Detroit went bankrupt because they failed to plan — sound familiar?
By Nick Paleveda MBA J.D. LL.M
National Pension Partners
One of the main reasons Detroit went bankrupt is they did not plan on funding for their employees' retirement and post-retirement health care needs. This is not a surprise, as most people have not saved enough for retirement. Lifestyle issues get in the way: cable TV, cell phones, education costs, bigger homes, bigger cars and the sale at Macy's. We are not doing a good enough job of encouraging people to save for retirement.
In Dr. Thomas J. Stanley's book, "The Millionaire Next Door," which should be required reading for all high school students (throw out "Flowers for Algernon" or anything by Shakespeare), the professor discusses how millionaires save-save-save. The insurance industry mantra should be the same. It has the products — annuities, life insurance and various retirement products — but the word is not getting through to the masses.
But back to Detroit... This will not be the last major city to file Chapter 9. Look for other municipal corporations to file for bankruptcy in the next couple of years. There is not much we can do about the finances of a city, but there is a lot we can do in counseling our clients about the advantages of saving.
How many clients do not take advantage of the 401(k) match? Found money. How many Wal-Mart employees do not take advantage of their ESPP? Found money. How many clients do not take advantage of certain tax structures, such as S-corporations of 412 retirement plans? Found money.
When we set up pension plans for clients in 2002-2006, they funded them with guaranteed life and annuity contracts. When the great recession hit in 2006, they looked to the 401(k) and found nothing. They went to savings. Nothing. They went to their stock accounts. Destroyed. They tried to take loans on their real estate. Underwater.
Next, they went to us. In many cases, we terminated the pension and sent them huge checks. Why? The money was in guaranteed annuity and life contracts. The money was there for them when the crash took place.
Most of the clients are interested in 412 plans due to the tax savings. It's an afterthought that the plan is asset protected and more importantly, guaranteed! However, during a crisis like the Great Recession, the afterthought became their best thought!