As I See It: Questioning Retirement
January 8, 2007 Victor Rozek
Another year begins. Perhaps this will be your final year of formal employment, or perhaps you have many more to go before confronting retirement. Regardless, there’s never a bad time to do some serious thinking about survival after the paychecks stop. But thinking is not unlike computing: stuff the brain with garbage, and garbage will emerge. And, according to the Wall Street Journal, many Americans are filling their heads with unfounded hope and betting their future on a set of risky assumptions.
The warning, coming as it does from the WSJ, is worth noting. The Journal is, after all, the chief promoter of Wall Street, not the champion of Main Street. So anytime it quits blowing economic happy smoke at the investor class and deals with issues relevant to the salaried class, the novelty alone should capture our attention.
In a thorough and informative article in the December 11, 2006 issue of the WSJ, Glenn Ruffenach examines nine of the most common retirement hopes that drive retirement planning, or the lack thereof. Although the headline writer called them “The Retirement Lies We Tell Ourselves,” Ruffenach–less dramatically but more accurately–calls them “wishful thinking.” Essentially, Ruffenach warns that things will not always break the way we wish them to, or the way we anticipate they will, and the results can be calamitous. It’s worth examining some of our most common assumptions because if, as Socrates said, an unexamined life is not worth living, neither is an underfunded retirement.
The first premise Ruffenach challenges is the belief that those who wish to will be able to work in retirement. Statistics suggest otherwise. While up to three-quarters of pre-retirees anticipate working beyond retirement age, only 12 percent of current retirees report being able to do so. What portion of that 12 percent work as Wal-Mart greeters or at some other minimum-wage job is not clear; but the lack of good-paying work combined with declining health (both physical and mental), prevent many retirees from pursuing employment.
IT professionals face an additional, cultural challenge. Innovation is a young person’s game. A plastic surgeon working in Silicon Valley told me that many of her clients were men in their 40s and 50s desperate to appear young in order to retain their jobs. In the entrepreneurial culture of IT, 45-year olds, she said, were deemed ancient. Hiring retirees in such an environment is nearly unthinkable. Given the corporate cost-cutting frenzy with its penchant for layoffs and outsourcing, it is more probable that high-salaried, aging employees will be replaced by younger, less expensive ones long before retirement. Certainly, there are few 60-year old software developers, and that to some degree is a matter of choice. Many older IT professionals report being weary of chasing technology and having their expertise rendered irrelevant by the innovative flavor of the month. The bottom line is: I have never seen a septuagenarian working in an IT department.
Another risky assumption is that the value of your home will provide a retirement safety net. During inflationary or economic boom times, real estate may indeed appreciate significantly. But turning equity into cash may be problematic. Equity loans or refinanced mortgages may be impractical since they must be repaid at a time when income will be greatly reduced. Downsizing the home is a possible option, but that may require abandoning your community and moving to a less desirable neighborhood away from the familiar and the familial. Besides, home is a place of comfort and refuge. Even those who are eager to retire lose a portion of their identity when they leave the workplace; losing their home on top of that may be more than many are prepared to endure.
The belief that you will be able to substantially reduce expenses after retirement may also be wishful thinking. Ruffenach points out that other than a vague desire to “travel more,” most people have no idea what they will be doing in retirement. And travel is certainly more expensive than staying home. Reducing expenses presupposes that something will drop off and that neither inflation nor unanticipated future expenses will offset the savings. In reality, retirement is a series of trade-offs. Fewer commuting expenses, but more use of electricity and heat at home; fewer dry cleaning bills, but more money spent on hobbies.
Thus, reduced expenses are by no means guaranteed. The wild card, of course, is health care. An unanticipated illness or the need for long-term care may be a budget buster even when people have insurance. Medication alone can cost hundreds of dollars per month; long-term care costs thousands. Of the people who file for bankruptcy and cite medical expenses as the cause, the majority were in fact insured. The actual reduction in expenses reported by retirees is very modest, according to Ruffenach. Research shows that survival in retirement requires a full “95 percent or more of pre-retirement income.” Not an encouraging figure for those without substantial savings.
Counting on an inheritance to augment personal savings can also be delusory. At first glance, the numbers are avariciously alluring. Ruffenach reports that an astonishing “$41 trillion could be passed down through estates during the next five decades.” But then come the disclaimers. If you’re still waiting for an inheritance after five decades, you’ll probably be dead, which is to say that a great deal of that money is irrelevant to near-term retirees. Plus, two-thirds of the money belongs to the top 7 percent of estates, so you won’t be seeing any of that cash unless Bill Gates gets divorced and takes a sudden inexplicable interest in your Mom.
In fact, AARP reports that only 15 percent of boomers expect to receive any kind of inheritance at all. And those who do may find their aging parents have spent their inheritance on medical care in the final years of their lives. Assisted living facilities may turn out to be the biggest beneficiaries of the estates boomers hope to inherit. As of three years ago, Ruffenach reports, the median value of a boomer inheritance was a modest $49,000.
Many who do not anticipate receiving an inheritance, put all of their retirement hopes in the pension basket–perhaps the most delusional belief of all. The degree of unfounded optimism is apparent in the following statistics. Ruffenach cites research published by the Employee Benefit Research Institute, which found that “61 percent of surveyed workers anticipate receiving money from a pension in retirement.” But here’s the curious part: “Only 40 percent of working couples currently are covered by such plans.” So the other 21 percent are basing their financial future on vaporware. And the 40 percent who are covered may not be by retirement time. More companies are defaulting on their pension obligations, and many more have underfunded plans to the dispiriting tune of $350 billion. The advice Ruffenach offers is that if you can pull out your pension in a lump sum, do so.
Reliance on Social Security is not among the risky assumptions listed by Ruffenach, but it could be. The Congress will eventually be forced to address the long-term funding of the system, but the longer it takes the less money there is likely to be for future retirees. Regardless, if Social Security is the sum total of your retirement plan, you’re already in trouble.
Hoping for the best is a reflection of the eternal optimism that is the hallmark of human nature. Preparing for the worst is the oft-neglected other side of the coin. Planning for retirement, as Ruffenach would no doubt agree, requires substantially more preparation than hope. A realistic projection of future expenses is the first step to understanding financial needs in retirement. Fastidious study of investment choices creates a roadmap for meeting those needs.
Oh, and saving every cent possible wouldn’t hurt either.