The New Retirement Plan: Save More, Invest Less | Financial IQ

Once upon a time in America?before the greedy 1980s, the bubbly 1990s, and the busted 2000s?when people talked about planning for retirement they did not say they were investing for it. They said they were saving for retirement.

There?s a big difference, and millions of Americans who?ve seen their retirement plans blown up are learning what it is, the hard way. A bird in the hand?saving?is still worth more than two in the bush?investing. It?s almost that simple.

This revelation may come too late for many Baby Boomers, but recent studies show that people in their twenties and early thirties are starting to figure it out, taking cues from the disasters of their elders.

The number of employees under the age of 25 who are contributing to company 401(k) plans jumped roughly 50% between 2003 and 2011, according to Strategic Business Insight?s MacroMonitor.Younger people are driving high-mileage used cars, shedding credit card debt, and saving at the highest rate?nearly 14% of income?of all age groups, according to a Vanguard report.

This is a good sign, but it will be one of the biggest challenges facing Wall Street and financial professionals to change the conversations they have with clients from selling products to providing common sense advice about how to save for a secure retirement.

The days are gone when clients could be persuaded with charts purporting to show that the stock markets rise 10 percent a year, or demonstrating how a certain hypothetical investment strategy could get their nest egg to a million dollars by the time they reach 65 years old.

You know something?s wrong when more than 90% of employees who are 30 to 40 years old tell researchers that the most important thing about retirement is a guarantee that the money will be there when they need it, yet more than 75% of Americans have their retirement funds invested in the volatile stock markets, where there are no guarantees.

On top of that conundrum is the recent finding of a Chicago Booth/Kellogg School survey that the stock markets are trusted by only 15% of the public.

That means the vast majority of workers have their retirement funds in a place they don?t trust, in financial products that do not meet their top requirement. How in the world did we get here? And how will we, a nation of financial illiterates (according to a recent SEC report), get back to basics?

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We lost our way as a nation when Wall Street persuaded Americans that they could retire rich by buying stocks and bonds?or any of the hundreds of financially-engineered products peddled as vehicles for accumulating excess wealth.

Up until then, most people put their spending money in community bank checking accounts. They financed their homes through small savings and loan associations. They kept savings accounts (no checks or debit cards!) in depositor-owned credit unions where they could get low interest rates on their car and boat loans. They bought ultra-conservative utility stocks for reliable dividends. Finally, they used mutual whole life insurance as a way to safely accumulate a nest egg while simultaneously protecting their families in case of early, untimely death.

When they felt the urge to gamble, they got on a plane and went to Las Vegas.

All of that was swept aside starting in the late 1970s, when Wall Street firms began to evolve from closely-held partnerships into giant, global institutions run by hotshots motivated by bonuses, and owned by shareholders demanding ever-increasing profits to support ever-increasing stock prices.

Many people whose retirements went upside down in the Great Recession had been sold?as opposed to bought?those complex investment products that held the promise of outsized rewards but also came with the risk the investment houses and other financial institutions shifted onto them. That?s how Wall Street grew fat and America got poor?selling investment products under the guise of saving for retirement.

The risk was all spelled out in reams of paper covered with tiny type in contracts that people signed without reading, ignoring the inconvenient truth their parents had learned during the Great Depression?investing is not saving. By definition, investing means putting money at risk to earn an extra reward. That?s a legitimate way to try to make money and over the very long term?decades?it has made a lot of people wealthy, but also ruined a lot of dreams.

Saving is the opposite of investing?conserving money you have by protecting it from risk in exchange for a more modest but more predictable reward.

Younger people are starting to understand that they need to put money aside at an early age. But they and most Americans need to be re-introduced to saving for retirement using the same tools that our parents and grandparents relied on. The good old days never went away, they just fell out of fashion. But that?s changing.

The credit union industry is growing by leaps and bounds as people discover that these institutions are local, owned by depositors, charge lower loan rates, pay higher interest rates, and have few transaction fees. Mutual whole life insurance, a contract that is a life insurance policy with a savings account attached, is also enjoying a major renaissance.

While Congress and Wall Street argue over regulations to keep Wall Street from fleecing the public and getting us into another mess, the real issue of financial education is being overlooked.

Just last month the SEC released its long-awaited report, ?Study Regarding Financial Literacy Among Investors,? mandated by Congress as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The findings: ?U.S. retail investors lack basic financial literacy [and] have a weak grasp of elementary financial concepts.? Incredibly, if do a Google News search using the title of the report, only nine results come back, including this headline: ?SEC Says Retail Investors Are Clueless About Stocks.?

What happened to the American Dream in the last decade is a tragedy of historic importance. It will also be a tragedy if we let the same thing happen to future generations.

John E. Girouard is the author of The Ten Truths of Wealth Creation and a Registered Principal of Cambridge Investment Research, and an Investment Advisor Representative of Capital Investment Advisors, in Bethesda, MD.

Source: http://education.ahipcup.com/the-new-retirement-plan-save-more-invest-less/

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