Investing For Retirement and Beyond: Start early and keep learning
By Tony Allison, August 31, 2009
The cold reality is that millions of the 76 million-strong Baby Boom generation, now starting to reach retirement age, will be unable to retire. Ever. These boomers will reach their golden years without enough assets and savings to survive for long without a paycheck. Some will reach retirement age with little but debt and good memories. For others working into their 60’s and 70’s will be no big deal. They enjoy what they do and will continue for as long as they can. For many, perhaps too many, they will be forced to keep working to make ends meet, which is not a happy prospect, especially if health concerns are an issue. Social Security is likely to provide little security in an environment that seems destined for higher taxes of all kinds and higher inflation. The concept of “semi-retirement” may become the norm as aging boomers struggle to maintain an elusive quality of life.
Hopefully, many of you reading this article will have the time, assets and strategy to arrive at retirement age and actually be able to retire comfortably. Unfortunately, the statistics indicate that most boomers could be better prepared. I will offer some tips and point out some pitfalls that may be useful to those on the path to retirement. Some may seem obvious, but it never hurts to be reminded about retirement strategies, and it’s never too early! There are many elements to planning for a successful retirement of course, and I will cover others in future articles.
In 1900 retirement lasted an average of one year. The US Department of Labor reports that Americans now spend an average of 18 years in retirement. Given the enormous debt burden at all levels of society and government, the average years in retirement may start shrinking in the years ahead.
The Big Three
According to the Society of Actuaries Risk and Process Retirement Survey, over 50% of retirees worry about three things:
- The cost of health care
- The effect of inflation on their nest eggs
- Being unable to maintain a reasonable standard of living for the balance of their lives.
The question that immediately springs to mind is what are the other retirees thinking? All retirees (with the exception of the uber-wealthy) and those hoping to retire should be concerned about, and planning for, these critical issues. In recent years many retirees with generous pension and health benefits have seen them erode or disappear as their former employers have downsized or simply disappeared. Even retirees with “guaranteed income for life” annuities cannot feel totally secure as those guarantees may become shaky if the insurance industry has to deal with a wave of bankruptcies.
The charts above show a clearly unsustainable situation. If left unchecked, continued deficit compounding for Social Security and Medicare will likely lead to much higher taxes and inflation, or worst case, systemic collapse. This is not a very rosy scenario for retiring baby boomers, or even those in younger generations with decades before retirement.
Stay solvent in retirement
Don’t look to the government to bail you out in retirement. You are not “too big to fail” and the government is far from a model of fiscal responsibility. In fact, the government will be looking to you (the nearly $12 trillion national debt is scheduled to nearly double in less than a decade) to bailout its own insolvency in the future.
Since retirees cannot print money at will like the government, personal debt should be minimized in retirement. A significant overhanging debt load will severely limit ones options, and clearly affect quality of life. Debt does have its uses however. If the debt is used to purchase cash-flow positive assets (such as rental property), then it can be useful in moderation.
It is important to own assets in retirement that pay you, and not just fixed income assets. In fact, in the current extremely-low interest rate environment, longer-maturity bonds carry major risks, as rising rates will lower the value of the bonds. In addition, bonds can lose tremendous purchasing power during high inflationary times, as your dollar payment stays flat as the dollar’s purchasing power declines rapidly. TIPS bonds (inflation protected treasury bonds) may be a partial answer, but their yield is much lower than regular treasury bonds at present and they are indexed to an understated CPI.
In addition, 10-year US Treasury bond yields are near 50 year lows, so the odds strongly favor higher interest rates in future years, especially given the exploding national debt, nervous foreign bond holders (China) and quantitative easing by the Federal Reserve. Given this scenario, one would be advised to keep bond maturities short if invested in fixed income securities.
Down the road a few years, bonds may very well be attractive investments again, but now they look more like a trap. Interest rates could be significantly higher in five years, perhaps sooner. Everyone (especially retirees) is looking for yield today, but unfortunately longer-maturity bonds (which yield very little anyway) are a risk, given that interest rates could rise very quickly and without much notice.
For income, look to invest in other assets such as dividend-paying stocks (in financially solid, international companies), in this very low-yield environment. In addition, look for those assets that are backed by something tangible (not just paper) and will retain their value better if the dollar continues to lose purchasing power over time, as I expect.
Open a Roth IRA
Roth IRA’s offer no current tax benefit like regular IRA’s, but all withdrawals are tax-free if the account is held at least 5 years, and the account holder is at least 59 ½. The conventional wisdom one always hears is that one will be in a lower tax bracket at retirement, so take the tax breaks now and invest in a regular IRA. How can you be so sure what your tax bracket will be at retirement? Given the fiscal irresponsibility of the federal government and a mushrooming national debt, I fully expect higher tax rates in the years ahead, and not just on the “rich”. In addition, many prudent retirees have paid off their homes and their children have grown up and moved out. Without those deductions, the tax bite becomes that much deeper. And if inflation grows worse (highly likely), the retiree will need to withdraw more than anticipated to get by, triggering more tax liabilities. With a Roth IRA, the account can continue to grow and compound tax-free, and there are no mandatory withdrawals at 70 ½, as with a regular IRA.
The main caveat, and it is a big one, is that Congress, in its infinite wisdom, could decide to abolish the tax-free nature of the Roth IRA at any time. Currently, there are rumors that Congress might remove (or modify) the tax-free status from municipal bonds to grab more tax revenue. Obviously that would not aid the already weak condition of state governments as they try to raise capital. One can only hope this story stays a rumor.
Stay Healthy
This may seem an odd topic when discussing retirement planning, but it is a critical element to a successful retirement. Sustaining good health during retirement is more than a lifestyle issue. Today, it is a financial issue as well.
According to 2007 government statistics, the median income for individuals 65 and older was $17,382, with 25% of that group reporting incomes of less than $11,000. This means most retirees are living on well less than half their pre-retirement income.
A semi-private nursing home room averages about $70,000 per year. According to the Employee Benefit Research Institute, a 65 year old couple retiring today would need to set aside $300,000 to pay for health care costs (premiums and out of pocket expenses), and more than $500,000 if the couple lives to age 92. For most retirees, that money is not going to be there. Medicare is very helpful, but it doesn’t cover everything, especially long-term illness. And with the arrival of the boomer hoards, Medicare benefits may get trimmed back to avoid system implosion.
The AARP estimates 73% of people 50 years and older do not have sufficient income and assets to withstand a long-term illness or disability condition totaling $150,000 over three years. Long-term care insurance should be strongly considered for those in position to afford the premiums. Unfortunately, those premiums are out of the question for many retirees just trying to get by month to month.
Health care costs are a wild card. They could eventually moderate (with the arrival of national health care and rationing) or continue to explode and bankrupt the system, even with socialized medicine. The one element you can control (at least partially) is your own health. Do whatever you can to take care of yourself. Sensible nutrition, exercise and lifestyle habits should be a given. If you neglect your health, one fine day the government may decide your operation can wait, and wait….and wait.
There are no guarantees of good health unfortunately, but taking an active role and complete responsibility for your own health clearly increases the odds for a long and happy retirement.
Start Early – Keep Learning
It is indisputable that the earlier one begins to plan and save for retirement the better. The simple power of compounding is a huge benefit for those who start 30 or 40 years before retirement age.
Another key element is to educate oneself and take an active role. The journey of knowledge never ends, and the more you educate yourself in financial matters, the better decisions you will likely make over time. Simply putting your hard-earned money in mutual funds every month and hoping for the best will no longer work in today’s complex and threatening world.
But given enough time, discipline and a common-sense knowledge of today’s financial system, many boomers, and those behind them, should be able to successfully navigate the challenging path to a long and comfortable retirement.
Today’s Markets
On Monday, led by energy and consumer-discretionary shares, the major U.S. stock indexes all ended lower, but still retained gains for the month.
After falling as much as 110 points early on, the Dow Jones Industrial Average finished at 9,496.28, off 47.92 points, or 0.5%, leaving the blue chips with an August rise of 3.5%. The S&P 500 Index shed 8.31 points, or 0.8%, to 1,020.62, giving the broad market index a 3.4% monthly gain. The Nasdaq Composite Index tumbled 19.71 points, or 1%, to rest at 2,009.06, a level that translated into a 1.5% rise from the month-ago close.
China's benchmark stock index fell 6.7% as fears about an overhang of new stock issues added to concerns over tightening credit. The Shanghai Composite Index dropped to 2667.75, its lowest level since May. The volatile market, which is mostly closed to international investors, has given back nearly a quarter of its value since it peaked on August 4th.
Wishing you a good evening,
Tony Allison
© 2009 Tony Allsion
Contact Information
Tony Allison, Registered Representative
PFS Group
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