“All right, let’s not panic. I’ll make the money by selling one of my livers. I can get by with one.”
A recent wave of media articles have trumpeted the notion that nobody is ever going to be able to retire, or, alternatively, if people do retire, they’re still going to have to work as WalMart greeters or burger flippers to be able to make ends meet. First World problems run rampant! The sky is falling! Older workers will never retire, which means that younger workers will never get jobs!
It’s also a bunch of crap.
It is a bunch of crap, though, that well and truly seems to have penetrated the collective psyche of the United States, and a recent survey by Maritz Associates shows that over 50% of people who are either near retirement or have recently retired believe that retirement is an outdated concept. 22% of workers surveyed in the Employee Benefit Research Institute’s 2013 Retirement Confidence Survey said that they’d have to postpone retirement.
If you believe what the media reports and what is “commonly accepted knowledge,” you’d come to the conclusion that our Golden Age has passed. Once upon a time, we worked up until we died. There was no concept of retirement. In fact, the origins of the word didn’t even appear until the 1590s, and had just as much to do with privacy and seclusion as working. When the Social Security Administration was formed and the Old Age Survivor and Disability Insurance established, the age at which you could draw Social Security was set at the age that the average person was set to expire.
Thus, the retirement notion of just kicking it with your friends on the porch, sitting in rockers and watching traffic go by is a relatively new one, but one that, for some people, seems to already be fading into the sunset.
Screaming headlines sell eyeballs, which sells advertising, so the effort convincing a couple of generations that there is no retirement is bound to gain some attention, but is that really the case?
First, let’s look at some of the data which may point to why these people feel concerned about their retirement.
The people who aren’t confident about their retirement don’t have a plan
The Maritz report showed that 48% of near retirees (those who were planning on retiring within 5 years) started saving and investing early, leading them to hold 57% of the total assets in retirement funds. 41% of near retirees started planning within 10 years of retirement. Unsurprisingly, 44% of near retirees were concerned about having enough assets to last throughout their retirement. Late planning + no savings = no confidence. It’s not a difficult equation to work out.
41% of near retirees have strong Monkey Brains. Monkey Brain doesn’t want to think about the future. While he loves the notion of never having to go back to work again, he deals in terms of shortcuts and quick fixes because that future you is a stranger to him. He doesn’t care what you’ll be feeling in 20 years, because his timeframe is about 20 minutes. Thus, working on a financial plan, actually saving something for retirement and not spending it now, is counter to everything he wants.
As a result, we blithely ignore the future until it’s really close. 10 years out seems to be the point at which the pressure of knowing that we can’t work forever starts to sink in on us and we override our Monkey Brains. Unless you’re a high income family, 10 years is rarely going to be enough time to make plans. It will take a lot of knuckling down to build up a sufficient base of assets to be able to retire. That usually means dialing down the lifestyle and throwing as much money as possible into retirement savings and investments.
Rather than do the hard work, many people simply say “I believe retirement is an outdated concept.” They satisfice their behavior and push off the day of reckoning. People can call it what they want, outdated, old-fashioned, whatever, but for a vast majority of us, there will come a time when we can’t go to work anymore, no matter how much we want or need to, and at that point, we’re going to live off of our accumulated assets and Social Security. 47% of retirees in the EBRI survey reported that they had retired sooner than they expected to, and 55% of them retired because of health problems or a disability; this means almost 26% of retirees expected to work longer but couldn’t, and they probably weren’t prepared to retire when they did since they weren’t expecting to retire early.
Failing to plan for that point could bring heaps of misery on the unprepared, and for them, retirement will continue to be a myth, a vision, and something only “rich people” can afford.
Workers and retirees are saddled with debt, leading to a lack of confidence
The EBRI study points out a glaring, gaping hole in the personal finances of both workers and retirees. 60% of workers say that debt is either a minor or a major problem and 39% of retirees say that debt is a problem. Unsurprisingly, 80% of workers who report having a major debt problem are not confident about their ability to have enough money to live comfortably in retirement.
If you have a significant amount of debt relative to your income or to your net worth, then you are going to have a lot of trouble getting to a comfortable retirement if you don’t address the situation immediately. Credit cards are Monkey Brain’s favorite currency because he can have it all right now. He can leave the future you to mop up the mess while he gets to stack the bananas high in the cage.
You’ll get to be confident in your retirement when you’re buying assets that grow in value and you take actions which increase your income. You won’t get to be confident in your retirement by accumulating a house full of stuff which will one day make for a great episode of American Pickers. Crap decomposes (and stinks). Assets grow.
Smart people get into debt all of the time. Smart people know they should spend less than they make and save more for retirement and get a plan and stick to it, but they don’t.
We hear these narratives that we’re never going to get to have a retirement that we want, and we start rationalizing. We tell ourselves that if we’re not going to have an enjoyable retirement, we may as well live the hedonic life and enjoy what we can now, since we’re going to be chained to a desk until we reach the age of 137.
It’s easy to take such an approach to willful blindness and just accept the narrative. The media tells us something, so it must be true. Believe everything you read on the Internet. Thus, we fall into lockstep behind everyone else who parrots the beliefs that living a good life is only reserved for the rich and the people who have some sort of “in” into the system and that it’s not for the rest of us.
But what do the numbers say?
I’m not about to tell you that getting to the point of financial security in retirement is going to be a walk in the park. It’s going to require work. It’s going to require intentional choices now to allow you to be comfortable later. But, it’s not impossible. Nor is it improbable.
Let’s look at a few basic cases to show you what needs to be done. For all cases, we’ll assume a 6.69% average annual inflation-adjusted return (see “6 Areas Where I Disagree With Dave Ramsey’s Investment and Retirement Withdrawal Advice” for why I use this return instead of something higher). We’ll also assume a 3.5% safe withdrawal rate in retirement. Finally, we’ll assume that spending increases each year by the rate of inflation both before and during retirement – meaning you will have the same standard of living in retirement as you do before retirement. They can retire when they can withdraw 3.5% of their assets and have enough money to cover their expenses. All examples start with zero net worth.
First, let’s look at a 40 year old couple. They bring home $75,000 per year.
To retire at age 65, they’d need to save a little over 29% of their annual take-home pay. How do different savings rates affect the retirement age?
Of course, reducing and managing expenses is one way to achieve the goal. Another way is to increase income. Let’s say that this family has a fixed annual inflation-adjusted expense of $60,000. At the current inflation-adjusted income of $75,000 per year, the family would have enough to retire at age 72. To retire at age 65, they’d need to increase income by 12.7%, or $9,511.96.
How does increasing income affect retirement age?
Remember earlier when I said that waiting would make getting to retirement comfortably extremely difficult? Let’s look at this same family but assume they’re 50 instead of 40. They would have to save 49.6% of their income to retire at age 65, assuming, remember, that they maintain the same inflation-adjusted expenses in retirement. It’s not impossible to get to that number. There are many examples of people who save 50% of their income. They’re just not common.
What about relying on a pay hike? They’d need to increase average annual income by 58.8% to retire at age 65 on an inflation-adjusted $60,000 per year budget.
To further drive home the point of the value of planning early, let’s make this family 30 years old. First, we’ll assume they make $75,000 and save a percentage of their income. They’ll need to save 16.2% of their income to retire at age 65.
If their expenses were fixed at an inflation-adjusted $60,000 per year, they could retire at age 62. However, they’re young and can probably expect advancement and pay increases. How much will increasing the average annual income affect their expected retirement age?
For every 10 years earlier someone starts saving for retirement, they can cut in half the amount they have to save, or, if they hold savings rates constant, cut 10 years off of their retirement age.
Additionally, Social Security would add a significant level of cushion and income support for these people; however, not including that benefit shows that retirement is possible for many people as long as they’re willing to work to get there.
If you’re not doing anything about your retirement, then you can expect to get nothing in return. You’ll need to plan to work as long as you can and hope that Social Security is enough to tide you over once you can’t work.
However, don’t let the stories of having to delay retirement and that retirement is impossible convince you to do nothing. Those stories are wrong. You can’t control the markets, but you can control other things. Take action and make choices over what you can control and actually plan for life rather than letting life happen to you.
If you want to see a similar analysis, check out PK’s calculator at Don’t Quit Your Day Job.
Around a year ago, I wrote about reframing purchases in terms of having to work longer. If you haven’t read it, go check it out.