Hope of Israel Ministries (Ecclesia of YEHOVAH):
Retirement and the Baby Boomers
What we are about to experience is unprecedented in American history, due both to our historic irresponsibility -- governmental and personal -- and our very high expectations of a retired lifestyle. Spending what we should have been saving has done wonders for economic growth in the past 20 years, but it has also created a glaring monster in the form of a retirement crisis like we have never seen before.
by Robert Wiedemer
When it comes to Americans and retirement, you can divide the population into two groups:
1) Those who don't save, and
2) Those who don't save nearly enough.
Think that's too alarmist? Sure, there are a few well-off people out there who will be fine. But that certainly doesn't represent the vast majority.
Incredibly, 56 percent of all American workers don't save any appreciable money, meaning in theory they will never be able to retire, or if they do they'll have to depend solely on the government dole for sustenance.
This 56 percent has less than $25,000 -- often much less -- in total savings, including retirement, emergency or otherwise, according to the Employee Benefit Research Institute (EBRI). (This figure doesn't count home equity or defined benefit pension plans.) If you look at retirement savings for those aged 50 to 59, who are just about to enter retirement and most in need of big savings, the median amount is a paltry $29,000.
The second population group I refer to at the start of this article -- those who don't save nearly enough -- comprise the remaining 44 percent. Of those, 34 percent haven't even saved $250,000, meaning only 10 percent have saved more than $250,000.
This dire savings situation doesn't necessarily indicate that people are entirely uliaware of how much savings they'll need for a comfortable retirement. The EBRI found that 76 percent of all workers realized they needed more than $250,000 to achieve that goal. So it's not a case of ignorant bliss leading people to shortchange their retirement accounts -- meaning it's actually an inability to understand financial planning and a flat-out lack of discipline to set aside money for the future.
Home Equity as Panacea
As I noted, the EBRI survey did not include home equity. So, you might argue that home equity could be the salvation for the coming generations, as it has been for many people in the past who have tapped equity in their retirement.
You would at least be correct in thinking that home equity is where the bulk of people's savings are stuffed. In fact, middle Americans making between $39,000 and $62,000 before taxes (about 22 million American families) have about 90 percent of their assets in their home equity.
That's not surprising after reading the savings figures I just cited. Equally unsurprising is that the home equity side of the savings equation isn't looking too good lately.
On average, since the housing price collapse began, Americans have lost 55 percent of their home equity. That doesn't necessarily mean the value of their home has dropped 55 percent; it just means that the difference between their mortgage and the value of their home has tightened considerably. In many cases, it has evaporated completely. Clearly, home equity isn't going to save many people.
To add insult to injury, many people also have been raiding their retirement accounts due to the recession. According to a national Bankrate survey, 19 percent of Americans have been compelled to take money from their retirement savings in the last year. That's one out of every five Americans!
Many people have had to empty their retirement savings due to job loss because they had no other savings. Often, the idea was to try to maintain the same lifestyle they enjoyed before the layoff, thinking positively that unemployment would be short. They perhaps even ran up credit cards on the assumption that a new job was just around the corner.
That bet didn't pan out for a lot of people, as evidenced by long-term unemployment (those jobless for 27 weeks and older) at 6.3 million as of June, accounting for 44.4 percent of the unemployed. The depletion of savings has left tens of thousands nearly penniless, with dim prospects of ever reaching retirement even when they finally get back to work. Debt, as we know, is a hole that digs itself deeper, as you chronically struggle because you're using tomorrow's dollars to pay yesterday's bills.
Clearly, the lack of overall savings is a key part of this problem, as is the length and severity of the job crisis, which is affecting many higher income people as well. The long-term effects on retirement savings from these early withdrawals are huge, considering that make-up deposits are challenging, and in reality all too rare among those who do get back to work. When you're struggling to make ends meet and under a large debt load, the idea of putting away extra retirement savings can seem impossible.
Poof! There Go the Pensions
I said earlier that the savings figures I gave from the EBRI don't include pension plans. Living in Washington, D.C., I can tell you that there are a lot of people here counting on federal pensions for a comfortable retirement.
Wait a minute, you may be saying. I don't work for the government. What am I going to do? That's a really good question.
Outside the confines of the District of Columbia, you come across a number of Americans with no such safety net. For people under 50 at least, the lack of a pension isn't proving too disconcerting -- according to a Wells Fargo survey, less than a third expect pension income to be important in their retirement. Either they already know a pension isn't in their future or they don't expect to ever be employed in a job that offers the antiquated benefit.
However, that same survey reveals that 55 percent of people in their 50s and 59 percent of people in their 60s have pensions. Private pensions are declining rapidly, but many older people have pensions that were granted by companies years ago. The bulk of the pensions currently are government related -- think teachers' retirement funds, public employees' retirement systems, etc.
However, as I've written in the new edition of my book Aftershock, pensions are likely to encounter severe stress as outlays outpace intakes. The investments in stocks and bonds will be under huge pressure. Many pensions' viability is predicated on high long-term stock-market returns. If the market underperforms, the pensions will be underfunded.
No doubt, many government pensioners expect that the various governments in charge of those pensions will simply raise taxes to make up the difference. However "simple" it may seem to those expecting their promised pensions, raising taxes to fund big pension payments will likely become increasingly difficult as constituents push back against aggressive taxation in lean economic times.
Also, if tax revenues fall significantly during another economic downturn, expect more pressure on pensions. The recent pension fight in Wisconsin is just the start. Many pension cuts all over the country are still to come. And, if the government is having a hard time meeting its own pension obligations, don't expect big bailouts of other pension plans.
Of course, looking at the sad state of savings in America, it is easy to see why so many pensioners are upset about any cuts. With little savings and less home equity, the pensions may be all they have to maintain a good standard of living in retirement. Desperation breeds discontent.
What's Your Number?
That brings us to another increasing problem with retirement savings: Funding for a "good" or "comfortable" retirement often means spending about the same as when working. The dated thought that you could spend less in a life of leisure has been shattered by reality. Once we escape the daily constraints of work, spending options proliferate as we try to fill our days with activities. We want to travel, we want to do things, we don't want to sit in our homes and pinch our pennies. That's a very fair and appropriate thought. .
In reality, if there is any downturn in spending outlay during a typical lifespan, it usually happens when children leave home (if you're not supporting them as they "find themselves"), which often happens long before retirement and thus isn't a factor. You can also potentially decrease home and maintenance costs by downsizing, but any savings on that front are often offset by increases in older-age-related costs like healthcare.
With all those pressures, people who retire have found it difficult, if not impossible, to dramatically cut living expenses by 20 percent to 50 percent when they stop working. They can't square their new income with their expenses.
In reality, retirement often means similar living costs to pre-retirement. Which means you may need a lot of money for retirement. Even people saving "a lot" of money -- those few in the 10 percent category who have saved more than $250,000 -- are often woefully underfunding their real retirement costs.
The math is easy. A $1 million retirement savings generating a 5 percent income gives you $50,000 a year. That's not much, especially if your working income was more than that.
Of course, you could start taking out principal to augment your savings, but then each year, you're also reducing the interest too. Live to 85 or older, as we all certainly hope to, and you'll more than likely be fully depleted of cash assets.
Sad as it may seem, even that $50,000 figure I tossed out for consideration is in many ways wishful thinking. Very few people in the U.S. have $1 million in liquid assets. Indeed, it's a dark picture when you focus in on the details of the retirement crisis.
Social Security Not Secure at All
Adding to this looming crisis is the fact that we're entering a period of unprecedented numbers of people reaching retirement age. The baby boomer generation -- those born in the years following World War II up to about 1957 -- comprises an estimated 77 million Americans. Do the quick calculation and you see that those boomers are just now starting to hit the traditional retirement age, with a major surge still to come over the next 15 years.
Not only is the country ill-equipped to deal with this influx of people onto the Social Security rolls, it's not ready for the Medicare hit either. On the former front, back in 1950 there were 16 workers for every retiree, meaning the system was well-funded by that metric. Flash forward to today, where there are only about three workers per retiree; within 40 years, that'll drop to just two workers per retiree.
Social Security, in fact, is even more troubled than that calculation suggests. That's because everything you're paying into Social Security now as a worker is being borrowed to pay down the massive U.S. budget deficit!
What? Yes, it's true. When you hear we are borrowing an unbelievable 40 percent of our federal government's daily expenditures, that's in fact glossing over a very key point. About half of our tax revenue now comes from Social Security taxes.
Remember, around 50 percent of Americans pay no income tax, but they do pay Social Security tax. If you take away Social Security taxes, assuming instead they're being invested in a pension plan, then the federal government is actually borrowing about 70 percent of our current expenditures.
Social Security isn't really a pension plan, it is a transfer payment. And that transfer payment will be under huge pressure when we can no longer borrow and print without spurring very high, unsustainable inflation. When that day comes, Social Security transfer payments will have to decrease, and that means instead of everyone getting a check, the program will instead become means tested.
Put another way, Social Security will become a welfare payment. If you really need welfare (no savings and no income), you will receive some level of Social Security (not the current level, of course). But if you have other savings or income, don't expect Social Security -- consider all that you paid into the system nothing more than another tax on your earnings.
Hence, we can't count Social Security as part of anyone's retirement savings, because it is quite likely it won't be there for many Americans who have just enough to be over the means-tested threshold. It will be nothing more than a safety net, not a savings that provides income. And it's a low net at that.
Crisis Preparation 101
We'd like to believe the typical reader is more aware of the reality of the situation, and is a better saver and planner than most.
However, even those of you who have $1 million-plus and a collection of assets to lean on to fund retirement won't be immune to the crisis. That's because a more deleterious tax environment is sure to result, as retirees who can't continue working will coax support from the system. You'll need to seek out ways to maximize your tax shelters, through the help of a financial planner, accountant and attorney.
For those who aren't on track toward an ideal retirement savings, there are actions you can take.
First, you'll have to consider working longer.
The Wells Fargo retirement survey found that 72 percent of Americans ages of 25 to 69 plan to work through their retirement years.
Of course, this solution depends on having lots of jobs for older people. In contrast, what we have found in the current recession is that one of the hardest hit groups in terms of long-term job loss is people over 55. It's a situation that'll be exacerbated in rough economic patches.
Next, you'll want to live more frugally now, spending less and minimizing your debt.
Like a lot of good advice, it's hard to do. As we get accustomed to a certain lifestyle, it becomes harder to make decisions that reduce costs dramatically.
You can at least nibble at the edges, however, eliminating credit cards, which more Americans need to do, and cutting back on meals out, vacations, and the like.
Third, be very careful in what you invest.
The stock and bond markets will be increasingly risky. But whether you believe fully that large-scale economic collapse is coming or not, it's a common refrain among experts that we can't expect the good returns we had from stocks in the 1980s and 1990s or the good returns of bonds in the 2000s.
An Uncertain Retirement Horizon
On a broader level, retirement simply won't be as fun or easy as it has been for many in the previous few decades. On a societal level, spending what we should have been saving has done wonders for economic growth in the past 20 years. But, it has also created a glaring monster in the form of a retirement crisis like we have never seen before.
In many ways, the retirement savings crisis is like the children's fable, The Ant and the Grasshopper. We had fun spending rather than saving and we're about to pay the piper once winter arrives.
What we are about to experience is unprecedented in American history, due both to our historic irresponsibility -- governmental and personal -- and our very high expectations of a retired lifestyle. Yes my friends, it's an old tale with a very new twist. Now we will wait and see how the story turns out for each one of us.
[The world's economic and fiscal systems will eventually collapse to be replaced by YEHOVAH God's perfect system. This we see prophesied in Revelation 18. -- Editor]
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