Retirement – Past, Future and YOU

You’ve seen the commercials… a green arrow pointing ‘the way’, a smiling, way-too-happy semi-elderly couple sipping iced tea on a patio, maybe a celebrity like Tommy Lee Jones or Joe Namath asking you retirement questions – all of these images are designed to make you feel secure about the idea of retirement, as something to look forward to. Ideally, it should be something to look forward to. But is it? Or are you terrified?

Perceptions about retirement have changed over the past 20 years, and not for the better. There are legitimate reasons for those changes, and normal working folks are worried. Having worked in retirement as an actuary for over a decade, I might have a slightly different take than others on both the concept of retirement, and how to plan for your future.

Firstly – I want to discuss briefly what retirement is. The concept of retirement has been so ingrained in our culture defined as “what you do when you’re old and done working”.  But retirement is actually a VERY new phenomenon; in the vast majority of human civilization, most people simply didn’t get old. If they did, they were basically worshipped and taken care of by their younger family (or tribe) members. It was only 130 years ago that the idea was introduced – you could stop working, still receive an income and live independently.

In 1881, German Chancellor Otto Von Bismarck announced that elderly and disabled citizens would be taken care of by the state. His primary motivation for this announcement was to placate his citizens so that they would resist the spreading Marxist doctrine. Germany went on to create the first state-run social income program, funded by a combination of employers, employees and the state. Think about this… it has only been in the past 1.5% of the existence of human civilization that the concept of retirement has even existed.

The age was initially set at 70, but then reduced to 65 by 1926. The US and other developed countries followed suit (side note – US life expectancy in 1920 was 54 for males and 56 for females).

Fast-forward to today – what happened? If we just look at the past 30 years, the retirement income world has been completely transformed. Remember how your parents or grandparents could simply work for the same company for 30 years and be completely taken care of for life through a combination of an employer-provided pension plan and the government-provided Social Security? Those days are gone. In 1985, there were almost 115,000 defined benefit pension plans in existence; as of January 2013, the number had dropped to 22,697. And most of those plans are frozen and do not provide ongoing accruals for employees. Moreover only 45% of private workers have an employer-provided retirement benefit of any kind, including 401k.

Social Security still exists, but it’s long-term future is uncertain. In contrast to the funding mechanism of employer-sponsored retirement plans, Social Security has always been funded as a pay-as-you-go system – meaning that the payments being made to current beneficiaries are funded by contributions from current workers. Put another way, the social security contributions being taken out of your paycheck through the payroll tax are not placed into an account to fund your retirement. They are placed in a trust that is used to provide benefits to current beneficiaries. You will simply have to hope that when you retire, there will be enough workers to pay the benefits entitled to you. Unfortunately, in 2010, for the first time in the history of Social Security, the benefit payments made to current beneficiaries exceeded the payroll tax revenues collected from current workers. This has been the case every year since 2010 and will continue. The latest CBO report projects that the OASI fund will be depleted by 2033 (https://www.cbo.gov/publication/44972).

So back to the question – what happened? How did employers and the government NOT see this coming? The answer lies in demographics.

• Birth rate – The birth rate in the 1950’s was 3.8 children born per woman. Today, that rate has fallen to 1.9. Today’s rate is just below the rate required to keep the population stable.
• Longevity – Life expectancy in the 1950’s was 68; today it is 79. 11 years added to our lives over the course of 60 years? Absolutely amazing.

Despite the obvious good news of living longer, this combination of demographic trends has wreaked havoc on retirement projections. If that birth rate remained the same for the past several decades, and the Social Security retirement eligibility age was slightly increased, there would be no problem with Social Security or employer-provided pension plans. Simply put, there are more non-working people receiving benefits for each working person paying into the benefits pool than ever, and this trend will continue.

Wow… this is NOT an encouraging article so far. I apologize for that. What does this mean for the future? Are your retirement prospects completely bleak? Although recent changes haven’t been favorable to the future of traditional retirement income vehicles, we need to keep things in perspective. Right now, you have the opportunity to live a long life including many quality years when you are older. It is a great blessing and should be taken advantage of. But it isn’t going to be handed to you. Now, more than ever, the onus is on us, the individuals, to grab hold of our futures and MAKE it happen – and anyone can do it. You need to begin to ask yourself questions about your future.

First question to ask yourself: How long will I live?

The blessing of being able to live a long time also comes the risk of… well… living a long time. Everyone who has pondered old age has considered the risk of outliving your income. Today, current retirees and those about to retire underestimate how long they will likely live. A female currently age 65 has a 31% chance of reaching age 90, and a male has a 40% chance of reaching age 85. Those who are healthy and have taken good care of themselves will live even longer. With life spans increasing at a rate of between 1.5 and 2 years per decade, how long will you live? How many of those years will be spent in retirement?

Next question to ask yourself: Where will my retirement income come from, and when do I want to retire?

Currently, the instruments used to provide retirement income are as follows:

• Social Security
• Employer-provided 401k or 403b
• Employer provided defined benefit pension
• IRA’s, both Traditional and Roth (if you don’t have one of these, Betterment is awesome! – sign up now)
• Other Savings
• Purchased Annuities
• Working

Have you thought about where your retirement income will come from in terms of the above categories? If not, you should. If you have done work managing your retirement accounts, then go ahead and estimate these. Will it be enough?

If you are fortunate enough to live a REALLY long time but unfortunately outlive your retirement assets, will the government take care of you? Right now, you would still have Social Security at a minimum and maybe government-provided help in other areas, but will that be the case in 50 years? If you are currently in your 20’s, 30’s 40’s or even 50’s, you must recognize that the world you will face when you are 85 or 90 will be so much different than the world today. Sure it might be better, but I’m betting that we will face more challenges, not fewer (gosh – I’m such a pessimist! How does my wife put up with me?)

The responsibility of income in retirement has been shifted almost completely to the individual… along with all the risks involved. And this shift of responsibility is only going to increase in the future. The good news is that the government does provide a friendly tax environment for those willing to plan for their future, but you have to take advantage of it.

This post has been long enough that I’m not going to get into the hardcore mechanics of investing or interest theory in this article (maybe another article if you’re interested?) I simply want to stress that you need to be planning NOW. Even if you are in mountains of debt and can’t afford IRA contributions today, you need a plan so that you are able to in the future. Sacrifice now for something better later. It all starts with your current spending and your monthly budget.