Die Early or Retire Broke
WAYS TO BEAT THE RETIREMENT CRISIS
An Analysis of the Investment Challenges
Facing Americans and Their Financial Advisors in 2020
BY JOHN LOHR
Excerpt 1:
INTRODUCTION:
A STATEMENT OF THE PROBLEM
Please believe that:
1. Retiring Americans are in trouble.
2. “Helpers” like Financial Advisors must retool their business to actually help their clients instead of pushing products.
Still, The retirement assets of Americans grew approximately 4% to $29.6 trillion in 2018, with the strongest growth coming from worker contributions to 401(k) accounts and other company-sponsored plans and to individual retirement accounts. However, in recent years we’ve had much lower growth.
But, the endemic retirement problem is that financial catastrophes are germinating in the good news that Americans have a high likelihood of living longer. The “bad news” is that we will not have enough money to sustain ourselves.
The expected lifespan of an average 30 year old TODAY is 120. The average age of the second to die of a couple aged 62 is 92! 65% of today’s 65 year olds will reach 85 years of age or more. “Retirement used to mean 10-20 years, but no more. Americans have simply not been taught to think in terms of a 20 or 30-year retirement. At a meager 3% inflation, in 30 years, we’ll need $2.45 for every $1.00 we need in 2019. You can’t think in archaic terms of being able to live on 75% of what you make now. The risk of dying too young has been replaced by the risk of living too long.
The soon to retire have no idea of the magnitude of their financial shortfall. They can’t imagine being 92 or how they get there. It’s expensive to golf every day for 25 years. In 2019, 10,000 people a day (A DAY!) will have turned 65. And it will continue at that rate for the next 19 years! According to the AARP, only 4 in 10 believe they have saved enough to retire. Today’s worker can forget about leaving a legacy to their kids or favorite charity. They may need to go back to work and stay there until they die.
Fit the Boomer into the longevity data and you’ll see that their investing plan, if they have one, must at least equal trendline inflation or they’ll run out of money before they run out of sustainable brainwave activity. Boomers need their liquefying money, even though they may not be aware of it now. Most of the Boomers want income continuation, principal growth and a legacy plan. Unfortunately for these Boomers, there is no such investment solution. Financial supermarkets run advertisements featuring retiring Americans buying sailboats, beach houses and businesses. Boomers smile and nod. But, the underlying true message of these ads is a grave one. Without a PLAN that was started years ago, forget it. If you’re 50 now, it’s not too late to start saving for retirement, but your upside is limited. If you’re 60, your chances of raising significant retirement assets by starting now are twofold—slim and none.
Let’s understand why we are where we are, analyze the issues and find some realistic solutions. Privatizing social security or some fundamental upheaval of the retirement investment industry are NOT the solutions in a vacuum.
Stay tuned…. John
EXCERPT 2:
IT’S TIME TO RETIRE “RETIREMENT”
It is an archaic system. My generation and the younger “Boomer” generation were brought up in a world where our parents lived the 1930’s version of a three stage life: educate, work, retire.
That is not what’s happening today. People in their late 60s and 70s have part time jobs, volunteer, start businesses, write, draw, play piano. Retirement fits into the lifestyle of the 20-30 and 40 year old even less. There will always be some who just want to hit an age, kick back and garden or golf or whatever. But, how boring? The combination of longevity and the declining retirement savings rate is forcing a change in our thinking.
It is and will be a difficult change. Those of us of a certain age have been hard-wired into the depression era thinking.
My parents believed that they could retire at 65 with a pension after slaving away at the metaphoric mill for 35 years, collect social security, maybe get a small pension from the mill and live the rest of their days until they had to go into the “old folks home” to die. Neither ever made it. They didn’t leave any savings because they didn’t have any, and never saw a need for it.
The combination of longevity and declining retirement savings rate is forcing a change in that thinking.
There effectively is no financial “retirement crisis”. At least there doesn’t have to be for everyone. We have been led (pulled?) down that path by Big Financial who have been the chief beneficiaries of the “save to retire” mentality. Along came IRAs and 401ks to enable us to “save for retirement”. Where did they actually come from? (No, not Congress, that’s not what I meant). Here’s a history lesson.
The advent of self-funding:
In 1974, Gerald Ford signed ERISA into law. And so IRAs began. As originally contemplated, taxpayers could contribute up to $1,500 per year and reduce taxable income by the amount of the contributions. Additionally, the amount inside the IRA would grow without being immediately taxed. ERISA, by the way was, at least partially due to the devastating losses of participants’ poorly funded pensions when Studebaker collapsed in 1966. So, rules.
Initially restricted to those who were not covered by a pension, IRAs rules were changed in 1981 when Regan’s Economic Recovery Tax Act removed the restriction limiting them to those not covered by a pension. After 1981, anyone with income could contribute, tax deductible, up to $2000 for themselves and $250 for a non-working spouse. Amounts and nuances changed, but the basic premise was “save for retirement”.
Then and now, you have to begin withdrawing (at least a required minimum distribution—the RMD) in the year you turn 70 ½. A few years ago, IRS revised the RMD distribution/withdrawal tables. Actually, IRS refined the withdrawal system in a way that makes more sense than I would have expected. There is a complicated formula, but the RMD is not arbitrary. It is designed to so that you are unlikely to outlive it, if you do not exceed it. Today for a 70 year old, the distribution period is 27.4 years. The way the table works is that the longer you live, the distribution period takes you to a longer period. For example, an 86 year old has a distribution period of 14.1 years. 70 year olds will not deplete their IRA until age 97 or so, and that’s without any assumed growth; an 86 year old to 101. Called the Lifetime Uniform Table, it goes up to a 115 year old retiree. (I couldn’t find any.) Also, there are tweaks for beneficiaries and for retirees with much younger spouses. I didn’t look up whether the “much younger spouse” category factored a longer or shorter life. Hmm…
Let’s leave the IRA system alone for a minute until we get to the solutions, below.
The demise of the Pension ….