The best way to learn is to teach – or so they say. I believe it, which is why I’m delighted to join InvesterGeeks as a contributer. While it could hardly make me geekier (as a long time software developer, my geek credentials are as solid as they come), I do hope to become a better investor as I share what I’ve learned (and am learning) here as well as my home site www.ThinkingAboutMoney.com.
And now, for my first tale….
Once upon a time, people would work for 40 years or so then retire. But nowadays for many there will be no happily ever afters. For those of you who have not or are not saving enough, there are other options which I’ll get to later.
Once upon a time, large companies had “defined benefit plans” – plans that guaranteed a set income and benefits for life after retirement. In the 1980’s companies largely switched to defined contribution plans (typically 401K) where retirement income depends entirely on the contributions and earnings on the account. Back to that in a moment.
What about those defined benefit plans that already exist? For those few companies that have fully funded their plans (contributed enough to cover expected costs), there are no problems. However, many companies have underfunded pension plans. Companies on the S&P alone are underfunded to the tune of $321 billion. For these companies it’s possible to declare bankruptcy and throw the pension plan into the hands of the Pension Benefit Guarantee Corporation (PBGC). Unfortunately, the PBGC does not guarantee health and disability benefits, nor does it necessarily match the pension numbers of the original plan. So corporate bankruptcies are great for management, lawyers and bankers, but not so good for the employees.
So how much does it cost to retire? It’s pretty easy to calculate. Figure out what income you need to live on comfortably (be sure to include health insurance premiums!). Figure out how many years you expect to live in retirement. Then use a present value function with an interest rate of one or two percent (the amount your savings are likely to earn after inflation).
For example: If you want 60,000/year for 20 years, you’ll need a bit over a million dollars. I’m not including Social Security in the calculations, because knowing the financial status of that fund we cannot assume that it will be able to maintain the level of benefits it provides today.
Saving that much isn’t hard over a 40 year career. Based on this very rough scenario (60K average annual income), All you need to do is save about 15% of your income each year. This is a gross oversimplification of course, but it’s enough for illustrative purposes. Given our national savings rate of 7% of the past 30 years (down to about 1% over the past few years), there’s obviously a real problem.
Frontline recently did an excellent show on this topic that should be required viewing.
You can see it at http://www.pbs.org/wgbh/pages/frontline/retirement/view/
I’d like to elaborate on one of the closing points from the show: “The answer is there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It’s the end of retirement.”
Most of us were raised on the idea of working hard and then enjoying our retirement years. But is it really that awful to keep working? Certainly it’s reasonable to not want to work as hard as when younger, but there are numerous advantages to working (aside from the income, it provides a sense of purpose and accomplishment). Though nowhere near retirement, I prefer not to put in the kind of hours I used to, but I cannot imagine not working at all.
The question is – what kind of work are we talking about? Health permitting, and being self-employed, I’ll be able to keep writing and developing software until I choose to stop. But many organizations continue to have set retirement ages, forcing individuals to leave their careers even though they are able, willing, and desperately need to keep working. As a result, many seniors end up with lower earning jobs (flipping burgers, for example).
Don’t expect this to change though – older workers cost much more than younger workers in terms of both salaries and benefits, so there is little interest in corporate America to extend the retirement age.
What does this mean for you?
If you are lucky enough to be saving enough or investing enough for retirement – that’s great. But if not, there’s a good chance you won’t be able to save as much as you want.
If you are in that situation, you will either have to cut your standard of living or you will be working after retirment. The good news is that even if you are only a few years away from retirement, you still have time to control the type of work you’ll be doing after retirement.
If you can’t save enough to retire, perhaps you can educate yourself enough to retire with the kind of work you’d enjoy doing. Now is the time to see if you have an interest or hobby that could turn into a small business. Now is the time to explore online options such as Ebay that are used by many to supplement their income (if not serve as a full time job). If you have to work after retirement, at least you can improve the chances you’ll be doing something other than flipping burgers.