The frequent talk about retirement, particularly in the financial media, stands in stark contrast to the Main Street reality that few will ever retire. I suppose we’ve all been conditioned to live at peace with the bipolar marriage of the “TV version” of life, alongside of a very different reality. Maybe few of us even question it anymore. But the statistical reality is that few will ever retire, at least not comfortably.
That isn’t to say that they won’t try. Every year, hundreds of thousands of people “retire” on little more than a monthly Social Security benefit. But except for the few who can live on next to nothing, the rest have to find some sort of income supplement. We even have a cliché for it – becoming a greeter at Walmart.
How has this happened, and how can we avoid the same fate?
The Grim Statistics Showing Few Will Ever Retire
We’re often treated to those happy retirement numbers – usually provided by investment brokerage firms – showing that the “average person” has $279,453 (or $311,912, or $257,858 – choose your figure) in their retirement plan. There’s almost always some sort of disclaimer that the number, as high as it is, is way too low for people to comfortably retire. It’s a call by the brokerage firm for their clients to invest even more money with them.
I’m not exactly sure where they come up with those numbers. Perhaps they’re using data from their own clients. Maybe they’re using averages, rather than the median.
For example, if you have 20 clients, of which 19 have $10,000 in their accounts, and one has $5 million, the total is $5,190,000. If you divide that by 20 clients, then the “average” client account is $259,500. Mathematically speaking, it’s correct – but it’s also a complete distortion, since 19 of the clients have only minimal balances.
That’s what “averages” do to numbers. A more accurate measure is median – half above, half below. It gives a more realistic picture of what the typical person is doing. If we use median in the example above, the number will fall to something just a bit higher than $10,000.
But there’s a pronounced disconnect between the optimistic retirement numbers provided by brokerage firms, and those from independent third parties – who aren’t selling a product. Not surprisingly, the third-party sources paint a more dismal picture.
Retirement Statistics from More Objective Sources
A 2015 study from the National Institute on Retirement Security reports disturbing statistics on the national retirement front.
The reports shows the following:
- Nearly 40 million working-age households (45 percent) do not own any retirement account assets.
- Households that do own retirement accounts have more than 2.4 times the annual income of households that do not own a retirement account.
- When all households are included, the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households. (Notice the use of median, rather than average?)
- 62 percent of working households age 55-64 have retirement savings less than one times their annual income. (Even if you have two or three times annual income, it still won’t be enough to retire comfortably.)
- Even after counting households’ entire net worth, two-thirds (66 percent) of working families fall short of conservative retirement savings targets for their age and income based on working until age 67.
Let’s zero in on item #2, because it’s symbolic of our time. It confirms that retirement saving is done primarily by higher income people. That makes sense, since higher income people have more money to devote to a deferred financial goal, like retirement.
The chart below confirms this point:
Note that the EPI findings show retirement savings of $274,000 among the wealthiest 10% of households, compared to just $5,000 for the bottom half of the nation.
What this means is that it will be primarily people in the top 10% who will have remotely enough money to comfortably retire. The bottom 90% will face some degree of struggle during the retirement years.
If you don’t have enough money to retire, you’re among the vast majority.
Those with Both Social Security and a Pension Will Fare Better, But…
If you will be able to count on both Social Security and a generous pension income, you won’t be as reliant on a large retirement portfolio. But that doesn’t necessarily mean that you’ll retire in comfort.
The first obstacle will be inflation. Social Security comes with a cost-of-living increase, based on the government’s own Consumer Price Index (CPI). So do many government pensions. But corporate pensions – which are no longer common – typically don’t include a cost-of-living adjustment.
However, a cost-of-living adjustment is hardly a cure-all.
The government has made it a practice to under-report the real rate of inflation. Even if you get a cost-of-living increase each year, you may still be falling behind.
For example, if the real rate of inflation is 5%, but the government reports a CPI increase of 2%, the purchasing power of your income will actually decline by 3%. Over 10 years, it will decline by a third. That $3,000 per month benefit you’ll receive in 10 years, will only be worth $2,000 in today’s purchasing power.
The other problem with pensions is chronic underfunding, particularly among state and local governments. It’s been estimated that state and local government pensions are underfunded by between $1.2 Trillion and $4.1 Trillion, depending on what rate of return is used to calculate the likely funding pool.
Unless this funding issue is resolved soon – and there seems to be little incentive for local governments to fix anything – there’s more than a slight chance that your government pension will be cut at some point in the future. That won’t be an issue with federal pensions, since the US government can always print money to pay its bills. Local governments don’t have that luxury.
We Shouldn’t be Taking Retirement for Granted
It’s often said that Social Security is the “third rail” of American politics – touch it, and you die. This is a railroad reference. The “third rail” refers to the two rails that support the train, and the third that carries the electrical current that powers it. We all know what happens when you touch live wires.
From a political perspective, this saying explains why politicians are terrified of even speaking of Social Security or pension reform, let alone actually enacting it. To do so would almost certainly mean the end of a political career.
While this saying has always been specific to Social Security, I think the broader implication is retirement itself. Since Social Security is the foundation of most people’s retirement, threatening to eliminate it or even cut it, directly threatens people’s ability to retire.
In modern industrial societies, retirement is no longer seen as a privilege, but a right.
For the first 50 – 60 years after World War II, retirement was a right for all intents and purposes. But the situation has changed radically in the 21st century. What we’ve seen in the past 15 to 20 years is a gradual unraveling of the post-World War II state of retirement. We’ve gone from retirees living in relative comfort and security, to the majority now being plagued with many of the same financial issues they had to deal with throughout their working lives.
With retirement fundamentally changing, we have to adjust both our expectations and our strategies.
Expectations and Strategies for a New and Very Different “Retirement”
Let’s start with expectations. We’re probably already past the time of thinking that we’ll be able to retire to blessed nothingness. That may be true for the top 5% or 10% of the population, who are already either wealthy or nearly so.
If you count yourself among the 90% to 95% of the rest of us, you should begin thinking of the retirement years as more of a time to downshift, rather than checking out completely.
That’s not a minor adjustment in thinking either. If you adopt that belief set, it will make it possible for you to properly adjust to the reality of what life will look like once you do enter the retirement years.
Have you noticed how most retirement strategies start out with the question how much money will you need to live comfortably? The new retirement reality requires turning that question inside out. The more relevant question is how little do I need to live comfortably?
Learning to live beneath your means, whatever those means are, is the ultimate financial plan. Most of the people I’ve known over the years who retired with limited resources – and managed to live comfortably – were able to master this concept. Critical to this strategy is reaching the retirement years in a debt-free position. It may be even more important than the size of your retirement portfolio.
Also, give serious consideration to renting, rather than owning your home. This can provide at least three benefits:
- By selling your home, you free up the equity to use as retirement savings.
- By renting, you will no longer be required to pay for expensive repairs and maintenance.
- You increase your mobility by renting. You will be free to follow your children, pursue income opportunities, or even move for medical reasons. Yes, you can move when you’re a homeowner, but it’s just a lot easier as a renter.
Still another consideration on the own-versus-rent question is tax deductibility of homeownership. Once your income drops in the retirement years, the tax benefit will be less generous. You’ll be paying the expenses of homeownership on a dollar-for-dollar basis.
Reduce Your Workload, But Don’t be in a Hurry to Stop Working
Rather than making a clean break from work at 62, or 65, or 67, plan to continue working at something for as long as you are able. There are too many reasons why this is a sound strategy.
The first is that most people no longer work in the types of occupations that used to force people into retirement. There are relatively few farmers, factory workers, and people working in hazardous occupations. The great majority of people today work in offices or in other occupations that are not physically hazardous. You can probably find work, at a reduced level, in some capacity that is not physically taxing. For most people, there’s no physical need to retire in their 60s.
The second reason is Social Security. You can nearly double your monthly Social Security benefit by retiring at 70 rather than at 62. Given that people are living much longer in retirement than in the past, maximizing Social Security income for the later years may be strategically necessary.
Choosing the Right Work May Be Better than Retiring
I’m of the opinion that most people are hell-bent to retire because they hate the work that they do. I’m a freelance blog writer and I LOVE what I do. I may slow down, but I have no plans of ever fully retiring.
I’ve also known a lot of self-employed people, and very few of them ever retire. That’s because they similarly love what they do.
When you love what you do, there’s no need to retire. Retirement is mostly an exit strategy for people who hate what they do, or don’t particularly like to do.
Changing what you do in the retirement years could be a game changer. Think about what it is you’d really like to do, and then pursue it. You’ll similarly find that you have no desire to retire.
The retirement years are actually the best time to make that kind of move. After all, if you have at least some retirement income, and the major expenses of life are behind you, you can survive on a lot less income. A Social Security check, moderate distributions from retirement savings, and income from a part-time occupation can give you a comfortable life.
That can open up a lot of opportunities. Here are some suggestions:
- Continue your current occupation on a part-time or seasonal basis.
- Move into an occupation that you’d really like to be in.
- Start a side business of your choice, doing something you like to do.
Even if you never fully retire, you will still be stepping out of your current occupation, and doing something that you like. It’s also likely that you will have more time for family, hobbies and even travel. All that is possible with a less formal work arrangement.
Don’t Give Up on Saving for Retirement
Probably the single biggest reason why people have no retirement savings is because they never got started. Others did build retirement savings, but life events got in the way, and either reduced their ability to save, or forced them to drain their accounts early.
If you don’t have much in retirement savings, whatever the reason, don’t give up starting or continuing to build a portfolio now. Anything you can do to put away will improve your situation.
This is where the financial media has been counterproductive. By convincing people that they need seven-figure or high six-figure retirement portfolios, the majority of people – with no hope of accumulating that kind of money – either give up, or fail to even try.
Don’t fall for it. And don’t succumb to that it’s too late for me excuse either. There’s plenty that you can do to save for retirement, even late in the game.
At a minimum, a small amount of retirement savings can serve as a large retirement emergency fund. In that way, it can help to even out your finances from one year to the next. You continue working into the retirement years, putting money into savings, and then drawing some out when there’s an emergency expense, or you hit on a temporary income drought.
The Self-Employment/Retirement Savings Connection
One of the reasons that I advocate so heavily for self-employment, particularly in regard to retirement topics, is that it offers a number of different ways to fast forward retirement savings. (OK, it’s also because I actually do love being self-employed myself.) There are several retirement plans for the self-employed where you can contribute up to 100% of your income. That will enable you to save a lot of money quickly.
Two examples are the SIMPLE IRA and the Solo 401(k) plans. With even a small amount of self-employment income, you can save a lot of money for your retirement in just a few years.
It’s even more important if you don’t have a retirement plan at work. And if you can maintain some form of self-employment in your 60s and early 70s, you can continue contributing to your plan until you reach the point where you finally will fully retire for good.
I realize that none of this solves anyone’s retirement “problem”. But maybe that’s the point – who decided that retirement is even a human necessity? Shouldn’t the real goal be to create and lead a comfortable and compelling life, regardless of age?