I think this needs to be the mind set when thinking about retirement savings. This probably applies more to folks that are still in the accumulation phase, but maybe not.
The motivation for this post was an article in Barron's that, while not providing anything new, was thought provoking. It included ideas about working longer, living longer, potential threats to social security solvency and the extent to which boomers are or are not good savers.
The idea of working longer, in your first career or some post retirement career, is something that I believe in wholeheartedly but one reader left a comment on this point a while back noting that sometimes circumstances may make that impossible. Planning to do some work is a good idea but a financial plan that hinders on it could be asking for trouble.
I tend not to believe that social security will be there as we now know it. There is data to support both sides of this point but I just don't have faith in it. According to a calculator on Yahoo my wife and I will receive about $3000 per month in today's dollars. Isn't the annual cap about $15000 (for self employed people)? So I'm paying in $15,000 and I'm getting $36,000? The kicker for inflation makes the estimate in future dollars more like $70,000. Hasn't the ratio of workers to retirees been shrinking for a while with more, ahem, shrinkage, still to come?
I will say that the $3000, if it actually happens, would cover about 90% of every nickel we spent last year, literally every nickel which includes a down payment on a Tundra. I can stop saving now and just party. In all seriousness we live an incredibly modest (cheap?) lifestyle motivated by my parents financial miseries.
Saving too much is not going to be a problem, if you should be so lucky. The "I have not saved enough" mindset will serve me well. You may or may not buy into this but the numbers of people that have saved enough, relative to their age, is woefully low. My wife's friend who is about 50 said she only has $4000. There is some stat floating out there about most people having less than $50,000 saved.
There is probably some sort of sport analogy about playing with at least some desperation. This can apply to saving habits too. If you focus on investing such that you have found a site like mine to read you are probably less likely to be so far behind the game as my wife's friend.
Part of financial planning has to be laying out a worst case scenario which for me means not working (even though I plan to work), no social security (I don't plan on it anyway), below average stock market growth and above average inflation.
If you undo some of the assumptions embedded in your financial plan, where does that leave you? You can go to any online calculator, plug in 5% investment returns and 5% inflation (or any other set of numbers) to get an idea.
I am not a planner of any sort. Portfolio management is not financial planning. A post from me on this topic will not solve anything but might ask one or two constructive questions. My wife and I are admittedly peculiarly conservative in these matters for reasons touched on above and so we are not a benchmark for anyone.
We all have gaps and quirks, no one is immune, that potentially get in the way of the desired outcome. These need to be addressed and mitigated to give a better chance for success.
Lastly, thanks for all the great comments in the last few days. It is tough to reply to all of them but I am thankful for them.
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15 comments:
Roger,
I was actually looking for the estimated savings at retirement. I ran across this article from Boston College's Retirement Research Center which lists the specifics of risks.
http://www.bc.edu/centers/crr/issues/ib_57a.pdf
We live in such a consumer oriented society, rooted in credit leveraging and coupled with our failure to educate our young people about sound money management. And just look at what has happened to housing--normal two-wage earners (this is more than a subprime mortgage issue) cannot afford homes in their areas without resulting to financing schemes that are ludicrous.
I read something yesterday about the demise of social security, and the following occurred to me. With our INDEPENDENT living--meaning generations quickly disperse out of the household, you end up multiplying living expenses. So if you think about family unit expenses, multi-generational living has some clear economic advantages. I cannot help but wonder if we will see a rather dramatic shift in this dynamic in the coming decades. I think that we will see a cultural shift as our society as a whole becomes less affluent and our governments coffers dry up.
The burden of caring for the old and infirm family members will likely move from the government to family units. I'm fostering in my kids the notion of you can stay in the home so long as you are working toward long term goals of independence (education toward career path, savings goals).
Roger, I read your comments about Baby Boomer retirement issues with great interest. As a leading edge Baby Boomer (I will turn 60 this year)firmly ensconced in the middle class I have to say that I don't know anyone who is as woefully unprepared as the Barrons article (and many other articles) describe.
I worked for a publicly traded company in Rochester NY for over two decades.
I never made a six figure income in my entire career even with multiple advanced degrees; no upper management golden parachute or stock options.
I was one of many many Baby Boomers who toiled daily but didn't particularly like his or her job. In the 1980s I decided that my goal would be to prepare for retirement as early as I could. My wife and I ended up 'self retiring' seven years ago on our own. I had to give up most of the Company pension (because of my age) and I got NO Healthcare.
We did it all on our own with conservative investments and patience.
I live in a nice wooded area of SW Prescott in a neighborhood which is about half retirees and half younger couples. The retirees are mostly in their 60s (some older) and consist of ex-teachers, salesmen, firemen, cops, with a sprinkling of Attorneys, small Business Owners and Doctors at the higher end.
It appears to me that the people who retired from jobs with a Union (Teachers, Cops etc) live the cushiest life style. Large pensions with COLAs and great Healthcare. I know some ex-teachers from California who boast that they make MORE in retirement than they made while teaching (whatadeal!) However, the rest of us are doing OK even without that. Most people my age I know who are getting ready now to retire (admittedly, seven years behind me and my wife) have saved and invested and are confident they will do OK.
I don't really have a lot of sympathy for those who spend , spend, spend their entire lives and then cry that the Government should take care of them in retirement (hidden meaning--people like ME should pay for their retirement with higher taxes).
People need to take more responsibility for their own actions.
I read your Blog daily because I have to carefully manage my nest egg in retirement because if I blow it, there will be NO ONE there with a safety net.
Leisa, interesting point. I might take it a little bigger picture and say that the resourcefulness you describe will apply itself, hopefully, to many aspects of life. For example the number of folks making a living on eBay. That is certainly the type of work that can be done well past retirement age.
RIP, I immediately thought about Albert Brooks forbidding Julie Hagerty from ever using the words nest and egg in the same sentence.
The idea of an annuity (which really is what a pension is) clearly has pluses. You give up control of the assets in exchange for the steady income. The down side would be that if something goes wrong with the pension system. We read things that question whether assets can cover liabilities. I don't know of course but I can say I prefer the control.
I for one believe that the baby boomer generation will, because of their voting power, insure that social security is the gift that keeps on giving. AARP is a huge voting block and social security is the third rail in politics. It may bankrupt the country, but at least fo this generation remember that old folk vote!
At some point the government has to come up with more money. The only place to get money is from people who have money, i.e. the savers among us. The savers will lose their savings by inflation, taxation, and means testing.
Save anyway. Fend for yourself.
Fred
A good post by Roger and equally good comments from the readers.
Those who are financially disciplined - those who sacrifice, save, and live within their means will eventually be seen as "the well-off" and punished with huge tax bills. One flaw with democracy is the masses can vote to legally plunder a minority.
I'm 46 and I've already conceeded the fact that I won't see a penny from Social Security.
Social Security IS my retirement plan!
"Hasn't the ratio of workers to retirees been shrinking for a while with more, ahem, shrinkage, still to come?"
It used to be 20-1 30 years ago. Today, it's 3-1. And, it's projected to be 2-1 when I get mine in 14 years. I ought to find out who the couple is that will be "sponsoring" me so that I can make nice now........
Larry, Joellyn and I found out a couple of years ago we are going to be the ones sponsoring you.
"There is some stat floating out there about most people having less than $50,000 saved."
The average Baby Boomer has roughly $55,000 in retirement savings and about the same in home equity.........
(I don't know about your folks, but mine did very well!)
WHY WASN'T I TOLD?
*not that I would have been nice*
EUREKA.
Here is the solution:
Marry correctly, the first time
Educate yourself well
Work
Save 20% of your gross pay
Save it
Worship a God other than yourself
Importantly, do not depend upon anyone else, especially government, to grant you victim status. You have a right to succeed. And, a right to fail.
As I write this, my 97 year old mother is busy in the kitchen of our home preparing dinner for the family, including our daughter and son-in-law who are USAF Captains visiting on a brief leave from serving our country. It does not "take a village" to appropriately nourish an extended family. It takes resolve.
I think the nuclear family was a quirk made possible by an unusal few decades of postwar prosperity in the US. I think we're going back to extended families. I can see it already around. It's how people have lived for 99% of human history so it obviously works.
I'm also worried that at some point we'll see a wealth tax. The govt will ask for 10% of your IRA, 401K etc to pay for whatever boondoggle or fiasco of the moment.
Can you please tell us about your views on CWI.
What does it hold, what are its strengths and what are its weaknesses?
How do you see it performing?
Thanks for your time.
I definitly agree with your thoughts on saving for retirement, but lets remember to live a little too. Sometimes I feel that we worry abit to much about saving for retirement and not enough about enjoying the road to retirement. How many time do you hear of people who die right after they retire. Of course there are many stories about people who long out live thier money. I guess i think you are correct about working during retirement, preparing, just dont forget to live a little in the meantime.
Banker, you are of course correct but I did not think this would need to be a life coaching piece, haha.
Balance in everything is key to good health, IMO. We went to Sweden/Iceland last summer, going to Molokai in April and hopefully back to NZ in the fall. Balance.
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