Dirty Big Secret

     There is a really big secret that evil republicans in Scott Walker’s administration and the state legislature don’t want you to know. A provision in the state budget passed last summer creates a commission to look at the performance of the current Wisconsin Retirement System and its pension plans. While its direct effects will be on the lives of public sector retirees, the ripple effects will land squarely on Wisconsin taxpayers.

     Most responsible adults are thinking about their retirement decades before it arrives. Conventional wisdom that is preached for workers preparing for retirement is dollar cost averaging, where the investor puts a set amount in every month, regardless of the current value of the fund. The logic is that when the price of the fund goes down, because the value of the underlying stocks and bonds has decreased, your dollars will buy more fund shares. When the value of the fund increases, the value of that larger number of shares means you make more money. The financial wunderkind assure us this is the best long-run investment strategy.

     Now here is the Big Dirty Secret. Defined contribution retirement plans have just the opposite effect once you retire. The corollary to dollar cost averaging during your working years is receiving a set amount from your retirement account each month after you retire. Most of us expect to get a retirement check to pay for utilities, groceries, insurance, taxes, healthcare costs, clothing and maybe even a little travel. The problem is when the value of your shares goes down, because the market slumps, that monthly check you receive requires the sale of more fund shares. That is your capital, or wealth, slipping away; and you will never get it back. Since the market tends to cycle about every 8-12 years, you can expect to take at least a couple of these big hits on your savings.
So what? For the first ten maybe twenty years, there is still money in the account. However, just as you head into your eighties and your healthcare costs really take off, your retirement fund is running out. When you need savings the most, your retirement fund is gone. Millions of Americans loss their homes and end up on Medicaid because their defined contribution retirement accounts failed them when they needed them most.

     You may not be a public employee but the explosion of Medicaid costs to care for indigent seniors will do the state budgets what Medicare threatens to do at the national level.