Millions of working people want nothing more than to pack it in and retire. The Internet has spawned websites and chat rooms dedicated to the topic. People swap stories about what they?re doing to make it happen, and how it?ll feel when they get there. But like so many other aspects of popular thinking these days, the desire is disconnected from reality. That?s why most people should never fully retire.
Consider a recent survey that shows that the average Baby Boomer, the generation currently retiring in waves, has less than half as much money as they think they?ll need to retire. And even the amount that they think they?ll need is almost certainly less than what they actually will need.
But that?s only the beginning of the problem.
Systems Don?t Always Perform as Expected
The news media has been awash in stories about failing pension systems. The poster-child pension failure has been the Central States Pension Fund, which covers nearly 300,000 retired union workers. As active union workers have declined dramatically in recent decades, there aren?t enough workers to fund the plan for all of the retirees collecting benefits from it.
This is hardly an unusual situation, and private sector pension plans aren?t the only problem area.
Depending on which definition is used, it?s now estimated that state and local government pensions have a cumulative funding shortfall of between $1.2 trillion and $4.1 trillion. The problem is more severe in some states than in others. States like California, Illinois and New Jersey dominate the headlines, since their problems are more extreme. But it?s a growing problem nationally.
What?s making the situation more complicated is that the shortfalls are developing at a time of a supposedly expanding economy and rising stock market. What becomes of these pensions if the stock market goes into a prolonged bear market cycle? I suspect we?re going to find out soon. And when we do, bad will go to worse much more quickly than anyone thinks.
Social Security Benefits ? a Strong Argument to Never Fully Retire
I?m not in the chorus of people who think that Social Security is going bankrupt. Somehow or other, the government will keep benefit checks going out. They have no choice.
But I?m equally confident that benefits will be reduced through other means. It may be in the form of raising the retirement age (which is already happening), gradually reducing future benefits, or making payments in seriously inflated dollars.
I suppose that?s really all a smoke and mirrors alternative to formal bankruptcy. After all, it all brings us to the same end, which is a gradual and effective reduction in benefits.
Just Because You?re Retired Doesn?t Mean You?re on Easy Street
This is the ultimate moral of the retirement story. Our entire economy is tightly balanced, and that includes the retirement sector. The stock market reversal that happened during the Financial Meltdown made the country aware of this problem. But the fundamentals have not been addressed since. Eight years of economic and market recovery have failed to make the problem go away.
I?m afraid the days of retiring to a life of bliss for over. Just because you?re retired now and living comfortably doesn?t mean that it will always be this way. If you?re on a public or private pension, you could be at real risk of a serious reduction. Social Security meanwhile could turn into a slow bleed.
Enjoy the benefits of both at the moment, but keep planning for the future, just as you always have. Retirement isn?t a magical time in life, when all cares disappear. They?re still there, they?re just temporarily covered over with income streams that we?re being promised are eternal.
?Any one who retires in this economy is a fool?
That was a warning from my Uncle Jimmy at age 88 (now 91). We were having dinner at their house, and in passing he mentioned about going to work on Monday. I was stunned, having thought he had retired years earlier. But that wasn?t the case.
A true example of a self-made millionaire, he feels strongly that the current economic situation doesn?t support full retirement. He made his money in real estate, and continues to do maintenance work on the few properties that he has remaining.
If anyone could outright retire, it would be him. But I?ve known others like him. Self-made financial successes, who see no percentage in retirement. Oh sure, he slowed down, and he does the things that he wants. But he always keeps his hand on the economic handle.
There are some people out there who are so prosperous that they will enjoy the TV version of retirement. But many of those people are rich, and already enjoy that lifestyle during what are the working years for people ordinary means. But for the rest of us, uncertainty continues to loom large.
We ignore it at our own peril.
What?s the Solution? Never Fully Retire!
That?s at the top of my list, but I?ve added three more strategies.
1. Plan on having some kind of earned income for as long as you can.
This doesn?t mean you can never retire. But by having at least a part-time occupation, you?ll be less dependent on savings and Social Security. That should help you weather a pension cut, or at least to avoid outliving your money. I plan to at least continue freelance blog writing, hopefully until I die. And fortunately, it?s one of those skills/crafts that I can do even at an advanced age.
Not only does some form of occupation help to ensure your ability to survive financially, but it also has social, psychological and emotional benefits as well. Just having a reason to get up every day is an often under-estimated advantage as we age. As well, keeping an active occupation enables you to make a full-on reentry back to working life, should that ever become necessary.
Have you seen those retirees who sit around the house watching TV all day? Don?t be ? or plan to be ? that person! I don?t know anyone who lives like that who’s happy. During program breaks, all they do is complain.
2. Don?t be in such a hurry to retire.
The earlier that you retire, the longer that you will need to provide for yourself financially. That means that you will begin tapping your retirement savings early, as well as drawing Social Security benefits. That can make sense if you?re either chronically unemployed or underemployed by age 62, or if you have serious health problems. But if you do, your Social Security benefit will be seriously reduced.
Statistically, 48% of women and 42% of men begin collecting Social Security retirement benefits at age 62. But you can increase your monthly benefit by 6% per year if you delay collecting your benefit until you reach your full retirement age (FRA). You can increase it by an additional 8% per year if you delay collecting benefits past your FRA, up until age 70.
Under that formula, a $1,400 per month benefit at age 62 would increase to $2,000 per month at age 67. That?s the FRA for anyone born from 1960 or later. You can increase the benefit further, up to $2,480 per month, if you delay collecting benefits until age 70.
3. Plan to keep your expenses low.
If you?ve been frugal all your life, you have a built-in advantage. You can just continue the same lifestyle. Retirement is all about doing more with less, and that?s a true talent. But if you?ve been living well, perhaps because you can afford to during your working years, you may be in for a rude awakening.
The problem with a high consumption lifestyle is that it can be crippling in retirement. Nothing about it affords you the discipline necessary to live on an income that?s fixed at a lower level. This is especially true about the big expenses, like housing and cars. They?re built-in expenses, and if they?re high they cause a chain reaction of higher costs across your budget.
Live light and on the cheap, and you?ll live a better life with more options.
4. Save and invest money like your life depends on it ? because it probably does.
For all the reasons we discussed earlier, you still need the largest retirement portfolio that you can create. Never assume that you?ll be fully insulated by high pension and Social Security benefits.
I?m one of the world?s greatest cynics when it comes to the promises of investing your way to retirement riches. But at the same time, a generous investment portfolio will provide you with a large financial cushion. Even if it does nothing else, it will give you maneuvering room in sudden changing circumstances.
In addition, income from a retirement portfolio can supplement Social Security, pension and earned income, helping you to stay comfortably afloat longer. It?s about applying the principle of multiple income sources to retirement. And given that the average person is living another 20 to 30 (or more) years after retiring, this is an absolutely necessary step.
Don?t worry if you haven?t been able to save up enough retirement savings to give you a golden retirement. That?s great, if that?s what happens. But even if it doesn?t, just having a gigantic emergency fund can soften any number of financial blows.
Have you been paying attention to the news about pension shortfalls and benefit cuts? Are you at all concerned that your retirement may not be as secure as you hope? If so, what are you doing in response to these concerns?