Monday, July 5, 2021

Your Projected Retirement Date: 7 Minutes After Hell Freezes Over

Back in the day when I worked for big financial services goliaths, managing 401k plans, I would fairly regularly be called on to conduct employee meetings aimed at getting the worker bees to contribute more to their 401k. It wasn't because the company gave a shit about their retirement but a 401k plan can only have a certain ratio of contributions by regular people versus "highly compensated" staff. Basically if your peons don't put enough in their plan, the higher-ups can't max out their own contribution. 

Good times. I often stayed at the Ritz Carlton, had a maximum $50 per meal budget and was driven to and from the airport by a chauffeured town car when I wasn't telling 20-something factory workers and secretaries that it was important to save in their 401k plan. Most of the time they understood the basic gist of low rate of return, low risk versus higher risk, higher potential return investments. I could show them charts of investment returns. Big number good, low number not so good. 

What they didn't ever seem to get was the idea of inflation risk, the risk that your investment return will slowly be eaten away by inflation. When I was doing these meetings inflation was generally very, very low so it wasn't a huge deal for most people. I brought it up because it was part of the presentation but it never got much attention. Back in those days it was all about the eye-popping investment return in funds like the Janus 20. The riskier the tech stock, the better! Who cares about inflation when you are picking from mutual funds with 20% annual returns?

Today?

Inflation is a serious issue and on the trajectory we are headed, it is the reason why many people my age are going to find out that the retirement model we have been taught since entering the workforce is about to fail us. 


The way it is supposed to work is this: you start young and invest regularly with each paycheck into a higher risk stock heavy mutual fund. While there are downturns in the market, it doesn't matter because it always bounces back and you don't need the money for decades anyway. Downturns are actually a good thing for young workers because it enables them to buy shares of mutual funds at a lower price. Over the long term, stocks have always outperformed every other investment class by a wide margin. As you get older, you are supposed to gradually shift your investment portfolio away from stocks and toward bonds and money market investments to preserve your capital. When I worked there Fidelity Investments came up with their Fidelity Freedom Target Date funds which would do the reallocation for you. I would tell people in meetings that if they knew their birth date, the could pick a fund. If you were turning 65 around the year 2040, you picked that target date fund and never had to watch your investment. 

20 years ago that logic seemed sound. Not many people were doing it of course but the models were based on solid evidence. One thing I learned from decades in banking and retirement plan management: very few people were saving anywhere close to what they were told they needed in order to retire. Many people ran the calculators that told them how much they had to save per paycheck to reach some ridiculous mythical figure, often a seven figure number, and realized that wasn't going to happen so they just didn't bother. Those people today are charging hard toward what used to be retirement age and they are in for a rude awakening. 

For those who have been making an effort at saving and investing, their mediocre savings are looking pretty uninspiring. I am not talking about Boomers who have already or are just about to retire but people who are middle aged and are starting to look more seriously at retirement. When you are 30, thinking about being 65 is more than double your age and seems like an eternity. When you are 50? That date is looming large and 15 years seems like a blink of the eye. 

There is a huge problem looming for these people with a retirement horizon of under 20 years. The cost of goods and services, especially gotta have stuff like gas, housing and food, is skyrocketing. 

Your retirement money is supposed to be sufficient to draw from for your current expenses for the duration of your retirement. Hypothetically, the way the model is supposed to work, your expenses will go down in retirement. Kids will be moved out, mortgage will be paid off, you won't be commuting to work, etc. However, what if inflation is ravaging your buying power? You likely won't have enough money to last your life expectancy and that will require you to significantly adjust your lifestyle expectations or, and this is more common by the year, you will need some sort of side hustle in retirement to make ends meet.

Granted, the expectation of 65 being the magical retirement age is based on people not living much past that point. Most 65 year olds now are in far better physical and mental condition than the same aged people were 75 years ago. And still, the American dream isn't to work at some part-time menial job until you die but for the vast majority of us, that is what the future holds. It isn't beaches and golf courses, it is living check to check, scraping by as the cost of the basics keeps climbing. 

Inflation is a vicious cycle in an era of fiat money. It is all about keeping ahead of the wave. As we pay people to stay home, they become dependent on that money. The problem is that all of the magical "money" we keep printing enables prices to keep rising so suddenly the people staying at home can't afford what they want, so they start to clamor for more government money, another "stimulus". Politicians oblige and create another trillion in make-believe money which in turn cause more inflation, and on and on the cycle repeats until you start to see hyperinflation like Weimar Germany. The other big problem? Once it starts, it is politically almost impossible to stop the cycle. When was the last time we had a significant voice in either party calling for fiscal restraint? 

There is more to inflation than just the Consumer Price Index. As reader Exile1981 pointed out, even as prices are going up, portions are going down. We have all experienced opening a bag of chips only to find the bag is mostly empty. This is especially true in dollar stores, where you think you are getting a decent deal but you get a lot less than you used to. You are getting less bang, or fewer Pringles, for your buck.

Not to mention that the stuff you are buying is flat out junk, needing to be replaced over and over again with new junk made in China. I know how this makes me sound but as a kid my dad had a Wheelhorse lawn tractor. We had a big lawn to mow so that thing got used a lot. From the time I can remember as a small child to when my parents sold the home I grew up in, he had the same mower. My wife and I bought a brand new Cub Cadet rider a couple of years ago and have had all sort of things go wrong because it is poorly made. Another childhood anecdote, this time something less expensive than a mower. We had the same ice cube trays for as long as a I can recall in that house, but we bought some the other day from a dollar store and about the third time I emptied the tray it cracked. Granted it was only a buck or two but that is pretty expensive per ice cube.

Prices keep going up, far faster than your investments can hope to compete. 

The bottom line:

There isn't an investment available to average people that can hope to compete with Uncle Sam printing limitless money to keep the country from exploding. 

Before you start with "wUt aBoUt mUh BiTcoIn?!" nonsense, that is even worse that fiat currency. At least the dollar for now is backed by the full faith and credit of the U.S. but bitcoin? It is completely make-believe. To make matter worse, it is incredibly volatile. Finally if things go really sideways and the internet isn't working reliably, where is your vast fortune in make-believe "money"? Do you think you can barter for food by offering internet bullshit gold pieces that can only be accessed via the internet? Good luck with that plan. Crypto is amusing for playing with and has some utility as a mostly anonymous way to pay for goods and services but other than that it is a joke.

The plan of getting a big nest egg so far ahead of increasing prices that you can ride it out until you die, and maybe even leave some for your kids, is long gone. There is no getting a big lead, with inflation you are now on a hamster wheel and any stumble means you tumbling off the wheel completely. That date you have circled in red on your mental calendar, the day you turn 65 and retire? Erase it. Not going to happen. Assuming we even still have a functioning society by that point, you aren't going to retire in the same way your grandparents did. Your savings and investments will be eaten up by inflation, social security will be a thing of the past. Unless you win the lottery, inherit a bunch of money or are in the top tier of wage earners already, there isn't a path where you quietly retire to the golf course.

So what to do? This is not investment advice, I am no longer an investment professional, etc. 

Figure out where you can live in retirement and get there, right now. Somewhere near family and friends and away from the blast zone of the urban areas. To have deep roots in the community requires time. Somewhere you can survive without reliable power, which mostly eliminates the deep south and far north. Get a modest home that will suit for your older years and get it paid off before you retire. That means thinking about your house and how suitable it is when you are 70 or older and stairs might be an issue. Do long term improvements now while you are working and can afford it. Get a side hustle you enjoy lined up now so you aren't forced to flip burgers or greet shoplifters at Wal-Mart. What I am doing now I can do indefinitely until I can't drive anymore. 

This is important: start to live on less now and ease into retirement. Abruptly going from a lifestyle of spending big because you are earning a lot is going to be painful, but learning to gradually live on less is a lot easier in the long run.

We don't have this all figured out yet, our house is built for a large family with lots of kids, not empty nester older people but we have plans to fix that. A couple of our adult kids already own homes near us and most of the rest are likely to stay in the general area. Still more to do but with a number of years until retirement we are starting to get in a good place. I just know this for sure, we aren't going to live in a retirement community somewhere in our golden years, places like that will be immediate soft targets for the zombie hordes coming out of the cities because they are full of old people with money and stuff. Sunny Acres is going to be a death trap.

Your retirement dreams aren't going to happen like you planned but that doesn't mean eating Alpo out of the can and living in a hovel when you are old, waiting to die. It just means that retirement planning requires something other than mutual funds, 401ks and dollar cost averaging. Mostly it means changing your mindset about your future and being realistic.

7 comments:

  1. and, let's not forget, they are going to nationalize all the 401k/ira/roth ira's. for fairness you know. And since i"d bet that 80% of people have pretty much nothing in their retirement accounts (and a few have millions) that only a few people are going to get screwed. You can see this coming from a mile away. It's already been done in other "western" countries and you can see it's coming here. Also let's not forget that when you withdraw, it's at current tax rates, which are certainly going to be higher than now.

    Yeah, just like every GenX'er has known since high school, everyone's retirement plan is the same "work until you die."

    ReplyDelete
    Replies
    1. They have been planning that for a long time, especially Roth IRAs because they realized a lot of people are going to cash those in with huge investment gains that are tax free.

      Delete
  2. Good advice Arthur. I've been working in "Continuing Care Retirement Communities " for 15+ years now, and the people that live here? Their MONEY makes more than I do! The crazy thing is, but with few exceptions these were normal people with normal jobs - engineers with HP or Lockheed, docs and lawyers, etc. The difference is the era in which they worked and invested. Bought real estate before this area became Silcon Valley - a $30k house in 1970 was selling for a million bucks in 2001, thats one hell of a return on investment! My parent's mortgage ( bought in 1972) was $320. My first apartment in the late 80's was $550/month which was roughly half my take-home pay. Another big difference is stability. A lot of our residents worked for the same company their entire working life, or maybe two. In the 35 years of my adult, working life Ive been laid off 3 times because of outsourcing, mergers and once because the economy was so bad there was no work(trades). One of those layoffs was December 2001 - the Dot Com bubble burst. It took 18 months to find a full-time job and my stock portfolio went from a value of $140k to $30k in a couple short months, which I had to cash out just to keep a roof over our heads and food on the table while trying to find work. There were no extra Fed bennies, no unemployment extensions, nothing. When I finally got a real job, it was at half my previous salary and almost an hour away by car.
    Our residents look at you like you're a space alien when you say "I could never afford to live in a place like this"... they simply have no concept of how things played out for the younger generation. I'm just thankful I dont have student loans to contend with! The one "smart" money decision I made.

    ReplyDelete
    Replies
    1. That late Boomer generation to the Silent generation have a ton of wealth wrapped up and they don't even get it.

      Delete
  3. Again, right NOW is such good advice. You won't be one of us unless we've had years to get to know you.

    ReplyDelete
    Replies
    1. In fact, people who just recently showed up are automatically viewed with suspicion. Especially people without kids. The relationships worth having when SHTF take years to develop.

      Delete
  4. I am actively looking to put this program into effect. I'm a bit late to the game, have had my own business (I own my job) in the trades for several years, and my skills are broad, needed, and portable.

    I've never put much into any retirement, since I think they'll just seize it all when they need to. All the retirement programs are just chapters in the IRS code, so they can be modified at any time.

    I am looking for a smaller community where I can buy a home with a bit of acreage, take it off grid, and settle into a working retirement lifestyle. I have never expected to "retire" like the silent generation has. I think that was a fluke, and is actually unnatural.

    The way that I am screwed is that I am unmarried with no kids. So I will have no support when I am older.

    I guess when I am too old, hospice will come by with their morphine overdose, and I'll be done.

    sigh.

    ReplyDelete