Friday, October 14, 2011

A Bill of Goods?

The concept of American Retirement has changed over the years.  Our generation, it seems, has been sold a bill of goods.

Retirement.  We are all supposed to plan for it, but according to statistics, most folks - even well into their 50's, have yet to save a nickel for it.  What is going to happen to our generation in the next decade?  It will be interesting to see how this pans out.

In the good old days of only a decade or two ago, one could work for a "big company" or the Government (the ultimate "big company") and expect a nice retirement, at or before age 65, with a defined pension (perhaps with Cost of Living Adjustments), Social Security, and of course Medicare and perhaps even health insurance - all paid up.

You could go down to Florida, buy a condo, and spend the rest of your days belittling your children, playing golf, and leasing new Cadilliacs every three years.  It was a pretty swell deal - for a very short period in our history, for a very few people.

But, I think even back then, people started to realize that it was not a sustainable model.  After all, when baby boomers retired en masse, where would the money come from to fund their pensions, Social Security, and health care?  And that is the "crises" in government spending we are facing today - trying to pay for the promises made in 1960, when baby boomers were just kids.

In the late 1970's and early 1980's, changes were made.  Defined pensions started to give way to IRA plans and 401(k) plans.  Defined Benefit Pensions were problematic for a number of reasons.  First, most were woefully underfunded.  Second, they were a magnet for corruption, such as with the Teamster's Union.  And third, well, people were living longer and longer, so there was no way to pay everyone as promised down the road.

There was a fourth problem with defined benefit pensions, and that was vesting.  Most companies required that you work there for a defined period - 5, 10, 20 years or more, to become vested.  If you were fired or quit one day shy of that cutoff date, you got nothing, or very little.  As a result, people who changed jobs a lot, such as Engineers, ended up working a lifetime with no pension to speak of.

And while the idea was to encourage employee loyalty, managers quickly realized that there was a real cost in keeping employees on the payroll longer and longer.  Not only did their wages go up, plus the cost of their health care, their pension vesting would kick in.  So ironically, the Defined Benefit Pension ended up being another incentive to fire older employees.

And of course, there were problems, even back then, of companies going belly up with underfunded pensions, leaving older employees with little more than unfunded promises to retire on.   The Pension Benefit Guaranty Corporation was set up in 1974 to insure pension plans.   But that insurance pays back only a portion of the promised amount - it is more of a safety net than insurance, per se.

Because of this and other reasons, many of us young people welcomed the switch to the IRA/401(k) when it was introduced.  Imagine, being able to keep your own money, instead of relying on some Corporation's promise of a pension down the road?  And since you could control that money, you could decide how to invest it.  You could become rich, instead of just having promises of income.

But two problems immediately surfaced with regard to self-funded retirement plans.  First, you have to fund them, and most Baby Boomers didn't.  We could always fund our plans tomorrow, we thought, and still be able to buy that Jet Ski today!  Or, many of us funded at the "minimum" amount, thinking that was sufficient, when in fact, it was just a token savings.

People are just not sophisticated when it comes to money, and people far down the economic ladder are even less sophisticated than most.  So, a friend of mine, while trying to explain the benefits of his company's 401(k) plan to hourly employees (a plan that had 100% matching funds!  Those were the days!) was met with blank stares.  "If I put $10 a week in my 401(k)," one employee noted, "then I end up with $10 a week less in my paycheck!  How is this making me more money?"  That is the level of intellect you have to deal with these days.

And of course, many folks did idiotic things like borrow from their plans as soon as they built up even a paltry balance - or merely cashed it all in and spend it on a car or drugs - and get socked with a hefty tax bill.  These self-funded plans are complex to even a college graduate.  Expecting the average unskilled laborer to understand them was a foolish presumption.

The second problem with the self-funded retirement plan is the staggering amount of money needed to fund it.  With a defined benefit pension, you receive a monthly stipend.  Since your life expectancy is lumped in with that of other people, the overall risk of "living too long" is spread out.  Some folks will die young, and the plan will pay out little.  Some folks will live a long time, and the plan will pay out a lot - like with an Annuity.  But since this risk is spread, there is no need for everyone to make contingency plans of living to be 100.

And that is the crux of the matter.   With a self-funded retirement plan, you basically have a defined benefit pension plan, with a group size of ONE.  There is no spreading of risk, so you have to plan on saving enough money to live for 20 years or more.  And that is a LOT of money.

How much?  Probably a million bucks or more, according to most sources.  And very few Baby Boomers have that kind of money.  Using the 4% rule for retirement savings of $1,000,000 will generate about $40,000 of income in retirement.  Using my own Social Security Projections as an example, I can expect (ha-ha, more on that, later) to get $36,000 a year from Social Security in retirement, for a total of $76,000 a year in income.

That sounds pretty good, but it is far less than what I earned in my lifetime, and far less than the "2/3 of last years income" we have been told to use as a benchmark.

Even saving half that amount ($500,000) is a staggering chore for most people - and far more than most have saved (average 401(k) savings for most folks is less than $100,000 by retirement age).  And using the 4% rule, a half-million dollars would generate only $20,000 in income in retirement.

Of course, some folks - most folks, actually - will end up violating the 4% rule in retirement - taking out more than 4% of their savings every year, until they run out of money.  Many retirement planners are already talking about a 5% rule, while many retirees are running closer to 10%.  The problem with this approach, is that in 10-12 years, at 10%, you run out of money.  And here on retirement island, I have seen firsthand, the results of this scenario.  At the time of your life you don't want to be broke (age 75) you have nothing.  And it is very hard to live on Social Security when you are old and infirm.

As I noted earlier, Social Security is something of a joke, as we have been primed for the last two decades not to expect much from it - despite the neatly printed reports we receive from the Social Security Administration, explaining how much we can expect to receive.  Today, Republicans are attacking Social Security and calling for "reform", which translates into cutting benefits.

So, where does this leave you, Mr. and Mrs. American Baby-Boomer?  Well, for starters, facing a bleaker retirement than our parents.  If you have only $200,000 saved up in your retirement plan by age 65, things are not going to be all that comfortable.  No leased Cadilliacs and leisurely retirement years on the golf course for you!

But then again, as I noted earlier in this article, perhaps that was not a sustainable model in any event.  And to some extent, perhaps not a desirable one.

Again, living here on Retirement Island, I see firsthand how retirement works out for some, and not for others.  And folks who retire with lots of benefits and money - who never work again - are often not very happy people.  It is an interesting aspect of our brains, but work is somehow part of our lives, and when we don't work - particularly for long periods of time - we become depressed.

The smarter ones find jobs to do - either for money, or as volunteers.  Others start making trouble for each other - joining clubs and organizations and then trying to start fights and coups and other nonsense.  Throwing Suzie out of the Parcheesi club seems to be a popular pastime.  After all, her hor's d'ouvres are so tacky.  Right?  Let's all hate her!  Women seem most prone to this type of behavior and the attendant depression that triggers it.  People use these sorts of things to give meaning to otherwise meaningless lives.  After all, the Parcheesi club is so important, right?  Well, actually it ain't.

For others, well, it is kind of sad.   They can't even find meaning in passive-aggressiveness.   Every evening, we walk along the beautiful bike path by our home and count the flickering blue lights in the windows of every nearby home.  In each home, there are two - the husband watching Fox News in the den, and the wife watching Dancing with the Stars in the living room.  Old people rattling around in 4-bedroom homes (bought on the premise that children and grandchildren will come visit, but they rarely do) and spending most of their time - 8-10 hours a day or more - watching Television.

So that is the vaunted retirement for most Americans - endless television watching (with the attendant political outrage), estranging themselves from their children, and complete and utter depression and isolation.  Gee, sounds like fun, eh?

People don't like to talk about it, but the suicide rate among the elderly, particularly men, is higher than any other group - double that of teenagers!  And here on Retirement Island, we get a one or two every year, although they are not talked about much, given both our country's problem with death-denial, as well as the "shame" associated with Suicide.  And of course, if you publicize these things, you get copy-cats.

So, if you under-saved for retirement and are panicked about how you are going to survive, perhaps you should consider yourself lucky.  You will be forced to live by your wits - which means living by your wits, not sitting around getting depressed while sitting on a pile of money, wondering what to do with your life.

So what does this mean for our retirement generation?  Well, for starters, most of us will probably continue to work well into retirement, at least part-time.  If you can bring in a few dollars a week working a McJob, it may pay your food and light bills - and allow you to leave more of your savings untouched for as long as possible.  And this probably also means that many folks will continue to work well into their 60's and 70's, at least part-time, in their previous careers - if that is possible to do.

And given our aging demographics, jobs for the elderly will perhaps not be so hard to find.

And already, we are seeing this change take place here on Retirement Island, much to the chagrin of some of the older residents and even the authorities.   Older residents, being of the "defined pension benefit" type of retiree, spend a lot of time volunteering for their Parcheesi clubs and whatnot, and generally causing trouble for one another.  Younger residents (people below, say, age 60) are often still employed, at least part-time, and continue to work, and even commute to work (or telecommute) or fly off to work for days at a time.

Not surprisingly, this younger group has less time and inclination to volunteer to make trouble for other retirees, and as a result, over time, these volunteer groups are being replaced by paid employees - oftentimes the same retirees who formerly volunteered!  And while this may sound like a bad thing at first (the death of volunteerism), considering our generation cannot afford to work for free, it evens things out.  And if you've ever worked in a volunteer organization, you probably realize all the attendant problems that occur when people are not paid to work.  Sometimes, money actually makes things better.

So, while we may have been sold a bill of goods regarding traditional retirement, I am not sure we got an entirely raw deal.  The retirement we face will be different, to be sure.  But it also may be something better than our forebear's experienced.  Sitting around all day doing nothing, or trying to create make-work, is not a recipe for happiness.  Our generation may have to work longer - and well into retirement, but we will find more meaning and joy, perhaps, by doing so.