“Retirement is a pretty cool idea, the thought of being able to enjoy 20, 30, or even 40 years without working is the societal equivalent of utopia. Unfortunately the math doesn’t work. It hasn’t worked for the last several decades, and it certainly doesn’t work now.”
I thought long and hard about writing this piece, its not a story that many investment advisors want to share. Its not a feel-good story.
Retirement is a relatively new idea, for most of mankind’s history, if you were alive you worked. Even the wealthy worked managing their estates. That all changed in 1881 when Otto von Bismarck, the conservative minister president of Prussia proposed government-run financial support for older members of society. It then took eight years for the German government to approve a plan which provided support for those who were over the age of 70. The life expectancy at that time was about 50.
By the 1920’s, a variety of American industries, from oil to railroads to banking, were promising their workers some sort of support in their later years. And certain municipal employees in bigger cities started receiving public pensions.
Most pension plans pegged the retirement age to 65, which had more to do with economics than health. When Social Security was passed in 1935, the official retirement age was 65, and life expectancy for American men was 58. The math worked.
As the post-war U.S. economy boomed, Americans started to live longer. By 1960, life expectancy was almost 70 years. All of a sudden healthy people were retiring in large numbers. For decades older Americans lived without working, so much so that we actually began to believe that we should be able to retire.
Today the average American 50 year old will live to 80, but that’s average, it will not be unusual to be healthy into your 90’s.
Retirement is a pretty cool idea, the thought of being able to enjoy 20, 30, or even 40 years without working is the societal equivalent of utopia. Unfortunately the math doesn’t work. It hasn’t worked for the last several decades, and it certainly doesn’t work now. You see, retirement takes a lifetime of hard work, and careful saving and investing. And all of the funds put aside for your retirement, whether in social security, pensions, 401-K’s, or just savings require economic growth. Without growth and positive returns retirement is an illusion.
Here are some sobering numbers:
- Median household income is $45,000
- Average American Retirement income is $18,000, with Social Security providing about $15,500 of that.
- The average American has $3,000 in retirement savings, but 45% have $0!
- The average American with retirement savings has $40,000.
- Based on 401-K and IRA’s 92% of Americans do not meet the most conservative retirement targets.
- The average American believes they need $60,000 per year in income to retire comfortably.
For most of us this is not new news. We’ve known for a long time that Social Security doesn’t work when life expectancy exceeds retirement age. We’ve also known that pension plans don’t work when life expectancy significantly exceeds retirement age. We’ve decided to shift some of the burden to the individuals by creating 401-K’s and IRA’s and growing a massive financial service industry to help those individuals save their fair share.
The entire financial services industry; banks, insurance company’s, mutual fund companies, and advisors have all been working diligently to help us manage our savings for retirement, while siphoning off at least 1% on an annual basis. And after all of our efforts the average American with a retirement plan has only amassed $40,000 in savings.
And this was when times were good. When until the year 2000 an individual could walk in to his local bank and buy a certificate of deposit and lock in a risk-free return of 5%. With a million dollars of hard earned savings he could get a risk-free return of $50,000. It wasn’t that hard, the hard part was saving for decades to accumulate the million dollars.
There also was a time when a professionally managed pension plan could properly diversify their assets and get a return of 7%. They could calculate how much cash they would need to pay benefits in future years, and build portfolios with mainly A rated bonds to match their liability projections.
None of this is possible today. Neither you or your massive pension plan can generate enough low-risk income to assure you a comfortable retirement.
Why not? Because our Central Banking overlords have deemed it so. Retirees and their pensions are being sacrificed for “the greater good.” The greater good is economic growth, and these compassionate overlords believe that easy monetary policy is necessary to achieve this growth. So they dropped interest rates to zero nearly eight years ago, with the belief that they would be able to raise them again after economic growth accelerated. Now, after eight years of ZIRP, and a meager 2% in economic growth they are looking at doubling down with negative interest rates (NIRP).
To be fair, unemployment has fallen, which is good, but probably not as good as the numbers indicate. Many people have gone back to work at lower incomes, savings have been depleted, and debt has risen.
But the real victims have been retirement savers and pension fund managers, ZIRP has destroyed their models and plans.