MarketVVizard's Market Thoughts

» Austrian - Re: Pension Law Changes

In response to message posted by Austrian:

This issue is heating up again in Congress. Companies have made large promises their business models and owners are not willing to keep. The size of the problem is at least $300 Billion today and very dependent on the stock market. If we are in a secular bear (current cyclical bull go KIRK et. al.) then this issue can only be handled through government intervention.

I urge all of you to evaluate where your promised money resides and get your hot little hands on it as soon as possible. Place your fate in your own hands.

http://www.nytimes.com/2003/11/12/busine...

November 12, 2003
Failed Pensions: A Painful Lesson in Assumptions
By MARY WILLIAMS WALSH

Robert M. Bowden retired from his job as accounts manager for a large trucking company with a plan to travel for himself.

But his company's pension plan collapsed this year, and his annual payout was cut to $24,000 from $48,000.

Mr. Bowden and other retirees of the company, CNF, see a culprit. In a lawsuit, they accuse the company of failing for many years to set aside enough money in the plan. The company did this, they say, by assuming they would retire much later than they really did. Though the CNF plan offered full benefits to people as young as 55, the company projected people would stick to their desks until they turned 64.

A look at documents made public in the retirees' fight at CNF and at a few other companies, including US Airways and Bethlehem Steel, shows that companies have great leeway to tweak certain crucial assumptions about the future — when their workers will retire, how long they will live, and which way interest rates will move, among others.

A year shaved off an estimate here, a decimal point's difference there can significantly reduce a company's pension obligations on paper. The company can save millions of dollars in pension contributions.

But if a company shortchanges its pension fund year after year and the company then gets into trouble, the plan that looked healthy can fail, seemingly out of nowhere, leaving workers stranded.

"I'm in a financial survival mode," Mr. Bowden said. At 59, he recently refinanced his mortgage in Lake Oswego, Ore., to conserve cash while looking for a cheaper place to live.

Assumptions that the government considers inadequate contributed to the demise of almost all of the roughly 150 pension plans that failed in the last year. Current detailed information about pension plans is not routinely disclosed, however.

The painful lesson for employees comes as companies press Congress for permanent relaxation of some provisions of the pension funding law. One measure, passed by the House in October, would allow companies to make more favorable interest rate assumptions for the next two years while a panel works on broad changes to the pension funding rules.

Two other bills, recently passed by different Senate committees, would extend the interest-rate change beyond two years, and one of them would also suspend a measure intended to punish companies that let their pension plans become severely underfunded. If Congress does not act before a stopgap measure expires at the end of the year, companies will be forced to make large mandatory contributions.

Companies generally contend that the funding requirements are out of step with the current financial environment. CNF has not filed a response to the retirees' suit, and a spokeswoman said the company could not comment on the dispute.

According to a rule of thumb used by actuaries, though, every year's difference between the company's projection and the age at which the employees actually retired might have understated benefits by about $15 million.

"There are ways companies can kind of game the system, to contribute a lot less money than is realistic," said Jeremy I. Bulow, the Richard Stepp professor of economics at Stanford University's graduate school of business. Essentially, he said, they are trying to get a loan from the government agency that insures pensions, the Pension Benefit Guaranty Corporation, or from their employees. "That's what they're trying to do, and it's very bad news," he said.

To be sure, the world of actuarial science is not the wild, wild West. Companies have been caught gaming pension assumptions in the past and as a result some assumptions are now regulated. Interest rate assumptions are especially powerful in pension calculations, and the most important ones are today a matter of statute — the same statute Congress is now being asked to modify.

Assumptions about employee life spans are also regulated today, after General Motors was found in 1994 to be assuming its workers would die younger than Ford's. Workers who die young will have collected smaller total pensions, reducing the corporate contributions. Today, all companies are supposed to use a standard mortality table, though some companies are lobbying Congress for more leeway there as well.

For other assumptions — about pay increases, staff turnover, marital status, retirement ages and other factors — there are no hard and fast rules. The law says only that assumptions must be reasonable; that term can mean different things to different people.

US Airways and AMR's American Airlines, for instance, have found it reasonable in recent years to assume that their pilots will retire when they turn 60, because the Federal Aviation Administration grounds commercial pilots when they reach that age.

"Pilots enjoy flying and typically it's an avocation in addition to being a job," an American Airlines spokesman said. "A lot of pilots would even work past 60 if they could."

After US Airways' pension plan for its pilots failed this year, however, the government looked at the age when they were actually retiring and found that lately, more than half have been retiring well before their 60th birthday. The Pension Benefit Guaranty Corporation is arguing in bankruptcy court that the airline should have assumed that the pilots would retire, on average, at 56. The agency, an unsecured creditor, is in court seeking a portion of the reorganized airline's stock to help cover its cost of paying the pilots' benefits.

Because the government insures pensions only up to certain limits, the US Airways pilots will lose, in total, about $1.6 billion in anticipated benefits, according to the pension agency.

Documents in the US Airways case also show how powerfully a pension plan can be affected by an assumption that seems only slightly off the mark. An analysis supplied by US Airways' actuary, Towers Perrin, suggests that when the airline assumed its pilots would retire four years later than they really did, it shrank the amount it appeared to owe them by about $385 million. That, in turn, meant it contributed less to the plan.

"In every dimension that was possible, they made the most aggressive actuarial assumptions they could," Mr. Bulow said in an interview. He submitted testimony on behalf of the government in the US Airways case.

Towers Perrin declined to comment on its retirement-age assumptions, citing its policy not to discuss matters before the courts. US Airways, in court documents, stands by its assumption that pilots will retire at 60 in the future. It notes that the defunct pension plan has been replaced by a new benefits package that will reward pilots who keep working as long as possible.

The airline also argues that the government is forcing it to make an inappropriate assumption about interest rates in its calculations, in an effort to grab a larger portion of its stock. The judge is expected to resolve the dispute in the coming weeks.

The retirement age was also a factor in the costly demise of Bethlehem Steel's pension plan. Bethlehem's actuary, Aon Consulting, assumed the work force would retire at age 62, even though the company offered pensions to much younger workers, as long as they had 30 years of service. Other actuaries said that assumption was highly questionable, and that it was an important factor in the Bethlehem plan's record $3.7 billion shortfall when it failed.

A spokesman for Aon said the firm could not comment on a client's affairs. Bethlehem itself has been liquidated. The government estimates that Bethlehem's work force has lost, over all, about $400 million in promised benefits.

At CNF, the pension troubles grew out of the freight company's decision, in 1996, to spin off its unprofitable Consolidated Freightways unit. Consolidated, a unionized long-haul trucking business, was losing money in the mid-1990's, dragging down the parent company's performance. CNF was meanwhile building up a separate nonunion trucking business that was profitable. By 1996 the two divisions were competing head to head in some markets.

When it spun off Consolidated, CNF had to split its pension fund and put some of the money into a new fund for the departing work force. Such transactions are regulated; companies must certify to the Internal Revenue Service that they are transferring enough money to cover the benefits the departing workers have earned.

Mr. Bowden and his fellow retirees said that when CNF calculated their benefits, it assumed that most of them would retire at 64. But many Consolidated managers retired in their late 50's, they say, to take advantage of generous early retirement benefits the company offered to people whose age, plus years of service, added up to 85.

Steven M. Tindall, the retirees' lawyer, said that by using a higher retirement age in its calculations, CNF was able to put less money into the spun-off pension plan.

"We think this is a way the company saved some money," said Mr. Tindall, a partner in the law firm of Lieff, Cabraser, Heimann & Bernstein in San Francisco.

He and the retirees also said that CNF used an inflated interest rate in its calculations, further reducing the amount it put into their pension fund. Born weak, the new pension fund was then underfed each year, they believe, because CNF continued to administer it using inappropriate assumptions.

Consolidated's retired managers, like Mr. Bowden, said they had no idea this was happening until it was too late. They said they were never even told the pension fund had been separated from CNF, much less that it was withering away.

Chester Madison, a group operations manager for Consolidated, said that just before he retired, in August 2002, he asked about the pension plan and was told it was "fully funded." Two weeks later, Consolidated filed for bankruptcy. Four months after that, he and the others began receiving letters saying the plan had failed. It had less than half the assets needed to pay their benefits.

"You feel betrayed," said Mr. Madison, whose monthly pension check has been reduced to about $1,700 from $4,100. He has been looking for a job to make up the difference. "Not too many people are going to hire you when you're 58 years old," he said.

Even Consolidated's retired president, Thomas A. Paulsen, was surprised. At age 59, with 36 years of service, he had earned a pension of $9,755 a month. When the plan failed, his check was reduced to $1,876. He believes CNF spun off Consolidated with insufficient resources, to "send the old dog out to die."

Employees at all levels are supposed to get basic information about their pension plans once a year, but it is difficult, if not impossible, to check the validity of the underlying assumptions. Companies are not required to disclose current, detailed information about their pension plans. They do list three actuarial assumptions in the footnotes of their annual reports, but retirement age is not among them.

More details about pension plans are on file at the Labor Department, but those records are generally at least two years out of date. And even if an employee goes to the trouble of getting the numbers, they are difficult to decode without a complete understanding of the company's demographics.

Mr. Bowden recalled that CNF hired him in 1967, when the company was expanding rapidly and hiring lots of baby boomers. They were entitled to early retirement, and the plan failed just as they were claiming it. The government's pension insurance has limits to begin with, but those limits are reduced even more for those who retire before age 65.

"There's hundreds of thousands, maybe millions, of people, who believe that the P.B.G.C. will guarantee their pensions, and it's not the case at all," said Robert Newell, a retired Consolidated vice president. His monthly pension has been reduced to $2,025 from $5,357.

-- posted by Austrian

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» Austrian - More Pension Law Stuff

In my April post regarding legislative relief, I felt this was and is a done deal...

From the WSJ Subscribe

Pension Agency Warns
Against Corporate Relief

By JOHN D. MCKINNON
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- As supporters searched for a way to make a bailout more palatable, the federal agency that backstops corporate retirement plans warned Congress against proposals to give airlines and other struggling companies a temporary, but significant, break in pension-funding requirements.

Even companies with relatively healthy retirement plans are facing higher contribution requirements because low interest rates and other economic factors are making their long-term pension obligations look larger under federal funding rules. In response, Congress is likely to pass a broad relief measure, in the form of a more generous interest-rate formula for figuring basic contribution requirements.

But some companies that have fallen seriously behind in their pension-fund contributions are seeking more. Such companies must meet steep catch-up contribution requirements, under a special set of rules enacted in 1987 to protect workers and the government's pension safety-net program run by the Pension Benefit Guaranty Corp. Airlines such as UAL Corp. are putting intense pressure on Congress to grant struggling industries temporary relief from the catch-up rules.

The Bush administration is on record as strongly opposing any attempt to water down the catch-up requirements. "If we're going to provide short-term funding relief, how do you not do the same for every future firm that finds itself in that situation?" a senior administration official said.

Bolstering the White House stand, the PBGC issued a report that estimated eliminating catch-up contributions for seriously underfunded plans would increase its overall unfunded pension liability by $40 billion over the next three years. Much of that shortfall could eventually wind up in the lap of the PBGC, which takes over pension plans when they go broke.

That could even raise the risk of an eventual taxpayer-funded bailout of the PBGC. The PBGC already faces a long-term unfunded deficit of about $8.8 billion for its single-employer plans, mainly because of the impact of a large number of steel-industry and airline plans that it has taken over in the past two years.

Despite concerns within the Bush administration, however, influential congressional leaders are widely believed to be pushing relief. They include House Speaker Dennis Hastert, an Illinois Republican whose state is home to troubled UAL Corp., and Democratic Sen. Max Baucus of Montana, whose large rural state is served by Northwest Airlines.

Some leaders say they worry that imposing tough catch-up contribution requirements on struggling companies could drive those plans into the PBGC unnecessarily. "There's just some concern that without any ... relief we could be causing more plans to be dumped into the PBGC instead of trying to find ways to maintain the viability of those plans long term," Republican Rep. John Boehner of Ohio, chairman of the House Committee on Education and the Workforce, said in a recent interview. Congressional aides have been discussing ways to limit relief -- for example, giving only partial relief, or allowing companies to maintain current levels of funding.

-- posted by Austrian

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» MarketVVizard - On Being a Bear...

No I haven't gone over to the dark side (or should I say bright side?) heh. But every now and then someone reminds me that I love to have my ideas challenged. This leads to self reflection, which in turn leads to correction or reaffirmation. There's a poem to be made in there somewhere...
_______________________________________

On Being a Bear

Dismal Thinking By Brian Nottage

Let me start my inaugural column by saying that I am by nature a pessimist. Absent overwhelming past historical evidence, I almost always expect the worst. Yet I am bullish on the U.S. economy, and continue to be surprised by how negative so many people remain not just about the near-term prospects of the economy, but the long-term ones as well.

Qualifying as a bear on the economy does not mean simply that someone is concerned about downside risks going forward. Any sensible economist is. No, it is the repeated predictable response to any good news as an aberration, a blip in the midst of some long- term decline. One can be a stock market bear without being an economic one, but the two increasingly seem to meld: the stock market is a bad bet and is overvalued not simply because investors expect conditions to be better than they ever have been, but because they don't realize that the economy is going to enter a period of extended malaise.

The degree of bearishness varies, of course, but I think there are a few common themes to being a good long-term bear. First is the claim that any positive data is either misinterpreted or simply a bump in the road to perdition. For example, when I wrote up the great third quarter GDP numbers with a very positive spin, among the responses I got was the following admonition: "Not sure what report you are reading, but a very good review is here: www.urbansurvival.com." Not surprisingly, that site explains, while hinting at duplicity in the data, that a correct analysis shows that there is no economic rebound. (For those concerned, I have confirmed that we were indeed reading the same report).

Fine, that's a bit extreme, but you can find many other examples. I have a favorite bear column that I read, in which the author gets more and more strident with every bit of good news about how everything just has to collapse. One recent bit: "My view also is bolstered by the economy, whose recent signs of "strength" mask weakness below the surface. I picture a frozen pond, seeing and hearing cracks all over the place. One day, the ice will give way and the crack of doom will occur."

Bears use "air quotes" a lot to describe how "experts" misread or misrepresent supposedly "good" news. It turns out many of us just don't "get it." For there is always some imbalance waiting to do us in. We don't save enough, China's economy will overwhelm us, debt as a share of something or other is higher than it's ever been. Just wait.

It occurred to me that to be bearish about the U.S. economy involves seeing it in the exact opposite context that I and most professional economists see it. Most economists see growth as the natural order of things, with an inevitable downturn as a shock or series of shocks exposes growing imbalances. After a short period of adjustment and policy response, prosperity-creating growth returns.

Yet the most bearish seem to regard growth as a lucky respite, an artificial period sure to end at any moment. To be sure, history (even very recent history) suggests that the economy is subject to manias and bubbles, many of which burst to bad effect. Yet, the larger story of the U.S. and other developed market economies is that the default position is growth. Not only is growth the default, but the last twenty years gave us two record-length economic expansions, interrupted by two of the mildest downturns ever. If anything, while we cannot fully explain it, we can infer that the business cycle is moderating.

Yet all this history is conveniently ignored. Each bubble, each imbalance, is generally slightly different from the previous ones, allowing a pessimist to wonder if this imbalance is the one that cracks history's dyke. To that end, the worst of history is alluded to. At the most extreme, some imbalance harkens back to the Great Depression. Most sensible people intuitively sense how unlikely that is, but there is always the trusty 1970s, which had the virtue of adding a stagnant economy and inflation together along with a multiyear bear stock market, a pessimist's trifecta.

It is good to remember that such sentiments always seem plausible when the economy underperforms. In the late 1980s, we were advised to learn Japanese and German, as those economic systems were clearly the future. As an undergrad in the early 1990s, I remember fears expressed that we Generation X'ers would almost certainly live worse than our parents, would never own a home, etc. Heck, I remember that the premise for the sitcom "Friends" was of a group of underemployed young adults with lowered expectations for the brutal 1990s economy. They did okay as it turns out.

My main point is that when times are dark, it is often easy to assume that things will not really improve, and to further assume that a current downturn is evidence of the arrogance of the optimist. Yet while it's important to prepare for the worst, history shows that we continue to get more, not less, prosperous over time. This is no accident. The U.S. economy sports a unique combination of high education levels; a vibrant middle class; a young, growing population; and a low-tax, low-regulation, entrepreneurial economy that is incredibly adept at absorbing shocks and change. I think these positives far outweigh our negatives and that we are in for another long, perhaps record, economic expansion.

But bowing to the inevitable future downturn, let me offer a prototype free of charge for a bear's column a decade from now:

"Finally, as I have been predicting, the ten-year dead-cat bounce is over. Maybe now I won't have to put up with all the whining emails you keep sending me about losing money in short positions you've held for the past decade. As usual, the clueless "experts" say a recovery is around the corner, and so far Joe Sixpack, driving his hydrogen-guzzling car and watching his huge LCD TV (bought on credit, of course), is buying into this nonsense. I see every sign that the U.S. economy is in for a period of stagnation like Japan in 1990 or Malaysia in 2006. Believe what you want, but when you lose your shirt, remember that I warned you."

So hey, if you're a pessimist, be comforted that you will be validated at some point in the future. As for me, I'm heading to the mall to look at LCD TV's.

_________________________________________
Remind me to post about LCD displays one of these days (or have I already done that?).

It seems to me that ignoring issues of debt, valuation, global economic shifts and their related employment impacts, government money pumping & spending, deficits, as well as the age distribution on stock market ownership are all major oversights. This sort of article is something I would expect to see near a cyclical top. That said, he is right about the certain element of irritating permabears and bear PPETS out there. As you know, I try my best to completely turn these sources OFF (example: The Daily Reckoning, or Robert Precter) as they are not objective and are just as destructive as the Abbey Cohens and Joey Bagadonuts of the world.

p.s. Note gold up big today.

-- posted by MarketVVizard

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» Kirk - Re: On Being a Bear...

In response to message posted by MarketVVizard:

Remind me to post about LCD displays one of these days (or have I already done that?).

If you did, I missed it.

Some of my stock holdings supply the "picks and shovels" to the companies in Asia building factories to build these LCD items. The items will become a commodity and Korea, China, Taiwan or some govt. will have a ton of problem with debt to build too many factories, but they will sure buy a ton of picks and shovels.

For example, how many gold solder bumps do you think are on a LCD Screen? UTEK has a huge market share for this... a monopoly I believe.

-- posted by Kirk

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» MarketVVizard - NVLS

Finally seeing that parabolic move up. Up vol = 88% right now on the NASDAQ, which is pretty darn close to the 90% that indicates a blow off top. Volume is not really that strong. I'm guessing we are within 24 hours of a top (?). Put/call is lower today than it has been. AMAT reports tonight, news should be factored in. Shorting some NVLS right now ($44.30 YOU HAPPY JAS?!?!?! did I do what I said I would do??? Hehahe), probably a day early but why not.

Gold hitting multiyear highs and about to bust though $400!

-- posted by MarketVVizard

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» MarketVVizard - Re: NVLS

While I have banned myself from watching CNBC, I'm told that they were repeatedly telling viewers the AMAT earnings announcement would be a sell the news event. Had I known that, I probably would not have shorted at the close today. Still, I think there is a good chance we top tomorrow after some kind of gap up or early rally. Semi equips up big afterhours, NVLS at $45.30 (new 52 week high). Nasdaq may bounce right off of 2000 but if it blows though 2000 and shows no sign of weakness I'll cover. I trade with discipline, its how I keep from being wiped out. The "fearless" come and go but the paranoid survive

If NVLS rallies more than 2 points I will cover it. I would REALLY love to short it after the naked call writers gets wiped out (approximately $55) but that might be asking a bit much... still I'll keep plenty in reserve to do so.

-- posted by MarketVVizard

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» collguy - Huge divergences

Dollar continuing rapid decline, gold at new 7 year highs, oil in the low 30s bbl, but equity markets continuing their upswing. I really have to believe something is going to give big time very soon. My guess would be it would be equities since they seem to be most out of whack in terms of valuation. Not trying to be too scary here, but it seems to me that we are the cusp of something big-I just haven't figured out what.

-- posted by collguy

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» Normxxx - Re: Huge divergences

In response to message posted by collguy:

Although I too am looking for an "out-of-season" dip in December and/or January, the market could well be back at these levels or higher by Spring.

The period from now until sometime around the end of April - early May is the next to the best strongest period of the 4-Year Presidential/Seasonality Cycle.

I'm sure G and W can hold it all together at least until next summer or fall.

-- posted by Normxxx

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» Jas_Jain - Looking to Add Semiperformer Shorts

My top Semi shorts are, and would continue to be, AMAT, INTC and TXN. I have added NVLS for diversification.

I have GTC orders to sell naked calls on AMAT and NVLS if my prices are hit. Otherwise, I wait until my prices are hit. No need to time the stocks or the market. I will cancel these GTC orders only if I find better alternatives.

Let the Pricing do the "Timing!"

Jas

-- posted by Jas_Jain

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» MarketVVizard - 401k article

Nice sell the news event today in the SOX. Also Walmart missed which is a pretty big surprise. Although I'm not seeing much conviction either way right now. Could just be a consolidation? Lock in profits by tightening the stop.

At any rate, the following is an article from marketwatch on 401k's. My biggest problem with people's assumptions on retirement are the life expectancy issues. Why plan on living for X years? What happens if you burn though all your savings but aren't dead when your money is? Ideally you need enough to live off investment income, if that is not possible you need to plan on living until at least 100. I have many relatives that lived into the 90's. It is so obvious that our government is going to be bogged down in welfare programs for the elderly. The money will have to come from higher taxes and depreciating the dollar. That will lead to a pretty sluggish economy.
_______________________________________________
Change the plan or change the people

401(k)s will not serve Boomers a comfortable retirement

By Robert Powell, CBS MarketWatch.com
Last Update: 7:11 PM ET Nov. 12, 2003

BOSTON (CBS.MW) -- Is it just me or does anyone else feel a bit worried about the future financial security of Americans, Boomers in particular?

CBS MARKETWATCH
PERSONAL FINANCE

IN INVESTING
ETFs offer untainted alternative to mutual funds
IN MUTUAL FUNDS
Consider costs of selling a fund in wake of scandal
IN LIFE & MONEY
The 10 most underpaid jobs in the U.S.
IN RETIREMENT
401(k) may be Boomers' retirement Waterloo
IN REAL ESTATE
U.S. home sales hit record pace in Q3
IN TAXES
IRS per diem travel writeoffs can beat real costs




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Yes, call me crazy, call me Chicken Little, call me a pessimist. But I don't think we're going to make it. I don't think most Baby Boomers, especially the four in five workers who don't have a traditional pension plan and who will rely in great part on their 401(k), will ever really enjoy retirement -- forget about adding "comfortable" as the adjective.

In fact, I'm beginning to think that the 401(k) may go down in history as the worst financial scheme ever devised. Forget Ponzi. Forget Enron. Forget illegal mutual fund trading.

This 401(k) thing has been good for corporate America, which needed to shed the costs and liabilities associated with defined- benefit pensions. And it's been good for investment firms, which have collected millions upon millions of dollars in fees since 401(k) plans were first introduced 25 years ago.

But I'm not so sure average Baby Boomers has benefited from being asked to bear the burden of building their own nest egg. And it may just be high time to abolish or drastically change the 401(k) plan. Or it may be time to drastically alter the spending and savings ways of Baby Boomers. Or both.

The average balance in a 401(k) plan is $57,668, according to the 2002 Employee Benefit Research Institute/Investment Company study of the 401(k) plan industry. Meanwhile, the median household income in the U.S. in 2001 was $42,228 according to the U.S. Census Bureau.

By my math, that means the average 401(k) plan participant has a tad more than one year's worth of post-retirement "salary" in his or her 401(k) plan. Assuming someone retires at age 67 and lives for another 10 years in retirement, this means our median/average American is on the hook for nine years of post-retirement income, or $31,671 per year or a total of $285,039 in today's dollars.

Unfortunately, the average contribution rates at the moment are a meager 6 percent and no matter how you invest it, $3,800 (which includes a 3 percent company match) in today's dollars won't make up the shortfall in any meaningful way.

For older Americans who have been socking away money in a 401(k) plan for 20-plus years, account balances are nearly three times higher than the average. In fact, those in their 60s had on average $156,180 in their 401(k) plans. Still, that means these folks just have just 3.7 years of post-retirement salary salted away, leaving them on the hook for at least six years of income to replace somehow.

Put another way, Americans who rely mostly on a 401(k) plan for their retirement security, regardless of age, may only have a fraction of the amount needed to fund a comfortable retirement.

And that's just for the folks who are lucky enough to have a 401(k). There's another segment of working Americans who don't have either a 401(k) or a defined benefit plan -- just Social Security. (I've excluded Social Security as a source of retirement income because it's expected to go bankrupt in about three decades.)

Another view on savings

Not everyone agrees with me. David Wray of Profit Sharing/401k Council of America in Chicago suggests that the average person needs to accumulate a life's savings of 10 times their final year's salary, inclusive of Social Security and financial and nonfinancial assets, to adequately fund retirement.

He says a 40-year-old earning $40,0000 with $40,000 in a 401(k) plan would need to build a nest egg of $888,000 to enjoy a comfortable retirement. Assuming our average American invested 6 percent per year with a 3 percent company match into a mix of 70 percent stocks and 30 percent bonds earning 8 percent per annum, his nest egg would grow to $767,000 over the next 27 years, leaving a shortfall of just $121,000.

And that's an amount that can easily be made up by Social Security or the conversion of a personal residence into a stream of income, he says.

"It's not a question of changing the plan, it's a question of changing the people," says Wray. Unfortunately, that's not an easy task. Boomers, you see, are a transitional generation. They watched their parents receive retirement income from defined benefit-plans. And they watched Gen X enter the workforce fully cognizant of the need to save and invest for their own retirement using a 401(k) plan.

And now, having been caught in the middle of this shift, Baby Boomers are more at risk of relying on other people's money during retirement than Gen Xers or retirees, says Wray. "It's a question of money. Someone is going to have put money aside for these people," he says.

And it could be a lot of people. At least 20 percent of Boomers, or some 15 million, might not maintain the same preretirement level of consumption in retirement -- and it could be more if you factor in all those 401(k) plans that get cashed in for nonretirement reasons.

"It's a question how many will be dependent and what we do for those who are dependent," says Wray. (To find out if you'll be independent or dependent, check out the calculator at www.401k.org.)

Solutions elusive

It's easy to spot the problem. The solution, however, is less easy to pinpoint.

As much I would like, we can't return to the days of defined-benefit plans. No company in America wants that cost. Nor do Americans work at any one company for life anymore. Nor do portable defined-benefit plans exist. Plus, those plans fly in the face of the American way, and the way in which we Americans presumably take responsibility for our own health and financial well-being.

We could increase our mandatory contribution to Social Security, but somehow that seems like a nonstarter as well. The proposed lifetime savings and retirement savings accounts are DOAs too. Why would anyone use those plans when they don't use the one they have? See Life Savings.

So what are left with? Two things broken, two things in need of fixing: The plan and the people.

"It's time [the Boomers] take charge and spend less and save more," says Wray. The father of the 401(k) Ted Benna agrees. "It's too late to change the plan, we have to change behavior," says Benna. He notes that most Boomers would never drive from New York to San Francisco without a map, but that's what they are doing with their retirement.

Yes, changing behavior would work, but it sometimes takes a generation to change behavior. And it's time we may not have. Especially since the people we are talking about are the live-for-today, worry-not-about-tomorrow generation.

-- posted by MarketVVizard

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