Tuesday, March 25, 2008

The Anti-Retirement

Financial issues have been on my mind a lot these days. My generation has completely different financial waters to sail through to reach retirement and beyond. The baby boomers, who are and are approaching retirement, have had golden opportunities. They got to see the housing bubble more than quadruple their home equity, making it a reliable source of retirement income. They saw double digit percentage growth in the stock market for decades, making retirement accounts grow plentifully. They also saw more reasonable education loan terms, making investments in college education simple. And they benefited from low rates of inflation overall, with only short bursts of crisis (witness the 1973 oil embargo lasting several months).

My generation, on the other hand, will have fewer opportunities and none will be golden in comparison. We have seen the housing market bubble burst, and many of us have seen the little equity in our homes vanish, leaving behind negative equity. Those of us who have not yet purchased homes will find it even more difficult, for even though home prices are declining, lenders are tightening the reins, requiring up to 20% down, and even refusing to lend to people with modest credit scores. Add to that the rising local and school taxes, which affect new home purchases. These taxes are not paid by the baby boomers living in homes they have owned for 25 years. These taxes are paid by those in my generation who decide to join the homeowner club. Because of the housing crunch, the stock market has suffered. It is unlikely that we will see double digit percentage growth very much in the next several decades. There is a huge difference between 6% annual return and 12% annual return. It's about a factor of 2, meaning that your money takes twice as long to double in value, so a $10,000 investment becomes $20,000 in 11.5 yrs and 5.75 years, respectively. Thus, after 46 years, $10,000 becomes $160,000 and $2,560,000, respectively. Very disheartening indeed. But that's not all. Education expenses have grown almost as fast as the housing bubble, making a college education up to 4 times as expensive in terms of adjusted dollars. And the disparity in income between high school graduates and college graduates has widened, making it almost mandatory to get a college education just to find a job. And lastly, inflation may certainly rear its ugly head again, as we find manufacturers raising the prices on products they've shrunken. We are paying more for a smaller bar of soap. Included in that is also the rising price of gasoline, which is likely to hit $5 a gallon in the next 12 months.

We should also mention Social Security and Medicare at this time. Current estimates by most analysts would predict that Social Security, Medicare, and Medicaid will require the entire federal budget in order to exist in 2070. And that's if the physician reimbursements are cut 41% over that time frame. Congress has repealed the cuts in the last three years in order to prevent physicians from refusing to see Medicare patients. (If you knew your income would drop 41%, would you be looking for a new job or fight the system? Apparently, both.) That means it is likely these three social service plans will bankrupt the system even earlier. So where will my Social Security check be? At this point I'm a little skeptical that I'll even have one. A common misconception is that the Social Security taxes you lose in your paycheck are somehow going to a big federal bank where they will wait until you hit retirement to be paid back to you. In fact, the Social Security taxes you pay are for the current recipients of Social Security. So my generation is up a half leg, being that we are a smaller generation than the Gen Yers and the Millenials. But health care is getting more expensive. Insurance is getting more expensive. Medications are getting more expensive. There is no solution in sight, since the Presidential candidates won't talk about it for fear of derailing their campaign. It seems that at the very least I will have to be responsible for a large part of my medical costs.

So what is an after-baby-boomer to do to prepare for retirement? Max out my company's 401k? Make sure I have 6 months of pay in an emergency fund? Max out my Roth IRA? Pay down credit card debt? The answers to these question are all yes, of course. But they are non sequitur to the original question. These financial recommendations are sound, but will be very unlikely to prepare my generation for retirement. Unless the stock market enters another atypically long bull run, I'll be down $2.4 million without doing anything wrong. It will make me feel less depressed about the $50,000 of lost home equity in comparison, though. There is no good answer to the great question. The combination of lower yields, rising prices, later start date for saving, and reduced funds for contribution make it impossible to be secure for retirement. The math is straightforward and simple.

Having accepted the sad fate of being poor or bankrupt in retirement, I do wonder what happens when you run out of money after you retire. No one ever talks about that scenario. It's always just a cautionary reference, "make sure your savings will last up to 30 years after you retire." What happens if you don't have money? What if a baby boomer lives longer than he expected? What if he spends too much after he retires? Does he file for bankruptcy and move in with his kids? Does he move into a nursing home and become a ward of the state? Does he get a job? How does he eat? Is he homeless? Why don't people talk about this? There must be at least 1% of people that don't have enough for retirement. We've spent 6 months talking about the 1% of homeowners that have defaulted on loans because of poor planning. How about the people that planned poorly for retirement? It must not turn out well for those folks, but I'm not worried. If a large part of my generation is headed for incomplete retirement savings and history repeats itself, the federal government will bail us all out. So I can just spend my money as I wish and extend my credit to the tomorrows. The fed will save me from the consequences with a retirement stimulus package in 2045.