Tuesday, February 14, 2006

Back to Work Old Man-Redux

Happy Valentines Day, Everyone! While the Author is still in more of a Thinking than Concluding Mode, He is Resposting some Prior Posts. The Post Below is From November 8th, 2005.

One friend says to another, “I plan to retire on a beach someday”.“Wow,” replies her friend, “You must have saved a lot of money for retirement.”“No, I don’t have anything saved. That is why I will have to retire on a beach”.[i]

Another version of this “joke” goes, “My retirement plan is to work until I die.”For some others, the retirement plan is the lottery or the Trifecta.Thinking about investments, finance and economics often brings one into contact with some unpleasant facts. After all, economics is the study of the allocation of scarce resources. But the Author has never backed away from unpleasantries. In fact, he is often described as “unpleasant”.But the following facts are really unpleasant:

Few Americans are saving enough to fund their retirement.Social Security will not be able to fund the “obligation” to the Baby Boom generation without major adjustments or reduced benefits.Corporate pensions are frequently under funded and many companies will default upon their pension payments to retirees.As unpleasant as these sound, there is at one “solution” and one “workaround”.

Few Americans are Saving Enough.

Retirement planning was formerly a “three-legged stool”. One’s retirement was funded by a combination of personal savings, a company pension, and Social Security. Many companies no longer offer “defined benefit” pensions and these traditional pensions have been replaced with 401(k) plans. These plans are effective alternatives to pensions, but require the act of “saving”, foregoing current consumption for future security. An act that Americans are often loathe to do.There is a solution to the inadequate savings problem. And this is the only one of the three unpleasantries that has a solution. “Bite the Bullet”, “Pony Up”, “Insert your own John Wayne type aphorism here” and save more for retirement. As my former Minnesota neighbors would say, “End ‘uh’ Story”!

Social Security.

Social Security has been called, and still is, the “Third Rail” of politics. Like the third rail on an electrically powered commuter train, touch it and you die. Witness Bush’s Social Security proposal fiasco of earlier this year. The Author will not jump in with some proffered solutions for Social Security. But suffice it to say that demographic factors will force change and those changes will mean reduced benefits. Whether those reduced benefits take the form of lower benefits, means testing based upon income, later eligibility age, or a combination of all three, benefits will be reduced.The solution above, “save more for retirement”, is a solution for reduced Social Security benefits. And there is a “work around”[ii]. Keep working.

When Social Security was enacted, the life expectancy of an American worker was 67 years old. It did not take an actuarial genius to know that the program would have it easy for the first few years. But if we look at the nature of work performed at that time, it was physical and demanding. People’s bodies were often “worn out” long before 65. The changing nature of work now leaves most people health and able to continue to keep working well into their 70s.Additionally, evidence is showing that many people are currently working past 65 and will continue to work as long as they find it satisfying (or economically necessary.)

Corporate Pensions.

For many workers, corporate pensions are not an issue. Few companies offer them anymore. And within the past three years, nearly 600 pensions have defaulted, throwing their obligations on an under funded federal agency called the Pension Benefit Guaranty Corporation. (PBGC). These under funded pensions will require shoring up from the earnings of the companies, lowering the value of the company’s stock. In the worst-case scenarios, they will fall upon the “guarantor of last resort”, the US taxpayer.


The Author believes that there will generally be two types of retirees in the next few decades. And their retirement status will NOT be determined by the amount of income they earned during their working lives. Their retirements will be determined by how they PLANNED and SAVED during their working lives. Let’s look at these two types of retirees:Frankie and Flora Ford. These are the folks that live well within their means, research how much they will need to fund the retirement they desire, and work diligently to save and invest enough to fund that retirement plan. They review their plan yearly and make adjustments as required.Lenny and Leona Lexus. They live in the best neighborhood they can afford, drive the best car they can lease, and live like there is no tomorrow. Their “tomorrows” will reflect that earlier lifestyle.


This post has been on the dour side. But it was meant to be. Saving for retirement is the only guaranteed solution to live the kind of retirement you would like. And lower returns in the next decade or so will make the job of saving and investing even harder. But what is the alternative?Politics aside, the US government lacks the fiscal ability to fund the Baby Boom generation retirement as generously as it has funded the retirement of prior generations. [iii] It might not sound fair to those of who have “paid in all their lives”, but fireside notions of fairness and equity cannot change the demographics and the failure of past government to address this problem. It is the situation the Baby Boom generation will face in retirement. YOYOMF.


[i] This is a paraphrase of a “Bizzaro” comic
.[ii] No pun intended.
[iii] But after the Baby Boom generation is in the ground, the demographics will look a little better. The Baby Boom generation, in benefit funding terms, has been described as the “snake swallowing the pig”. Once the Social Security system digests the “pig” (baby boom generation), the “snake’s” body will return to normal size and the ratio between retirees and workers will come back into line.