Rethinking Retirement

[courtesy Google Images]

The GuardianOf course

Still, if the article’s title is a little silly, its content is serious and implies that retirement may be disappearing for most Americans :

“According to the Financial Analysts Journal, “retirement is not hopeless.” Indeed, all you need to do is save 22 times the annual income you hope to have when you retire. That means if you make $150,000, and hope to retire on $100,000 a year, you only need to sock away $2.2 million in a bank account to be able to retire comfortably.

The Financial Analysts Journal sounds like a prestigious and credible publication but its conclusion (“retirement is not hopeless”) implies that if a comfortable retirement is not hopeless for all, it is hopeless for the vast majority of Americans.  Oh, the average American may be able to retire one day, but only at a comparatively low standard of living of $10,000 to $20,000 a year.

•  The Federal Reserve Bank of St. Louis says the current average savings rate for Americans is 4.4%.

Sociologist Leonard Beeghley identifies a male making $57,000 and a female making $40,000 with a combined household’s income of $97,000 as a typical middle-class family.

If we make the unlikely assumption that any family can make that $97,000 average annual income for each of 40 years before retirement and pays 20% in taxes, and that it’s not ravaged by divorce, medical problems or death, it will net about $3.8 million pre-retirement dollars .  If they save 4.4%, they’ll retire with about $170,000 in savings. Even after compound interest on those savings, they’ll be lucky to retire with $1 million.  That’s less than half of what the Financial Analysts Journal predicts is necessary to support a $100,000/year retirement lifestyle.

If inflation for the next 40 years runs about as it has for the past 40, the actual purchasing power of their possible $1 million in retirement savings could be less than $100,000 in terms of today’s dollars.

If we factor in the probability that this average family will suffer divorce, disease, death, unemployment, a shrinking economy and falling wages and salaries, you can see that the probability of retiring into a comfortable standard of living is just about zero for the average middle-class husband and wife.

Even the Financial Analysts Journal asked if the article’s proposal is “realistic or a fantasy”.

In order to make their proposed retirement program work, all you have to do is live a nearly idyllic life untroubled by the usual trials and financial tribulations we all usually face, clear $3.8 million after taxes and save 20% of your income each year.

Then, “retirement is not hopeless.”

But who saves 20% (or more) of their income?  Very, very few.

Point:  A very few Americans may be able to retire comfortably, but most will have little to rely on other than Social Security—and it’s unclear how much longer anyone will even be able to rely on that.

•  Financial Analysts Journal agrees:

“Twenty percent [savings] for retirement is an aggressive goal. Most people save much less. . . . But, once you reach this pinnacle of saving virtue, how long would it take you to reach your goal of $2.2mn for retirement?

“Only another 110 years.”

How encouraging!  If you and your spouse start working in the middle class at age 22 (right out of college) and stay at it until you’re about 132 years of age, you’ll have saved enough retire comfortably.

If retiring comfortably is not yet “hopeless” for the entire middle class, it’s nevertheless highly improbable.

Yes, you might get lucky in the stock market, or hit the Lottery and be able to retire comfortably, but for the vast majority of Americans, their “golden years” of retirement will be closer to poverty than comfort.

•  If you’re one of the disciplined few in the middle class who are able to save 20% per year while you’re working, and if inflation is predominant during your retirement, the purchasing power of your savings will be diminished.

If deflation is predominant, the purchasing power of your savings will grow, but the nation will go into a depression, you may lose your job or at least your salary will be diminished and you’ll be less able to save for the future.

The first implication for these grim scenarios is this:  Most Americans will not save enough during their working lives to retire comfortably.

A second implication is that, most Americans can’t safely rely on Social Security or pension plans to support them through twenty or thirty years of retirement.

If personal savings and governmental or private pension plans can’t be relied on to ease most people’s retirement, then it follows that retirees may have to find alternative sources of regular income during their retirement.  These sources of “regular income” could include dividends, rental properties, insurance contracts, owning your own business—or a decent investment plan.

But how reliable are most of those investments?  Given our current economic conditions, how many of you are sure that the stock market indices won’t collapse in the next twelve months?  How many of you believe you can rely on the Dow as a place to deposit your savings for the next ten years or even twenty?

If you had to deposit all of your savings into just one investment, right now, that you expected to last for 20 years—what would that investment be?  Apple?  GM?  IBM?  Berkshire Hathaway?  US bonds?  Or gold?

•  Further implications:

If you can’t save enough for your retirement, it’s certain that no one else can, either.

In other words, private pension funds, 401(k)s, and government will be at least as unable to save as you are.  Therefore you probably won’t be able to rely on most private pension funds, 401(k)s, or government to provide you with much more than a subsistence-level or retirement–and even support for a subsistence-level retirement is less than certain.

Note that I’m not talking about right now.  For the moment, pensions seem somewhat reliable. Social Security checks or deposits still generally arrive on time.  For the moment.

But I am talking about the foreseeable future.  Soon, if economic conditions continue to change so quickly that you can’t provide for your own retirement, you won’t be able to rely on anyone else—including government—to do much better.

Implication:  It’s increasingly unlikely that you will ever retire.

Implication:  You’re going to need a job to put food on the table long after you turn 65.

•  Therefore, for most Americans, retirement will be:

1) postponed beyond 65 years of age; and,

2) at a much lower standard of living than we might’ve once enjoyed or hoped to enjoy in our “golden years”.

Our “retirement” (if there is one) could devolve into abject poverty if:

1) we don’t save aggressively to accumulate savings; and,

2) if we trust our savings to an unreliable class of investments that dissipate those savings rather than protects them.

•  Implication: Most of us may have to begin to rethink our hopes for retirement.  The whole idea of retirement may be fast-fading into some dim recollection of a magical “Camelot” when people could stop working and just enjoy their lives.

Again, odds are growing that you may never retire—at least not until you’re completely disabled physically or mentally.  At that point, you can’t expect to live much longer.  The “golden years” of retirement that you may’ve once hoped for may be translated into several “golden months” (or even weeks) spent in the hospital or hospice between the time when you were finally unable to work and the time when you pass on.

•  All of these unpleasant retirement implications go beyond the fate of senior citizens.

If we’re entering an era when a “retirement” is only for the rich, and most senior citizens must work or live in poverty—what will that same era mean for those who young but unemployed and dependent on some form of government welfare or subsidy?

If senior citizens can’t save enough in a lifetime of work to support a decent retirement, what’s the probability that government will have enough money to fund welfare for the poor and subsidies for the upper classes who are young or middle-aged?

Not very high.

The decreasing likelihood that most senior citizens will enjoy a comfortable retirement signals that the whole nation is heading towards an era of lower wages, fewer jobs, more poverty.

What can you do to protect yourself?

1)  Recognize that you may never retire.

2)  Recognize that as a senior citizen, retired or not, the biggest threat to your finances may be medical costs. Do all you can to protect your health and minimize your exposure to medical care costs.

3)  Recognize that, if you never retire, by definition, you will need a job to survive as a senior citizen.

4)  If possible, protect your job by owning a viable business. Owning a business isn’t easy.  Most people aren’t likely to be capable of starting to run a successful business for the first time in their 60s.  You’ll have to risk some of your savings to build or buy a business that you can operate successfully.  But you can’t be fired so long as you own the business.  So long as you own even a modestly successful business, you will have a job.

5)  Save as much wealth as you can.

6)  Store you wealth in a form that’s not easily destroyed by market fluctuations or collapse. Generally speaking, that form will not include stocks, bonds, pension funds, bank accounts, or even stack of $100 bills stuffed into your mattress.  Most of those paper-promises-to-pay will be repudiated.  For some of you, that form could be a viable business.  For most of you, that form will generally be gold or silver.