This report was originally published by Adam Taggart at PeakProsperity.com
The concept of ‘retirement’, of enjoying decades of work-free leisure in
your golden years, is a relatively new construct. It’s only been around for a
few generations.
In fact, the current version of the relaxed, golfing/RV-touring/country
club retirement lifestyle only came into being in the post-WW2 boom era — as Social
Security, corporate & government pensions, cheap and plentiful energy,
and extended lifespans made it possible for the masses.
But increasingly, it looks like the dream of retiring is fast falling out
of reach for many of today’s Baby Boomers. Most will outlive their savings
(if they have any at all).
And the retirement prospects look even worse for Generations X, the
Millennials, and Gen Z.
A Bad Squeeze
While the US enjoyed a wave of unprecedented prosperity throughout the
20th century, the data clearly shows that halcyon era is ending.
Real wages (i.e., nominal $ earned divided by the inflation rate) for the
average American worker have hardly budged since the mid-1960s:
Yet the cost of living has changed dramatically over the same time period.
Note how the rate of increase in the Consumer Price Index (CPI) started
accelerating in the late ’60s and never looked back:
Squeezed between stagnant wages and a rising living costs, perhaps it
should be little surprise that so many Americans are having difficulty
finding anything left over to save for retirement.
We’ve written about this extensively in our past reports, such as Let’s Stop Fooling Ourselves: Americans Can’t Afford The
Future and The Great Retirement Con. But as a way of driving the
point home, here are some quick sobering stats from the National Institute On Retirement Security:
- The median retirement account balance among all
working US adults is $0. This is true even for the
cohort closest to retirement age, those 55-64 years old.
- The average (i.e., mean) near-retirement
individual has less than 8% of one year’s income saved in
a retirement account
- 77% of all American
households aren’t on track to have enough net worth to retire,
even under the most conservative estimates.
(Source)
To these grim stats, we have to add in the likely additional challenges
that will be brought by the coming epidemic of failures of underfunded public and private pension plans, the loss of
jobs due to automation/outsourcing/competition from younger workers/layoffs
during the next recession, the extra years of funding demanded by longer
lifespans, falling home and asset prices as interest rates
rise, and the vaporizing of any existing savings as the Everything Bubble finally bursts.
We’re already seeing a new term appear in the research: senior
poverty. We’re going to hear this term a lot more over the coming
decades.
Keep in mind that things have gotten this bad during the longest bull
market in US history. How much worse will it get during the next downturn?
The problem is growing as more Baby Boomers reach retirement age—between
8,000 to 10,000 Americans turn 65 every day, according to Kevin Prindiville,
the executive director of Justice in Aging, a nonprofit that addresses senior
poverty. Older Americans were the only demographic for whom
poverty rates increased in a statistically significant way between 2015 and
2016, according to Census Bureau data. While poverty fell among
people 18 and under and people 18 to 64 between 2015 and 2016, it rose to
14.5 percent for people over 65, according to the Census Bureau’s
Supplemental Poverty Measure, which is considered a more accurate measure of
poverty because it takes into account health-care costs and other big
expenses. “In the early decades of our work, we were serving communities that
had been poor when they were younger,” Prindiville told me. “Increasingly,
we’re seeing folks who are becoming poor for the first time in old age.”
This presents a worrying preview of what could befall millions of workers
who will retire in the coming decades. If today’s seniors are struggling with
retirement savings, what will become of the people of working age today, many
of whom hold unsteady jobs and have patchwork incomes that leave little room
for retirement savings? The current wave of senior poverty could
just be the beginning. Two-thirds of Americans don’t
contribute any money to a 401(k) or other retirement account,
according to Census Bureau researchers. And this could have larger
implications for the economy. If today’s middle-class households
curtail their spending when they retire, the whole economy could suffer.
(Source)
Yikes.
OK, so the masses are screwed. Retirement is nothing but a pipe dream for
them.
But what about for you?
Will Your Retirement Fail To Launch?
Rocket science has a concept that’s very relevant to retirement planning.
It’s called escape velocity.
When attempting to shoot a rocket into space, you need to make sure it’s
travelling fast enough to get out of the Earth’s gravity well.
Not enough speed, and your rocket plummets back to the ground
(catastrophically). Just enough speed gives your rocket orbital velocity,
where it stays in constant motion circling the Earth. Anything faster than
that achieves escape velocity, sending your rocket out into the
larger solar system:
This is a good analogy for retirement planning:
- Not enough savings and it’s a
lifetime of work until you’re simply too old to continue. Beyond that
point, unless you win the lottery or find a generous benefactor, you’ll
likely live below the poverty level and depend on whatever government
subsidies are available to you and the growing army of impoverished
seniors like you. This will not be a fun outcome —
trust me. I’m supporting a close family member going through this now.
- Just enough savings and you can
retire, albeit cautiously. The main danger to those in this situation is
that living costs may rise faster than anticipated. If so, falling out
of retirement is a real threat. Frugality and vigilance are key.
- Ample savings let you achieve
escape velocity. This doesn’t necessarily mean you can enjoy a
caviar-and-champagne lifestyle; but you can leave the rat-race behind to
focus on your interests, and sleep at night without worry. This is the
state most of us aspire to, but fewer and fewer of us will actually
attain.
The critical question each and everyone reading this needs to ask
themselves is: Are my retirement efforts on track to achieve escape
velocity?
Statistically, for most of you, the truthful answer is: No.
So get started by getting clear about what your current shortfall may be
(we’ll talk about steps for addressing any shortfall later on below).
As a jumping off point, use the Multiply By 25 Rule. Many financial planners use this as
a general rule of thumb: to be able to afford to retire, you should have at
least 25x your desired annual income saved up before you hang it up at the
office.
What’s your current household’s annual burn rate? Do you want to maintain
that same standard of living as a retiree, or are you willing (and able?) to
get by on less?
Don’t forget that the older you live, the higher the probability you’ll
need to enter assisted living or a nursing home at some point. Here are some
figures for you on that (from the Genworth 2017 Cost of Care Survey):
- $100,000 a year = the median cost of a private room in a
nursing home
- $85,000 a year = if you don’t mind sharing a room.
- $50,000 a year = if you can manage with just daily help
from a home health aide. $50,000 pays for one shift a day; the rest of
the time you’re on your own
(Source)
Whatever the final estimate, given your current savings rate, is it
realistic to expect you’ll have 25 times that amount saved by the age you’d like
to retire?
If you’ve never yet done this simple math, do it now.
If the numbers reveal you’re on or ahead of track, congratulations! And if
not, at least you have a sense of what the gap is and can get to work on
devising a credible plan for either closing it or ratcheting your retirement
goals downwards.
(Of course, the Multiply By 25 Rule is just a rough guideline. The correct
multiple for you may be higher or lower depending on your personal situation
and goals. As always, we recommend working with your professional financial
advisor — or the
one we endorse at Peak Prosperity — when developing your retirement
plan.)
For as they say, to fail to plan is to plan to fail. Workers who plan to
fail rarely succeed in achieving retirement escape velocity:
Multiplying Horror Stories
The media is increasingly peppered with heartwrenching stories of seniors
unprepared to support themselves.
Many have spent their lives working, but were simply unable to put enough
away:
In a perfect world, the perfect retirement is where life begins. But
for people like Debra Leigh Scott, there’s the very bleak possibility that
retirement is where life might end.
“Suicide is my retirement plan,” Scott, a 60-year-old
adjunct professor, said in an interview with Vitae. “Unless you have a spouse
or partner, you’re looking at dire poverty in old age. In addition to
poverty, you’re looking at getting no additional work because of your age, or
you’re looking at dropping dead in the classroom.”
Scott, a divorced mother of two grown children, has been teaching for over
a quarter century but never received the tenured position she hoped for.
After years of financial struggles — including the loss of a home — she has
no money saved for retirement.
(Source)
Some are seeing their cost of living escalate much faster than expected,
depleting their savings more quickly:
In one neighborhood in Jersey City, New Jersey, the average
tax burden will rise to $29,026 from $16,591, an increase of nearly 75
percent.
Property taxes are up 38 percent year-over-year in
Clark County, Nevada.
Meanwhile, homeowners in Williamson County, Texas — just outside of Austin
— experienced a 15 percent tax increase last year.
(Source)
Others are learning that the pension promises made by their employers are
in jeopardy:
New England Teamsters facing $5.1 billion pension shortfall,
putting retirees at risk, study says (Boston Globe)
A pension plan covering more than 72,000 truck drivers and
warehouse workers represented by the New England Teamsters union is the
nation’s second most underfunded multiemployer pension plan, and is on track
to run out of money within a decade, according to a new study.
Nationwide, the study said, 121 multiemployer
plans covering 1.3 million workers are underfunded by a total of $48.9
billion and have told regulators they could slip into insolvency within 20
years.
And remember, this is all happening at a time of record-low unemployment,
low interest rates, record high stock and real estate prices, 3%+ GDP growth,
and relatively affordable energy prices:
Again we have to ask: How much worse will things get when the
next recession hits?
Securing Escape Velocity
Everyone reading this is on a one-way path to old age. Whether you plan
ahead for it or not.
For the majority of us who hope to avoid spending the rest of our lives
*having* to work but do not yet have our retirement fully funded, the
following strategies will prove critical:
- Minimize your cost of living footprint —
Your savings will go farther the less you draw from it. Which expenses
can you reduce/remove when you retire without losing undue quality of
life? Start with the big expenses first — housing, food, vehicles,
education, etc. Moving to a smaller/cheaper residence or a lower-tax
state can extend your financial self-sufficiency by years. Buy in bulk
and cook more meals at home versus eating out. Become a 1-car household
— or go carless (it may be much cheaper and more convenient to simply
call an Uber when you need a ride).
- Maintain your health — Failing
health is typically the biggest financial and emotional drain of old
age. Making wellness a priority now, and taking good care of your
health will reap tremendous dividends in your retirement, in
(potentially huge) savings and (potentially much) higher quality of
life.
- Line up family/community support in advance —
Too many folks delay involving their support community until things
devolve to crisis levels. At that point, options tend to be much more
limited. Instead, start openly planning with your family and close
supporters long before retirement, to clarify how folks may be able to
support you (and what you can do today to earn that support tomorrow).
For many, a return to multi-generational residential living make great
sense — where aged parents move in and help with chores and child
rearing while they’re able, and then are caringly attended to in their
last years when they cannot.
- Develop passive income streams —
When you stop working, that doesn’t mean your income has to stop, too.
In the years/decades preceding retirement, there are steps you can take
to create income streams that will persist for the rest of your life.
Real estate investing, creating or buying into businesses, allocating
your portfolio increasingly into dividend and income producing assets,
purchasing annuities — these are all examples of steps most of us should
be looking into. The more passive income you have coming in during
retirement, the less your need will be to draw down from your nest egg.
So the good news is that the retirement dream is still
attainable. You’re just going to have to remain laser-focused and disciplined
in your pursuit of it.
There are strategies and behaviors that, if adopted now, will make it
much more likely for you to be able to afford to retire — and in a way you
can enjoy.
If you haven’t already read it, be sure to read our report Success Strategies For Retirement by Charles Hugh
Smith. It details out a number of the best practices needed for a
solvent retirement in today’s environment, including providing 14 specific
action steps you can start taking right now in your life that will materially
improve your odds of enjoying your later years with grace.
For far too many Americans, “retirement” will remain a perpetual myth.
Don’t let that happen to you.
Click here to read Part 2 of this report (free
executive summary, enrollment required for full access)
