Investment types often trot out the cautionary phrase, "past performance does not necessarily predict future results." And for good reason. Clients must understand that their financial tomorrow is no guarantee. Yet when it comes to the question of whether we are doing enough to ensure that we won't outlive our resources in retirement, we can learn a lot from history.
Until the late 1800s, nearly everyone worked where they lived or at least nearby. America was largely an agrarian society of farmers and craftsmen. The economy was simpler, far less global. Transportation followed rivers, railways, and local roads. The Industrial Revolution's rapid transit and automobiles were still around the corner.
The industrialists created the commuter society, in which radiating trolley lines allowed workers to traverse between homes in the suburbs and jobs in the city, and back again. The industrialists also adopted pensions for their workers. As of 1919, over 300 private pension plans covered about 15 percent of U.S. wage-and-salary employees, according to the Pension Research Council, and as companies expanded benefits to attract workers and reduce turnover, that amount only continued to grow.
Pension plans were followed by profit-sharing plans facilitated by the Revenue Act of 1921, and then came the creation of Social Security, the social safety net enacted in 1935. All of these programs, whether private or public, were easily financed and funded because workers typically clocked in and out until the age of 65, and life expectancy was around 70. There was no major financial exposure to invest in workers' retirement years.
But over time, our collective saving habits slipped as memories of the Great Depression grew distant and fuzzy. Soon, consumer spending eclipsed all of our take-home pay as credit became more widespread and accessible. We discovered we could go into debt. Fueled by inflation, especially in housing, our debt grew and grew through an extended period of economic euphoria -- one might call it "irrational exuberance" -- yet no one worried.
Then housing values, which rose dramatically and fueled all sorts of economic excess, plummeted stone-like into an abyss. The Great Recession took hold, destroying jobs and devastating nest eggs. Our savings were history.
Meanwhile, during the past decade, the 401(k) plan had become our go-to retirement savings program. Employers elevated what was originally intended as a tax-sheltered savings program -- all but terminating "expensive" pensions -- and went with the smaller -- and finite -- 401(k) contributions. With personal pre-tax contributions available, the thought was employees would put away funds for the future. At the same time, public pension plans -- which are not protected by the Employee Retirement Income Security Act (ERISA) or the federal Pension Benefit Guarantee Corporation (PBGC) -- saw their funding slide as politicians, by necessity or by choice, put the money toward more tangible and pressing programs.
The austere result is more and more local governments face dire financial straits, even bankruptcy, causing these plans to be sharply reduced or eliminated mid-stream. The private sector has beaten the public sector to the punch by eliminating pension plans or finding ways to turn them over to the PBGC.
As for the much vaunted 401(k), employer contributions for the most part are lower than the predecessor pensions, and while there may be some advantage to these plans for today's mobile work force -- mobile as in jumping from job to job, not working remotely via a tablet computer -- the outlook is less than stellar. The median 401(k) size stands at about $24,000, according to a Fidelity Investments report. For those older than 55, the nest egg is about $65,000.
Young people often take a bit more money home rather than into their 401(k) account. When they change jobs, they often cash in their 401(k) accounts, paying not only taxes but a penalty for early withdrawal, leaving in some cases about half the account in their pocket, and nothing for retirement. Some 5.7 million, or 4 percent, of U.S. households reported paying penalties on early 401(k) withdrawals in 2011, according to Bloomberg data.
Somehow, we must change this grim retirement cycle. Running up debts by turning our homes into piggy banks is not the way, nor is burning up our salaries while putting little aside for our ever-extending post-retirements. In addition to the disruption in employer funding, Social Security could be pressured negatively as the population ages and, with added longevity, what funding there is -- government, employer or personal -- could be stretched to last, or depleted altogether. In either case, that leaves worse than planned, or hoped-for, retirement.
The key is for people to take personal responsibility in their retirement planning. Here's how:
- Calculate (with an online tool) the amount of benefits and savings you will need/want in retirement;
- Pay yourself first -- establish a routine savings plan that calls for savings first;
- Maximize 401(k) opportunities, especially those matched by an employer (don't leave your employer's cash on the table);
- Buy an annuity or high cash value life insurance policy with periodic premiums -- and pay the premiums;
- Open an investment account (with a broker, discount brokerage firm or financial adviser);
- If discipline is lacking, have an amount automatically taken from your bank account weekly or monthly and placed into a retirement or investment account;
Individuals must take it upon themselves to increase their savings. There is a real need to avoid -- as some financial planners are wont to say -- "too much life at the end of the money."
Where do you see most RVs? Parked in their owner's driveways for 11 months a year. So instead of rushing out to buy one for $100,000, check out renting it instead. We're told a pretty nice Airstream that sleeps six will set you back $2,000 per week. In general, the rule of thumb has always been to own what appreciates and lease what depreciates. Do you really want to walk past the behemoth in the driveway five times a day knowing it devalues a little more each month with age? And don't forget about the other costs of RV ownership: insurance, maintenance, storage off-site when you tire of it as a lawn decoration.
Our favorite places to shop are thrift stores near retirement communities. Golf clubs and golf carts show up frequently in these shops at a fraction of their original cost. We also comb the classifieds of the retirement community newsletters for gently used cars; you can find some gems with low mileage.
To state the obvious, you can always rent a boat for a day of sailing or a weekend at sea. You also let your boat-owning friends know that you're "thinking" of buying one and ask if they would mind taking you out for the day? Most boat owners love to show off their toys. And you can become the guests they always invite back by going a little overboard with the food and drink you bring. Boat owners we know say the guests they like the most are the ones who stick around long enough after the sail to help clean up and secure the vessel.
Offer your guest room to out-of-town visitors and you'll feel better asking to use theirs. Use a home-swapping service when you visit new places. Trade your plumbing skills with the house-painter's. You sew and your neighbor bakes like a pro; order up a birthday cake and offer to take up a few hems. The one commodity that retirement gives everyone is time. Barter it for the lifestyle you want.
Public libraries rent out not only books and movies, but they also run lots of free programs including lectures. Parks hold concerts in the summer for free. Colleges frequently allow those 55+ to audit classes for free; you won't earn credits toward a degree, but you will learn some new things.