Friday, May 3, 2013

The Death of Retirement

If you talk to a financial advisor today you will learn that Social Security is one leg of a three-legged stool.  A comfortable retirement also depends on a pension and personal savings.  There are three things wrong with this model.  First, pensions are going away.  Second, personal savings are low, even non-existent for many.  Finally, Social Security must be fixed to survive and the fixes are likely to reduce payments to future retirees and possibly to current ones as well.

Private pensions, those provided by an employer are coming under pressure.  Companies are finding that they can’t continue to pay the benefits they promised.  Even those with union contracts locking them in are struggling.  We have heard news of the US Postal Service running annual deficits due to pension costs.  Auto companies fighting for their survival turned to lump-sum payoffs to reduce their liability.  Hostess declared bankruptcy citing pension liability as a major cause.  Even public plans like that for the State of Illinois teachers make the news based on their financial shakiness.  “The portion of private-sector U.S. workers covered only by so-called defined-benefit plans fell to 3% in 2011 from 28% in 1979, according to U.S. Department of Labor data…”  Pensions are going away.  Anyone who has one should feel lucky, not entitled.

Personal savings is likewise troubled.  “The Center for Retirement Research at Boston College estimates that 53 percent of households did not have enough money to maintain their standard of living in retirement in 2010 (the last year for which data is available).”  According to a Yahoo-reported story:  “Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes…”  This is clearly inadequate and people know it, but every few months we get another dose of similar bad news – often stressing that it has gotten worse over the last 5 years.

Average Social Security is about $15,000 per year, hardly enough to live on.  With two wage earners this would still leave a significant gap between dollars received and dollars needed to retire without significant financial pressure.  In addition, talk continues of needed changes to avoid a benefit reduction of 25% in less than 25 years.  The latest White House budget has already proposed a change in the cost of living calculation to reduce the size of future increases.

Retiree healthcare is more rare than a pension, adding another expense.  Recent estimates claim that over their lifetime “the average 65-year-old couple in retirement should expect to pay $163,000 in out-of-pocket expenses for health care, excluding long-term care.”

Putting it all together an average couple without a pension would need savings of at least $400,000 to $500,000 based on a lifetime withdrawal rate of 3 to 4% to supplement Social Security.  That’s a far cry from the $25,000 shown above.  Put that on top of the additional healthcare expense mentioned above and it doesn’t look promising.  (If you care about this subject you can do your own calculations.  Many free sources are available, e.g., Google: financial advice or try this link.)

Will retirement become obsolete?  Will we return to the reality of a century ago when rich people retired and the rest worked until they died or depended on family support?  Pressures toward this outcome come from several directions.  The government has less and wants to pay less; employers want to pay less.  The only one left is the potential retiree, who would like to spend more today, saving less for the future.

Of course it’s not fair that we are living longer and that healthcare demands so much more of the budget.  It’s not fair that we have to give up some of today’s pleasures and luxuries to guarantee tomorrow’s security.  These are clearly discipline, responsibility and perspective issues.  There is no one to save us.  We must understand our values to separate needs from wants, then buckle down and behave accordingly.

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