Sunday, January 30, 2011

Retirement Fun for Boomers and Beyond

I should note that I do not have a crystal ball or a product to sell which will magically fix all the problems I am about to discuss. I am also not an accountant or a financial advisor or anything like that so nothing I say should be seen in that light. By all means read what I say and think about it. If you decide it might have some merit then consider it in your plans. However don't just mindlessly put a lot of money into this or that because I (or anyone else) talk about it if you do that you are a fool and deserve all the bad things that could happen. Be an adult and make your own decisions because you will have to live with them.

With the slew of municipalities being broke and having insolvent retirement funds, corporations dumping pensions whenever they get any excuse and a whole bunch of states broke I would be concerned if a pension was going to fund my retirement. Heck even the federal government isn't doing so great. Consider what would happen if you pension was radically reduced or even defaulted entirely.

Also if you haven't noticed the USA has a real problem with welfare social security and medicare. Like the level of problem Charlie Sheen has with vodka and cocaine. Social security was started by commie FDR with benefits at 65 when people on average died at 62. Also there were lots of workers to pay for it. The numbers don't work and are rapidly getting worse. Too many people are retiring and not enough are working to pay for them.

I imagine a lot of small things will be done to try and bend the exponential curve of welfare entitlement costs.The are to collect full benefits will likely go up, well off people will be charged on more of their income (I think it's 100k right now), and some sort of a means test will likely appear. I believe all of this will only succeed in kicking the can down the road a few years.

Also more significantly generations X and Y realize we are never going to collect meaningfull social security. As boomer politicians screw us with higher rates of theft contribution we will get pissed. Pretty quickly we will get into an age demographic that votes at a far higher percentage and are a significant force there is going to be a reconning. I am not sure how we will screw you the boomers but I bet we will. Best case is that they are going to be paid in inflated dollars. On a more gloomy side it could be significantly inflated dollars. Worst case for them the welfare social security checks will stop entirely.

My point here is that you should plan for retirement without counting on a pension OR social security. If you can collect either of them then go for it. However personally I would want to be able to support myself without either and just have them as icing on the cake.

In an even darker scenario the dollar and subsequently paper investments denominated in the dollar could take a nasty hit. Maybe it could be a slow slide or a fast crash, I don't know. In any case the have money in investments and live off interest/ dividends plan would fail in this scenario. To be honest this is relatively unlikely (slow slide to a currency among many versus world reserve currency and a moderate loss in purchasing power is more likely) but it would be a bad one. Most retirees would be devastated. The truly rich would generally be fine (somehow they always are) but middle and upper middle class folks would mostly be destroyed.

What can be done for those who are worried about this relatively unlikely (the extreme version anyway) scenario? The first thing that comes to mind is to have your basic financial house in order. For those close to retirement age having very minimal or no consumer debt and having your primary residence paid off is so huge. I watch a lot of those financial shows and the amount of people who are trying to retire with car loans and very little equity in their home (let alone having it paid off) baffles me. If you are debt free and retire then something happens so you face a drop in income at least this way you can shred your expenses. It would suck but as long as you can pay property taxes, fuel and food you will be OK if not happy. However if your pension fund fails/ the stock market and subsequently your investments collapse and you have all sort of stupid consumer debt and a high mortgage payment it will get ugly fast.

My next thought also flows well with what is likely reality for most boomers. The reality is that many of them saved like they have a cushy defined benefits retirement plan when in fact they have a 401k. Too many of them continued to upsize their home and used home equity like an ATM instead of paying off their home. Fundamentally a lot of people are approaching retirement age and just can't afford to retire, at least in the way the Greatest Generation did. Some will be able to retire and live modestly (versus lots of travel and recreation) while others will need to keep working in some capacity or another.

The advantage is that earned income (vs from dividend's, stocks, interest, etc) is pretty flexible. You can, at least in theory, renegotiate the deal for future services to reflect a changing economic situation. That could mean getting paid to reflect the real value of currency, in a stable currency, PM or barter. Hard to do that with your pension or retirement account. If something this ugly happened a lot of people would be headed back to the workforce in a seriously damaged economy. The way to get ahead of the game would be by working in some capacity already. Maybe you could work part time, consult or just have a couple clients. Even a modest income could (in addition to making todays retirement economics more comfortable) be the difference between making it and not.

Where you choose to put your money is important also. I am not against precious metals for an alternate currency/ store of value but have concerns about them for retirement. The reason is that they do not benefit from interest, dividends, etc. Every silver dollar or gold eagle you spend is coming strait out of your principle.

The reason that truly rich (maybe wealthy is a better word) people do not get wiped out is that they own businesses and real estate that produce income for them. If currency values change radically a solid business will continue to earn some money. People will continue to rent apartments, homes and commercial space.

Things that produce income are good things to buy. A lot of the downsides of real estate (and to a lesser degree businesses) are minimized if you pay cash. I would rather have some money in the bank and the market and a modest rental house or twelve in decent areas earning me income than a bunch of money in the market.

I don't know what is going to happen so I hesitate to suggest putting all your eggs in any basket. If your finances are in order, you earn a bit of income and have at least some of your money in tangible things that produce income odds are you can weather whatever comes.

Thoughts?

10 comments:

Anonymous said...

We are in our mid 60's, both collect SSN, one has a tiny retirement income, we have other money that we label 'emergencies', one has VA medical benefits and Medicare. We have a small mortgage payment - less than we would pay in rent for a studio apt. Every thing else is paid for. We live on our SSN and retirement - less than $24000 yearly.

We had an absolutely miserable year in 2010 medically - one had major heart surgery with major complications - mostly paid for by VA & Medicare, but still paid out about $7000. Other had skin cancer - several surgeries and a diagnosis of diabetes none covered by insurance. Paid out just under $4000. These expensives were paid from the 'emergency' fund.

Why am I telling all of this - because if we lived the way most of our friends and neighbors do, we'd be bankrupt, homeless, carless, and probably dead for lack of medical care.

We prepared for retirement - paid off bills, made sure to have the necessary tools (power, hand) for the life we wanted, our hobbies are those that help us financially and health wise (gardening, walking, sewing, knitting, cooking and baking from scratch, etc). We did not take up expensive leisure time activities like golf, tennis, eating out and the all too common in our area of 'come over for cocktails'.

Our life is full of free things to do - lunch time concerts where we bring a picnic lunch; walks along the waterfront; various fairs on going green, health where we get free samples, health screenings,and lots of good info; antique auto shows; art galleries; talks on various medical, social, history topics - at least two things each week.

We really did not change our lifestyle much when we retired - we liked the way we lived and still like the way we live. The only real change is being positive to stay out of the sun 9-4, exercise daily and have our doctor checks every 3 months.

Preparation is everything. Being sure of your financial needs and how they will be fulfilled is vital.
We took 5 years to plan, 1 year to make the change, and after 5 years are making some fine tunings. It's definitely not a turn-off, turn-on situation.

Mayberry said...

Ryan, Yep, the division/diversion campaigns have worked very well. You are still in bed with the system, therefore you lash out at those who've done nothing more than start to collect on that which they paid into their entire career. Your diatribe is best directed at the criminals who 1) created the Ponzi scheme to begin with, and 2) stole from the "trust fund" for decades, and 3) made promises to pay ever increasing "benefits" from that fund, knowing full well there was not enough money to cover those promises. For no other reason than selfish political gain...

But those truths seem to be lost on the right wing crowd, who have no problem forking billions into illegal wars of imperial aggression, while screaming for SS beneficiaries to have their funds cut.

SS is not "welfare". It WAS a retirement program, which, by the way, was (is) FORCED upon us working stiffs by nanny.gov, and has been aborted beyond it's original intent by criminal politicians. Do I like it? No. Do I want it? No. But I've been forced to pay into it for 20 years now, and like all the others who've paid, I damn sure expect to get back what I've put in, with INTEREST.

Will it be my sole retirement income? No. Hell, I doubt I'll ever be able to retire. But do I want to see my 80 year old Grandmother's SS go away? Hell NO! That, and a small pension from my Grandpa is all she's got.

Now to address you on your Dave Ramsey high horse: MAYBE if SS was not extracted from our pay by the barrel of a gun, folks could have planned better for their retirement. But they suck a hell of a big chunk of cash from our pay, reducing our ability to plan and save for ourselves. So maybe you want to rethink your "welfare" position. Maybe you want to open your eyes and SEE that the government WANTS people dependent on them. It's a self preservation thing you know. Most people, yourself included, refuse to recognize that little fact. Chew on that for a while...

Anonymous said...

And THAT type of philsophy is the reason I am no longer a libertarian.

Rose said...

I closed my IRA and paid the penalty. The gov. wants to nationalize IRA's and take even more of our money. I would rather have cash at my disposal than to have the gov steal even more of my hard earned money. All of our friends and family take vacations to Mexico, Hawaii, Vegs, etc. They have flat screens, ipods, new clothes etc. We have food, a home that's paid for and are self-reliant. We are in our 40's with a graduating high schooler with college to pay for next year. I would rather live simply and have security in my abilities than to rely on the govt to "help" me when I retire, that is, if I am ever able to retire.

Anonymous said...

When politicians talk about Social Security they lump in Medicare. The Medicare portion of the system is in deficit and must be fixed. The Social Security portion of the system is not in deficit and takes in enough from the payroll taxes to cover costs. In the future the SS portion of the system will need to get back some of the $2.5 trillion the federal government "borrowed" from it as more babay boomers retire. At the anticipated rate of growth this combination of the $2.5 trillion and the revenue from payroll taxes the SS part of the system is not expected to go broke within the next 100 years and may well still be in good shape then as well. Social Security is not in need of fixing except to stop the politicians from meddling with it.

Anonymous said...

I'm with Mayberry on this one. I've paid into it, and by God I'll get something out of it. I didn't ask to contribute, it was taken. It's not welfare, it's paid for. The Republican hero, Reagan, revamped SS so there'd be a huge surplus, and then the FedGov spent it all. Everyone wants to blame the previous generations, but I know that the boomers spent a ton of money on their kids, and continue to spend money on them, so it's not asking too much to get the Y&Xers to pay. Because they will pay, one way or another, if there's no Social Security, where will mom and dad go? They'll move in with you, just like the Waltons.

Chris said...

I agree that the broad brushstrokes are absolutely correct. There is no way to fully fund all the obligations. The three options are (1) increase taxes, (2) decrease benefits, or (3) default on the obligations. Option 1 is painful, and if you crank up taxes ever higher, then eventually growth slows and people start to invest more and more time and effort into tax-avoidance strategies (which may employ some CPAs and lawyers but are hardly "productive economic activity), so there are diminishing returns. Option 2 is painful but can be done stealthily (via inflation) so I think it is most likely. We may well see some tax increases as well but you can't solve the entire problem by porking over today's 25-year olds for the next three decades. Option 3 is also painful and while I think it is unlikely we'll go there, our politicians might just steer us into a ditch.

I really don't know what to say to the average boomer. The average boomer has less than $100K in retirement savings (far less, actually). In my opinion, to think about retiring comfortably, you probably need close to a million in the bank. The incredibly low savings rate means they're dependent on social security, which we've already discussed is unsustainable. What are you going to do when that SS check's buying power shrivels away as inflation continues? 75 year olds may vote in large numbers (which could stear us towards option 3) but they aren't going to riot in the streets over bread.

As a young person, my retirement savings strategy is simple:
- Don't count on SS for squat. I view that as a tithe of 1/10th of my income. When I retire I hope to be able to donate my entire SS check -- if it still exists -- to charity. We also invest a fair amount of effort into legal tax avoidance to minimize self-employment tax consequences and other payroll tax deductions.
- Max out the ROTH IRAs every single year. If you make more than $40K a year, then you can max out you and your spouse's ROTH IRAs. People who make less than $50K a year even get a dollar-for-dollar tax credit on their federal income taxes for a good chunk of these savings. ROTH IRAs are a great deal if you think taxes will be higher in the future than they are now.
- Strive to save 25% of my income every year in tax-advantaged accounts (including those maxed out ROTHs). Beyond the ROTHs, I also make use of 401Ks (and similar vehicles) and 529 plans (tax advantaged education savings).

People who were counting on SS were naive or willfully blind. My parents never counted on SS and saved for their own retirement and they will be comfortable. That's just the way I was raised. Historically, people who didn't want to work their entire lives either (A) saved ~25%+ of their income through their entire working lives or (B) relied on the charity of their children and communities. The modern welfare state seems to have reached the limit of what is possible before you realize that there's TANSTAAFL.

Chris said...

@Rose,

I closed my IRA and paid the penalty. The gov. wants to nationalize IRA's and take even more of our money.

I wouldn't go that far. The benefits of tax-advantaged retirement vehicles are so massive that you have to be darn sure that the the end is nigh before taking such an action.

Consider a taxable vs. non-taxable account.

With both you pay your income taxes right up front, so that's a wash. However, if you make less than $55K a year or so then with B, you get a dollar-for-dollar tax credit for some of your savings. That's free money.

On the taxable account, you get to pay taxes on all the dividends and interest. Due to the Bush Tax Cuts, the tax rate on qualified dividends for many people is 0% (sweet), for now. Don't expect that gravy train to last forever though. Interest (such as from FDIC-insured CDs) and proceeds from other funds such as bonds are taxed as income, however, so that is 10%, 15%, or even more. The average 40 year old person should have around 40-50% of their portfolio in bonds so that's pretty sizable.

Meanwhile, the tax advantaged account grows tax free, allowing you to fully reap the benefits of reinvesting profits.

Every time you trade funds in your taxable accounts there can be capital gains consequences. Again, due to the Bush Tax Cuts, the rate is 0% for many people (for the next year or two). Don't expect that to last. This is another brake on growth of your portfolio. I have a feeling that many people who are thinking about closing out their IRAs also have sizeable holdings of precious metals. Well, guess what -- those are taxed as collectibles, at an obscene 28% rate. If they are sheltered in a tax advantaged account, though, you can trade to your heart's content, tax deferred, and then cash everything out at the end in a tax-advantaged way.

Your other option, of course, is to go the tax evasion route. That also has problems. If you lie then you can get busted which basically will crush your estate's worth. If you invest in "off grid" assets then you can still get busted and you likely incur significant expenses that slow your rate of return.

If things have gotten to the point where 401Ks are nationalized or the government reneges on long-held contracts about things like Roth taxation policy, I don't think holding money in a taxable account will help you much. So closing out those accounts just seems like a way to give Uncle Sam a nice check right now, and even more over the next few years.

Anonymous said...

@ Chris who said "People who were counting on SS were naive or willfully blind."

I think that before the FedGov takes away SS, they'll confiscate your IRA/401K and guarantee you a government SS retirement. It's happening right now all over the world. I think then all the other young know-it-alls will be saying the above quote about you. lol

Chris said...

Anon,

If we're at the point where the government forcibly confiscates IRA accounts with the threat of force for non-compliance, do you really think that money in taxable accounts is going to fare much better?

In this dark scenario, if you put your $$$ in IRAs, you're hosed. If you put your $$$ in the bank, you're still hosed. The only way you're not hosed is if you buried gold, silver, and lead in your backyard -- and if you do that, and it turns out that nothing happens, well, you're hosed and better like cat food.

One must also wonder why the .gov would ever pursue such a path. There are less politically costly options (like stealthy inflation). Even defaulting on Treasuries might be less politically painful than confiscating private retirement accounts. They don't have to "take away" SS. They just need to make the liability smaller, which can be done fairly easily with inflation and modest tax increases on higher incomes.

As Ryan says, people who have chosen not to save for their own retirements or people who can't put aside a few hundred bucks a month need to seriously rethink their priorities. Someone who saved $2K per year in a tax deferred account at a fairly conservative 6% rate of return would have over half a million at retirement. Given that you can get a dollar-for-dollar tax credit on retirement savings up to $2K/year if your income is below ~$55K, if you aren't doing this then you're just not very financially savvy. Max out your ROTH's and you'll have $1.5 mn (only ~$1 mn if you don't trust the IRAs and leave everything in a taxable account, by the way).

The real entitlement bomb is medicare. We used up all the politically easy cuts to pass ObamaCare. SS is relatively easy to fix compared to medicare...

Anyways, maybe I underestimate what Americans are willing to put up with. Given that they're willing to see their wives and children groped in public by total strangers, maybe they will put up with having their bank accounts raped. I rather doubt it though.

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