SA contributor Dirk Cotton has a superb article about "why the retirement train wrecked," citing four key factors: the enormous increase in longevity; the stagnation of middle-class incomes; medical cost inflation; and under-saving. As Cotton puts it:
"Families need to earn enough over a 35-year career not only to support themselves for those three and a half decades, but also to help fund perhaps three more decades in retirement. Most Americans will receive Social Security benefits, but they are meant to replace only about 30% of pre-retirement income."
His article is helpful, because when you look at these variables all at the same time, you can better appreciate the almost Kafkaesque dilemma most Americans today fact. Another implication may be that the enormity of the problem potentially magnifies the value of a financial advisor who can help Americans address this grave problem.
To that end, here are a few suggestions I will offer to help advisors frame these discussions, or to help DIY investors wrest control of this onerous issue.
- Remember that retirement is a new idea historically. Granted, people do live longer today, which presents a challenge (and an opportunity); so it is reasonable to want or need to de-intensify one's work. But understand that so much of what we think about retirement is filtered through commercial interests, ad campaigns, etc. Everybody needs to plan for their futures, but it need not be the future projected by Madison Avenue, Hollywood or Wall Street investment firms seeking your investment dollars.
- Anything you end up getting from Social Security will help. But given the program's shaky finances, unfavorable demographic trends and a new normal of tepid economic growth, it would be unwise to count on it (or all of it). Whether through means testing, taxation or bankruptcy, the current deal could well become less generous in years to come. Planning now to work longer may make the biggest contribution to your retirement security simply by increasing income and diminishing expenditure.
- Statistics reveal retirement savings to be woefully inadequate; even wealthy Americans have saved too little. No financial advisor has the magic to fund a 20-year (let alone longer) retirement on the basis of the amounts the vast majority of Americans are saving. This implies that the best advisors, or most conscientious DIYers, have to make heroic savings a big part of their program.
- Heroic savings is very hard when a household is funding other pricey items like a college education. This implies two imperatives: families, even wealthy ones, need to tighten their belts during their working years in order to save more. For example, given the sky-high rate of tuition inflation, families might think hard about low-cost ways to get a college education (e.g., online), or, it may be time to revive notions of teens taking summer jobs. And on the spending side, retirees would be wise to question the commercial and cultural push toward a resort-style retirement including constant travel, golf and dining out.
- Retirees can save costs, preserve their health (thus saving more in costs) and contribute to their communities, family and legacy by dropping the partying mentality portrayed on your mutual fund brochures in favor of assuming roles of responsibility in community organizations, exercising, and making yourself available to babysit the grandchildren.
What do you think? Please post your comments.
Now for today's advisor-related links:
- Manning & Napier on customized benchmarks designed to meet your personal, future liabilities.
- AllianceBernstein: Target-date funds need more sophisticated diversification.
- Allianz Global Investors' Kristina Hooper uses her legal training to assess the likelihood of a Fed fall rate hike; (spoiler alert: the data won't be strong enough to do so).
- David Merkel, CFA, reasons market is likely to rise higher, but investors should not get too aggressive.
- Louis Navellier on the problem with index funds and America's army of idle men.