Friday, July 4, 2014

Retirement Crisis


Along with the distressing articles about the disappearance of the middle class, the number of articles, tips and information about retirement is growing.  The USA Today printed 7 mistakes people make in retirement last October and again this April.  (It is a different article, but substantially the same tips.)  The real question, though, is whether people who are now in their thirties will ever be able to retire.  Some of that depends on wealth, but a great deal also depends on behavior.

In the past people understood that retirement financing was "like a three-legged stool.”  They could rely on a pension, Social Security and personal savings.  Today, not only are people living longer, but the first leg, pension, is disappearing, being replaced at many companies by a 401(k) and other forms of personal investments.  Many large companies are avoiding the liability of a pension commitment by phasing it out for new workers or completely eliminating it.  Even union guarantees are being challenged and renegotiated retroactively as in the Detroit bankruptcy and on-going debates in Chicago, among other places.

What’s more a survey this March shows:  “About 36% of workers have less than $1,000 in savings and investments that could be used for retirement, not counting their primary residence or defined benefits plans such as traditional pensions, and 60% of workers have less than $25,000 (less than a year of expenses for most people)."  The icing on the cake is that Social Security funding has not been solved despite concerns dating back 30 years.  No politician wants to take the chance when AARP and others vociferously attack consideration of even the slightest adjustment.

Longer life throws two monkey wrenches into the works.  The first is simply that savings must last longer.  The second is that associated with longer life is the potential for more medical bills.  Current estimates are that “the average 65-year-old couple could actually expect to spend more than $220,000 in Medicare premiums and out-of-pocket medical expenses during retirement.”  That’s on top of regular expenses.  The majority of Americans are either overweight or obese and those who are not physically fit are in for an even ruder awakening.  Fidelity estimates that poor health can increase the amount of retirement income this person will need by about $15,200 per year.”

The bottom line is that most people don’t know how much to save and, even if they did, don’t have the will to save it.  According to this expert, even a million dollars might not be enough.  Despite plentiful tips, they don’t know how to save, spending all they earn, and sometimes more.  Some advice intended for retirees applies to everyone:  they should make a budget and stick to it or “avoid impulse buying and make sure they have other ways to socialize besides shopping.”  Just as shopping should not be the new job for retirees, it must not be a hobby for younger folks.

Many make mistakes while they are young and will never recover:  not appreciating or planning for the size of college debt, having unwanted children or children with a deadbeat spouse, buying too much house with a minimal down payment and not paying off the mortgage before retirement, abusing credit, and generally wasting money by not distinguishing between needs and wants.  We could learn a lesson from professional football players on that score.  “Just two years after their athletic careers end, 78% of former NFL players are bankrupt or nearly there.”

Will retirement become a thing of the past?  Will we revert to the America of the 1800s when only the very rich retired and the rest worked as long as they were capable and then were totally at the mercy of family or charitable programs?  With the current behavior in the five key dimensions, it doesn’t look promising, and there is less and less possibility of passing the responsibility on to the government.

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