2011 June 09 Thursday
Austere Religion Of Work Needed For Retirement Cost Problem
We need a revival of Puritanism or a new religion based around very austere lifestyles combined with long hours of work at the best paying occupations. Why? A new report from the Employee Benefit Research Institute finds that based on how much people at various income levels are saving toward retirement a large portion of the US population will need to work into their 70s and beyond.
Those who earned between $11,700 and $31,200 will need to work till age 76 to have a 50% chance of covering basic expenses in retirement. Those who earned between $31,200 and $72,500 will need to work to age 72 to have a 50% chance and those who earned more than $72,500, those in the highest income quartile, catch a break; they get stop working at age 65 to have a 50/50 chance of funding their retirement.
Since their full report assumes "historic equity returns" (which the market is not going to deliver in the next 20 years) the real level of unpreparedness is much greater than this report indicates.
Unfortunately, some substantial portion of the population will retire too early. They'll be senile and/or sick before they realize that they do not have enough money. I already know people in their 50s with ambitions to retire in their late 50s who are in no way ready (still paying mortgages with years to run on them and little in the way of savings). But it is hard to reason with people who hate their jobs.
Average life expectancy at age 65 is about 18 years (big PDF) and rising. The latter link is probably insufficiently optimistic since advances in biotechnology will cause a large jump in rejuvenation therapies in the 21st century. That jump in biotech argues for saving to directly pay for cutting edge medical treatments you might not otherwise be able to get.
The lowest income people need to work into their 80s. Basically, they need to work until dead.
LOWEST-INCOME LEVELS, HIGHER CHANCES OF ADEQUACY: If the success rate is moved to a threshold of 70 percent, only 2 out of 5 households in the lowest-income quartile will attain retirement income adequacy even if they defer retirement age to 84. Increasing the threshold to 80 percent reduces the number of lowest preretirement income quartile households that can satisfy this standard at a retirement age of 84 to approximately 1 out of 7.
Generation Y (born from 1977 to 1994) aren't doing enough for their retirement and with the decline in defined pension benefit plans they are in even worse shape. Kids, you've got to work longer hours, spend less, save more, and find some worthwhile investments. Making too little money? Your college education was probably worthless. Better start studying for computer network administrator certificates from Cisco and Microsoft. Get useful education.
Then there's the problem of medical cost inflation. Since Medicare benefits are bound to get cut (and you are better off being able to pay a specialist who refuses to participate in Medicare) you need even more money.
Future retirees could face even higher costs. A recent Urban Institute report projected that median out-of-pocket costs for the typical senior could rise from about $2,600 in 2010 to $6,200 in 2040 in constant 2008 dollars. I asked researchers from each of these organizations how we should go about budgeting for health care costs in retirement. Check out The High Cost of Growing Older.
The solution is to make career moves to make more money while living like a pauper. What's needed: a new religion of very hard work and extremely low living standards. Time to bring back Puritanism. In the new austere hard-working religion wearing ragged clothes should be portrayed as a virtue. TV should be labeled as evil. That way you won't have to pay a monthly cable bill. I dropped cable already just to save time. You need that time to work at a second job or to take night classes.
You need to make and save so much money that you won't have to spend 35% of your income in retirement on medical costs.
Furthermore, health spending as a share of after-tax income will rise dramatically. In 2000, health care spending for older married couples was 16 percent of their total income. According to the Center for Retirement Research, that number is expected to increase to:
- 24 percent of income in 2010.
- 29 percent in 2020.
- 35 percent in 2030.
Time to start a new religion of austerity and hard work. I'm looking for names for the religion. Anyone got any ideas?
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."
Perhaps we should call for a revival of the Gods of the Copybook Headings.
There are only Copybook Headings, and Rudyard Kipling is their prophet!
Jeez, people, relax. Save 10-15% of your income. Maybe you get a 401k match, so you bump that up to 13-18%. Put your age into a Vanguard (or similar index) bond index fund, i.e. if you're 30 years old, put 30% of the portfolio into bonds. Put the remaining portfolio into Vanguard Total Stock Index fund and Vanguard Int'l STock index fund split evenly. Rebalance the portfolio every year on either Jan. 1 or your birthday.
Do that, and you have very good chance of retiring between 60 and 65. (By the way, you'll also outperform 95+% of your neighbors and 90+% of professional money managers.)
How much do you need to retire. Figure out your living expenses, i.e. how much you spend not including taxes and savings. Then, when your portfolio reaches 10-15 times your living expenses, you should be ready. So if I have living expenses of $75k, I'll need ~$950k to retire.
Once you're retired, take out 4.5% a year. During crap years in the market, try to make it on that 4.5%, even though it'll mean a fair amount less money, though if you have to, it's alright to increase the withdrawal rate to 5% until times get better. Also, during good years in the market, try to reduce that withdrawal rate from 4.5% to 4.0% or even less. You'll still be getting more money, but it will reduce the withdrawal rate. This will give your portfolio (and your withdrawals) some cushion during the bad years.
Wow. That sure was hard. Forget the conspiracies, forget trying to be smarter than everyone else, just keep it simple.
Sometimes you are too subtle for me to tell whether you are really advocating what you are saying.... in any case I worry that posts like this help contribute to a culture where it is easier for business to exploit labor. Beyond the individual level it seems we are running out of work to spread around not that people don't work enough. But I do agree Americans by and large need get used to lower living standards.
The sciences and medicine are endless frontiers, so it's not possible (in the foreseeable future) to run out of work that needs to be done.
When our loved ones die, or we wake up one morning with surprise brain cancer, thank the luddites, and know it only happened because humankind didn't advance fast enough.
Sometimes I'm too subtle for me to know what I'm saying.
Should we do what I advocate above? Well, is it better or worse than what we are doing now? I argue it is better. Not saying there isn't a 3rd Way. But most proposed solutions are not solutions. We really need to curb our consumption and work harder.
I do not expect the next 20 years of the stock market to yield anything like the return of the post-WWII era thru 2000. We've got natural resource limitations as well as other problems retarding growth and possibly preventing it altogether.
The article you cite on Gen Y does not prove what you say it does. The article doesn't say Gen Y isn't saving, it says they're making a mistake by investing in money market and gold rather than stocks. The author seems to think that under no circumstances should they be invested in anything but stocks.
But if stocks are going to underperform as you say (and I agree), then they (we, I should say) are not making a mistake at all.
Exactly what we need, Another religion! lol
As if the ones we already have weren't doing the world enough harm already.
I know it's not religion we're talking about here really, but just thought I mentioned it
I agree, but I was noting more that our economy isn't geared toward that. Very few are involved in R&D despite all kind of people who can't get a job. I speculate that one way a future highly automated society could provide people with a living and something to do is to have more people involved in science and engineering. Of course not everyone is useful to science and engineering, so we could also expand sports careers and the arts and humanities. I have no idea how to do that politically or if that is even possible. It just seems that it is good for people to have some productive purpose and means of earning their keep. Automation will probably keep killing jobs.
In the right context I have no problem with working hard. But speaking as someone who could choose to work his ass off for a real long time or look for alternatives, I must admit it is tempting to shirk. Maybe it is just me, but beyond a certain point the incentives to bust ass for the man don't seem to be that great. I'm sure this was less true in the past. Of course there are alternatives like starting a business that might have a better payoff and require hard work.
"Automation will probably keep killing jobs"
Yes, and it's a good thing to. Automation makes sense, but the saddest thing is that now we can have an overproduction of everything, but only a few have enough money to access it.
Money and private property must be abolished so that equality in the world becomes a fact. So that we in fact do not destroy ourselves.