individuals completing bachelor’s degree programs graduate in business-related subjects offering familiarity with principles of finance. Per capita savings in the United States is negative. The average individual spends more than they save each year (BLS, 2019). The American Community Survey (also administered by the Census Bureau) found that median household income in the U.S. in 2018 was $61,937. In this discussion, we look at 22-year-old Nadja, who is typical of young householders under the age of 25. Young workers like Nadja have little practical financial knowledge and the lowest median household income, at $33,389 per year.

Case Study

The PBS video at the beginning of this discussion explores factors influencing a worker’s ability to self-manage retirement accounts to achieve a satisfactory level of savings by the time s/he would otherwise be prepared to retire. This following case combines factors found statistically to contribute to an insufficient level of retirement savings. We connect Nadja, the character in our case, with the corporate trends resulting in most workers being given responsibility for managing their retirement saving. In this way, we combine personal and corporate financial concerns.

Nadja, age 22, is typical of many people transitioning into the labor force. Nadja may be relatively unprepared to begin planning for her retirement. She is young, and saving for retirement may seem less important than current needs. She has more education than most Americans, but statistically, she has only a 12% chance of having familiarity with financial principles. Her earnings are most likely low because she has just begun her career. The median income for all individuals holding a bachelor’s degree is roughly $60,000 (Torpey, 2018), and workers just entering the labor force are likely to earn less than the median. Half of workers with bachelor’s degrees will earn less than this amount, while half will earn more.

Unlike 88% of the population, however, Nadja graduated and received a bachelor’s degree. According to the National Center for Educational Statistics, only 12% of individuals earning a bachelor’s degree choose to major in business-related subjects (NCES, 2020). As a recent college graduate, Nadja has accepted her first professional position. Without a great deal of life experience, she is confused with the process of “on-boarding” by her new employer. Like 51% of all private sector employees, she has been offered a Defined Contribution Plan as part of her employment benefits package. Nadja is concerned about the retirement plan and is unsure what role it will play in her preparation for retirement. Nadja does not have a high income, and meeting her basic needs is already a challenge on her moderate wage. She saw her father and grandfather work beyond the age when she knew they were eligible for Social Security benefits, with questionable health and an unquestionable desire to retire to a more leisurely life. Nadja has been told by family members that retirement planning is important. As this is Nadja’s first full-time position, she feels it is too early to contribute to a retirement plan when retirement is decades away. Her earnings are also limited in relation to basic financial needs, such as housing and transportation. She wonders whether she should contribute to the retirement plan or wait until later in life to begin saving for retirement.

In this discussion, you will take on the role of a relative or trusted friend with knowledge of the importance of retirement planning. You will assist Nadja in determining whether to contribute to a retirement plan offered by her employer. Taking into account trends in financial management that you learned about in this module, you will consider how typical Nadja’s situation is and what issues she and many other employees may face as they age. You are concerned that trends in financial management have caused firms to offer defined contribution versus defined benefits plans most frequently, placing the burden of financial planning on the individual, rather than on the employer.

Case Questions
Initial Post
Section 1: The Statistical Question of Worker Preparation for Financial Management Responsibilities
Considering material in the required reading and the PBS Frontline video, “Can You Afford to Retire?”, reflect on a typical worker’s age and preparation for a decision to contribute to a retirement plan, including choosing investment options. Discuss at least two reasons why it is statistically unlikely that Nadja will reach her retirement goals.

[Hint: You might consider statistics regarding educational preparation of the American population and the likelihood that individuals are familiar with investment planning tools and concepts. You might also think about which varieties of individuals are best prepared to meet these goals and the techniques used to build retirement savings to a high value, as discussed in the video, “Can You Afford to Retire?.”]

Section 2: The Work of the Professional Financial Manager
Even if you are not a professional financial manager, you employ financial management tools and concepts in your personal life. Remembering that the functions of a financial manager are to manage cash and credit, issue and repurchase financial securities; decide how to allocate capital for new and existing projects (capital budgeting), and manage financial risk; comment on the similarities between corporate and personal financial management that you learned about in this module and discussion.