Occam's Razor

With stocks in some cases at half or less of their value of a year ago, many Americans are wondering if they will ever be able to afford to retire. To retire with a decent standard of living you generally need to have a number of financial ducks lined up. First, you depend on Social Security and Medicare benefits to provide basic subsistence and medical care. Second, if you are lucky enough to have an employer that actually provides a pension, you need to hope that the company does not go belly up before or during your retirement. Third, you have the value of anything in your 401-K or IRAs that you have squirreled away. Fourth, you may have some other savings or some sort of inheritance to draw from. Lastly, and really as a last resort, you may have equity in your house you can draw from, which perhaps you can draw from with a reverse mortgage. With enough of these assets, you can afford to retire when you hit a certain age. How many of us reaching retirement age can honestly say our financial ducks are lined up?

For many of you younger readers retirement may be an abstraction. You are probably far busier trying to hold on to your job and standard of living than to worry about something so far away as retirement. For us middle age Americans, retirement is on our horizon. For example, I am a civil servant who will soon be 52. In theory, I can retire at age 55 with thirty years of service, which will be in May 2012.

Will I retire and begin a life of leisure at 55? Probably not. If I did, certain other expenses would need to be trimmed. Even with my very generous government pension, I would get at best something like 60% of my government salary. However, I still will have bills to pay and I do not particularly want to reduce my lifestyle. Moreover, my mortgage will not be close to being paid off in 2012.

Without some substantial adjustments in my lifestyle, I cannot afford to really retire at 55. Since my investments like yours are in the toilet, it is unlikely I will be able to draw from them in a couple years. So I will still have that 40% gap in income to make up, at least until the mortgage gets paid off. Also, I have many more productive years ahead of me. I am a restless creature too. I simply do not have the constitution to “retire”, at least not at 57, the age when I currently plan to “retire” but when in reality I hope to simply start my next career.

I am betting though that many of you do not have these options. Your “pension” is probably anything in your 401K or IRA, which if you assess it at today’s value might make your heart skip. If you “retire”, your retirement home may be in a trailer park. It is also possible with today’s economy that your “retirement” will be involuntary and you will end up with a fraction of the benefits you were promised. So your “retirement” could simply mean getting one or more new jobs at a fraction of the wages you are used to, perhaps while also working more hours than you do right now. Even with all this, you may end up with a lower standard of living.

In short, for many in the fifty to 60 something age range, retirement, which used to seem almost tangible, is now off the table. We might as well pretend we are twenty or 30 somethings again. If this sounds like your situation, you will have one option: the non-retirement retirement. With this is a retirement you work as long as you are physically capable of working even after you “retire” by collecting social security benefits. You will be likely working at substandard wages perhaps making little more in real dollars than you did as a teenager. However, you will still have Social Security income to draw from and Medicare benefits to cover most of your medical expenses. The combination will not let you really retire, but it will keep you from having your standard of living drop through the floor.

Unless our new President Obama and Congress are able to fix things, and the macro-economic forces work in our favor for a change over the next few decades, “retirement” as our parents knew it may become a luxury most of us can no longer afford. In short, even though the Social Security system will survive the New Deal will have largely unraveled. Social Security and Medicare will provide seniors with a foundation for keeping their financial heads above water, but still not provide enough income to retire.

Many senior citizens are already dealing with this reality. Many retired to discover that they really could not afford to do so. Their actual cost of living exceeded their income and assets. For many, the new model looks like you retire when you absolutely, positively cannot earn money anymore. In other words, when you retire, you will have one foot in the nursing home.

Suppose you are fairly young and headstrong enough to think that you should be able to enjoy a real retirement someday, perhaps when you are in your mid sixties? What do you do? You can invest now while stocks are cheap and hope they will become nice juicy retirement assets by the time you retire. There is no guarantee here, of course, but stocks have tended to provide a higher returns over long periods than other forms of investment. You can also choose not to have children, or if you have children, have just one. (This is what my wife and I did, in part for economic reasons.) Children may be loveable and give purpose to your life, but they suck enormous amounts of money out of your wallet. In addition, you can spend your earning years living frugally while doing your best to climb the income ladder by having a well paying job and specialized skills. Perhaps these things, a resurgence of the American economy relative to the rest of the world, and a government that works for the people, will turn the dynamics around. My gut feeling is that we are sailing into very strong headwinds. We can tack as much as we want but moving forward is likely to be daunting.

For many of us, particularly those of us nearing retirement age, our retirement can be clearly envisioned and it is scary. The vision that we are seeing bears little resemblance to what we envisioned some decades back. The retirement our parents knew is dying from a combination of economic forces and bad government. We are likely to pay the price in an anxious non-retirement retirement.

Let us hope that President-Elect Obama and our new Congress can actually move us in the direction we need to go so we can really retire someday. I sure hope that a real retirement does not become something we lose in the 21st century.