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Today's Commentary: 06.03.04
The Last, Best Hope for Retirement, Part One
For years, I have been suggesting that people find some sort of second career about mid-way through the one they have. The premise for such a suggestion resided quite comfortably in the fact that I believed that the economic cards continue to be stacked against us. That the working man and woman, no matter what they did, would need to find another job at the very time in their lives that they thought about stopping.
There was medical presidence in that thinking. An active mind is, according to research done recently less likely to fall victim to Alzheimer's. Coupled with the fact that many of us will stay on this planet far longer than our parents and grandparents have, is reason enough to rethink that span of time between cutting the cake at your retirement party and your funeral. In many cases, that span may be forty years!
That said, how do you place your bets. Perhaps it is erroneous to suggest that this is a gamble, but how else would you portray such an event. You gamble with destiny and win the game of life. You get to live until you are one hundred years old. It would be a shame if you failed to win at the game that helps pay for it.
We are notorious when it comes to wishing for what we want without thinking the whole request through. In ancient Greek mythology, Tithous asked for long life without considering the need for youthfulness to help him enjoy those years. So how do we achieve what would amount to economic youthfulness to accompany our golden years?
Carefully and with due diligence. Americans tend to be neither when it comes to retirement. Stories of woe ridden investors who dreamed of early retirements filled the pages of newspapers and magazines for years following the meltdown of the markets in 2000. These investors gambled their economic youthfulness and paid dearly.
So the question is: how and when. How do you find the elixir of economic youthfulness that will make your wish for long life worth living? And when do you stop looking, comfortable in what you have will be adequate come hell or high water?
There are several things acting against your attempts at retiring. The first is your net worth at retirement. While we bemoan the wealthy, they do many of the same things we do including spend more than they are worth. This carry forward debt is hardest on the lower 90% of wage earners. But we will get to that problem soon enough.
Your net worth, the difference between what you owe and what you can invest is probably much larger among the top 10%, but the need for risk is necessary. Is there a way to be both conservative with your wealth, whether large or small and still find happiness in your investment return? Yes, but it won't happen in Treasury Inflation Protected Securities or TIPS. While they are designed to help offset the rise in inflation, the 2% and change these bonds pay are dependent on the continued good faith and credit of the federal government and your ability to undertsand how much of an investment is needed to achieve at least a modicum of comfort in those golden years. For evey thousand dollars that you expect to receive annually from your retirement savings, you need to have $50,000 saved. Add in the cost of taxes, deferred until you supposedly are in a lower bracket, of around 10% on up to, if your are fortunate enough, 35%. Investing in these securities requires you have, at the time of retirement, a cool $2.5 million socked away for a $40,000 a year annual income after taxes.
So the addition of risk lowers the amount needed to achieve the same goals. Unfortunately, even increasing the risk with another type of fixed income investment such as municipal bonds does increase the return but is subject to inflationary pressures that are absent in TIPS. By calculating an average annual inflation of 2%, which is optimistic by historic standards, relies on the ability of whomever is running the Federal Reserve Board to grasp monetary policy adequately enough to control a sudden increase in any of those asset gathering years. Expect the same nestegg funding of roughly $2.5 million to give you the same annual income of $40,000.
So folks look to the risk laden equities markets for help in gathering assets quicker with less invested. Even if you beat the inflation factor, are able to pay whatever taxes are necessary, and are able to find the good fortune to successfully navigate the stock market, a long prosperous retirement may be based on luck more than skill. To date, only a handful of people have been able to prod their nesteggs into long term wealth using equities.
For the rest of us, our net worth depends on a buildup of equity in our homes, which many Americans have leveraged to the point of disaster, a lottery or even better, a sizable inheritance. Discounting the last two, the net worth of many future retirees is resting in the social programs that are in such dire need of attention.
Next, a look at the economic policies and investment habits that will keep Americans working long after they hope to retire.
At Arm's Length: 06.02.04 Is it possible to mislay or worse, miscount over two million jobs? Current conservative economic thinking believes that this is not only probable but likely. The blame is in the numbers and those numbers are important.
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