Ric Edelman, a New York Times bestselling author, has been providing financial advice to the public for more than twenty-five years and is a well-known, successful financial advisor. His television series, The Truth About Money with Ric Edelman, airs on Public Television stations across the country and his syndicated radio program can be heard from coast to coast. Ric’s bestselling books include The Truth About Money; Ordinary People, Extraordinary Wealth;and The New Rules of Money. His firm, Edelman Financial Services LLC, serves individuals and families across America. Visit Ric online at RicEdelman.com.
In the beginning, there was no such thing as retirement: If you were alive, you worked.
Children gathered, adults hunted. The old and the sick, unable to work and feed themselves, died.
Soon, nation-states formed, and people organized to defend themselves from invaders.1 But how do you convince people to fight when there is a high likelihood they will die doing so?
One way is to bribe them.
The First Pension in America
During the American Revolution, the Continental Congress offered soldiers a monthly lifetime income as an incentive to join General Washington’s army. The income they’d receive following the war (assuming they survived the ordeal) would be a reward for their service.
This lifetime income was called a pension.
The colonists didn’t invent the idea; it had been used by Romans 2,000 years ago.
But the idea was new to Americans: For the first time, you could work for (just) a finite number of years instead of your entire life, after which you’d continue to receive income as though you were still employed.
As far as Americans were concerned, it was (pardon the pun) a revolutionary idea.
The federal government repeated the offer during the Civil War and has done so ever since.
Pension benefits are still being paid for service in the Civil War. Although the last soldier to fight in that conflict died in 1958, his child (now 94 years old) is still receiving a monthly check from the federal government, according to the Department of Veterans Affairs.
Ditto for 58 children of veterans of the Spanish-American War (fought in 1898), 2,192 children of World War I veterans and 10,733 kids of WWII vets.
The first private company to offer a pension plan was American Express, which in 1875 gave an income to each retired employee. The amount was equal to half of the worker’s annual pay, based on an average of the worker’s final 10 years of employment (up to $500 annually). Over the next 50 years, hundreds of other companies created similar plans.
Pensions came to be known as defined benefit plans because the future benefit you are to receive is defined.2 What was undefined was how much it would cost the employer to provide this benefit.
Workers came to love pension plans. They paid nothing for them and had to stay with their employer only long enough to qualify (called vesting) — typically 20 to 40 years. Employers loved the plans too because they helped ensure that productive workers would stay for an entire career. The higher productivity and lower turnover helped the employer save money.
A Retirement Plan for the Public
Then came the Great Depression. Tens of millions of people were out of work, which created fierce competition for jobs. The nation’s economy was agricultural and industrial — both very physically demanding — placing older Americans at a distinct disadvantage. So when these folks lost their jobs, they were unlikely to find new ones. They thus found themselves permanently — albeit involuntarily — retired.
To provide them with income during their retirement years, President Franklin D. Roosevelt introduced the Social Security Act of 1935 — the first public retirement plan. Similar to the private plan created by American Express, Social Security was to pay monthly benefits based on each worker’s length of service and average annual wages. The first person to receive a Social Security check was Mary Fuller. Starting in 1940, she received $22.54 monthly — and she kept receiving money from Social Security until she died in 1975 at age 100.
Did I say Social Security was similar to the American Express plan? Actually, there’s a big difference: AmEx paid for the benefit it gave its employees, while you pay taxes to support Social Security. Today, in fact, more Americans pay more in Social Security taxes than they do in federal income taxes. And Social Security taxes keep rising. But that’s a different book.
In 2013, nearly 57 million Americans were receiving Social Security benefits, averaging $1,150 monthly. The maximum monthly retirement income was $3,350 as of December 2013, and you must be at least 70 years old to receive it.
The benefit is based on your 35 highest-earning years.
Smoke-and-mirrors alert! The benefit used to be based on your 10 highest-earning years. But the federal government changed the formula to reference 35 years of work. Although earnings are indexed to inflation, workers nevertheless earn a lot less at the start of a career than they do at retirement. So including those early lower-income years in the calculation reduces the amount you receive.
It’s a tricky way for the government to reduce Social Security benefits, and I bet you didn’t notice that they changed the formula.
How the World’s Largest Automobile Manufacturer Changed Retirement Plans Forever
The Studebaker family of South Bend, Indiana, started making wagons for farmers, miners and the military in 1852. Ten years after the first gasoline-powered car was tested in the United States, the Studebakers began manufacturing automobiles and became, at one point, the world’s biggest carmaker. But by the 1960s the company was having financial difficulties, and the last Studebaker car rolled off the assembly line on March 16, 1966.
One of Studebaker’s problems was that its pension plan had so little money in it that the company couldn’t afford to pay all its retirees the pensions they had been promised. So when the company went broke, the pensions ended as well, leaving thousands of employees and retirees with no pension or only a fraction of the amount they had been promised.
Remember when I said that workers loved pensions because they paid nothing for them? Well, now you’re beginning to realize how this hands-off approach came back to haunt them. By leaving all the details to their employers and merely assuming everything would be fine, millions of pensioners found themselves with no pension at retirement — and no savings, since they thought they didn’t need to save. Big mistake.
You can avoid this mistake easily: Don’t believe that the promise of a pension alleviates you of the need to save for retirement.
Studebaker’s collapse, along with similar events at other companies, caused Congress to create the Employee Retirement Income Security Act, signed into law by President Gerald Ford in 1974.
ERISA governs how pension plans operate, to help ensure that promises made to employees are honored by their employers. ERISA also created PBGC, the Pension Benefit Guaranty Corporation. Similar to the FDIC (Federal Deposit Insurance Corporation) for banks, PBGC restores some (not all) of the pension income that workers lose when a company goes out of business.
1. That is without question the fastest history lesson ever. From Cro-Magnon days to modern society in just three and a half sentences. Beat that, Tolstoy.
As a client of Edelman Financial Services I received a copy of this book as soon as it was published. I looked forward to reading it with great anticipation, because Ric Edelman has always been my favorite author on personal finance. In spite of my high expectations, I was blown away by how comprehensive, sensible, and easy-to-read this book is. (Not that his others aren't, but this one is special.)
What's impressive is that no matter where you may be on the retirement planning life cycle, this book provides a straightforward guide to the things you should be doing right now to achieve financial security in your retirement. The advice is understandable and practical. And even if you're not capable of implementing all of it on your own, it shouldn't be hard to find a reputable financial adviser who can do it for you.
The book is very logically organized, and it could actually be used as a reference (i.e., reading the parts that are most relevant to your circumstances). But I wouldn't advise doing that. In order to fully appreciate the soundness of advice, you owe it to yourself to read the entire book.
Bottom LIne: If you're serious about your retirement (and who shouldn't be?) you're doing yourself a disservice if your don't get this book.
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Ric Edelman is sly, self-conceited, opinionated, and self-promoting. This book is a good overview about retirement accounts, and the discussion about RMDs is pretty good. But he is wrong and inconsistent in many ways. He says you should put all your contributions into stock funds, but then he tells you to select a diversified portfolio appropriate to your needs and risk tolerance for the money already in your retirement account. If you have followed his advice about 100% stock allocation for all contribution, then the money in your account would be 100% stocks. And if you are to move some of the money already in your account into bonds, then why the trouble of buying stocks for new contribution, then once the money is in, sell some stocks and buy bonds? This only creates excess trading activities that may be frowned upon by many 401k administrators.
Ric is also wrong in his advice for federal employees to transfer their TSPs into IRAs once they have left their employment. He cites the paucity of investment options as the basis for his recommendation. But even though the TSP has only five funds, it covers US large and small caps and international EAFE stocks, as well as all bonds and a unique G fund of government bonds that can never lose money and historically has kept up with inflation. The only viable investment option that TSP lacks is emerging market stocks, which arguably may be too risky and high cost for most investors. TSP charges only 0.029% expense ratio, which is significant lower than any other mutual fund or ETF. For the amount of diversification and low fees, the TSP is unbeatable. Investors with TSPs will do themselves a huge disservice by following Ric's advice.
Lastly, he frequently promotes his services throughout the book and often omits important details on the excuse that it is beyond the scope of the book or, his most common response, "it depends", and points the reader to call his firm instead.
As a Certified Financial Planner (CFP), I am impressed with Ric's success in the business, but not generally with his advice. All individuals have unique financial planning goals which cannot be completely addressed by any book. It is not honest to say that only Ric has the "truth" about any financial topic - but people title things to sell books.
Ric has some very strong opinions about personal finances, but it is mistake to equate strong opinions with correct opinions. As we all know in the business, we don't know it all. No one does. I have more financial credentials than Ric (although not the honorary doctorate given to him by his college for a substantial gift) but I still don't know everything about personal finance.
He does have an entertaining way of writing which is easy to read. There is some good information about retirement planning, but also some strong opinions about the right thing for everyone to do. This is the problem. Any true Certified Financial Planner will tell you that there is not a right way for everyone. That is left to shock jocks, not planners.
Enjoy the book if you choose to buy it, but don't believe that it has all of your retirement answers. It doesn't.
This is a well written book with good explanation of IRA, 401(k), and similar accounts. I would like to have seen information about how to plan when and how to sign up for social security in relation to withdrawal strategies from the accounts discussed, and the tax strategies involved in making this choice.
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I just finished reading this and was very pleased with it. The book explains things in laymen terms that are easy for us non full time investors to understand. I am looking forward to ordering more of Ric's books to learn about money and investing.
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I am a fairly knowledgeable investor and I thought I understood the aspects of 401K and IRA. However, I learned many knew truths that I either had forgotten or never knew. It was a very easy read as all of his previous books have been.
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