Yesterday I wrote a bit about saving for retirement. 401k plans aren't doing too well, but they're the best we have. Social Security is problematic. I don't know what is going to happen, but it's pretty clear that the retirement age will go up and benefits will go down. Still, it is the country's safety net of last restort, so I don't think it will ever be eliminated.
All you really need to know about retirement is how much money you'll need, and how to make your savings and investments stretch to that. It's really very simple. Just get out your crystal ball or tea leaves and predict the following:
1. What will your annual spending be?
2. What will the estimated inflation rate be?
3. How long will you live?
4. How much will you make from other sources, like Social Security?
5. How much return can you expect on your investments?
6. When will you retire?
You can probably figure out when you'll retire, so long as you're not laid off or incapacitated. But the rest are shots in the dark, and depend largely upon your temperament. If you're in the doom and gloom camp, better start planting turnips and laying in a good supply of powder and shot - you'll be fighting with feral dogs for the last can of Dinty Moore.
In the words of that great sage of the second Bush administration, Donald Rumsfeld, There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.
Basically, you'll be fine so long as you have the savings equivalent of the GDP of a small country. You might want to think about retiring there.
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bill_sheehan- bill_sheehan
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When you are old you want to be sure that someone will notice if you are cold and hungry and bring you soup.
You can do this buy paying to live in an assisted living center, or you can do this by living amongst friends and neighbors. Either you invest in money or you invest in human connections. That's pretty much what it boils down to.
It's a pretty good bet that someday you will be incapacitated by old age, just as you were incapacitated by infancy. Infancy comes with a ready set of caregivers. Until recently old age did, more or less, as well.
Until recently people did not have quite the amenities in old age that they have now. Central air and heat, for example. Building codes and safety features that we take for granted now didn't used to exist; people died when their nightgowns caught on fire while stoking the wood stove. (I know someone who had that happen to him recently.) You want to have safety, leisure and wealth but in practice you have to trade them off one against the other.
Until recently people did not have debt service in retirement. By the time they were old they had established a paid-for residence and paid cash for their last car.
Until my grandparent's time people did NOT expect anyone to pay for their old age and saved up on their own, putting 1/10th of everything they earned aside. If you didn't have to deal with inflation this was a decent method.
Until recently "investing" meant helping your child buy a farm that you would live on in your old age.
Another recent development is that medicine actually works now. Until about 40 years ago the cost of medical spending was low because it didn't actually work. You got cancer, you died. You had a heart attack, you died. You got diabetes, you died. Ditto kidney failure, etc etc. Now we are consuming far more medical services than ever before. My octogenarians told me that going to the doctor's is "like having a part-time job". Every day they get up, get dressed, check their calendar and set off for their doctor visit du jour. They have skin doctors who zap their precancerous moles. Foot doctors who trim their toenails. Eye doctors that fix their cataracts. Ear doctors that adjust their hearing aids. Dentists that implant new teeth. There's a cardiologist and a pain specialist. One of them has need of a gastroenterologist, another needs a neurologist. There's a physical therapist and a mental health counselor AND their primary physician who conducts this orchestra of care.
If every person they visit gets $100 for that point of care then they are spending roughly $50,000 on medical care a year. Much of it is paid for by Other People's Money, but I know for a fact that they pay $10,000 of it out of pocket.
My father-in-law (who was a high school science teacher) has recently hired a person to come in and bathe him. After four hip replacement surgeries his hip is still not functional and he needs help in the shower. So he is getting a body servant, which they are getting covered (confusingly) through Medicare as part of "hospice services" to a man who isn't actually dying; he could live another twenty years this way.
We are paying for old people to have individual body servants now.
Ever hear of "Stern's Law"? That which cannot continue, won't.
Retirement planning is something I do professionally. I do not find that there is a "number" to aim at. The better things to aim at are to be resilient, ready for change. To do self-care so you aren't ill in old age. To pay down debt (and keep lifestyle simple) so you have a small nut you have to cover each month. Moving from a two car family down to a one car family when the first person retires is an excellent start. Moving to an intergenerational household is another good move.
The future is full of unknowns. When has that NOT been true? Decrepit old age is our future. Oddly, it's considered the BEST CASE scenario. From my experience I think one of those medically-prevented early deaths might have been preferable, but I do recall that I didn't think that at the time.
Edited at 2012-05-15 12:20 pm (UTC)
I agree with a whole bunch of what you say, especially as concerns healthcare. According to Fidelity, the average couple retiring today will need almost a quarter million dollars for healthcare alone. However, most of that money goes to people who have nothing to do with health. The number of administrators and other climenole wavers (See Gulliver's Travels) is appalling.
And I certainly agree with your peroration. Fortunately, we've always been a one car family, have always kept it simple and managed our debts wisely, and have been exceedingly fortunate. The Unindicted One and I are in the minority of folks who are on track for a comfortable retirement. I'm looking forward to decrepit old age.
This is part of the concept behind my edible landscaping project. My yard is filled with fruits and nuts and vegetables. It's not enough in terms of year-round calories to feed me in old age, but it will reduce the amount I have to go out and buy.
Money you don't have to spend is equivalent in benefit to money you saved. (Or, as someone else put it in the days before fiat currency devalued our money, "a penny saved is a penny earned".)
You are concentrating on how to continue your 20th century existence. The American Century you lived much of your life in: it was an ABERRATION. It was fueled by fossil fuels. It consumed far more than sustainable. It is not gloom and doom to say that civilization will stabilize closer to the lifestyle of 1900 than 2000; that's math. We don't have the energy inputs to support 7 billion people at that level.
Misery comes from clinging to that which is changing. People existed for thousands of years without the trappings you've had the benefit of. A cheaper lifestyle makes sense. You can get it by moving to a third-world country, or you can get it by living more austerely here. But, one way or another, you will end up living on less when you aren't working.
You mention that you need to know how long you'll live. Uh, no. What actual pension managers do is pool money into annuity pools and make payouts based on expected lifetimes of a big pool of people. After you're done accumulating your retirement stash the thing you probably want to do is the same thing: go buy a single premium immediate annuity, essentially buying a lifetime pension with that pile of cash. Then you don't have to worry about how long you'll live; you'll stretch this money until the day you die. If you die early it turned out to be a bad bet, but you don't care, you're dead. If you die later than expected you're awfully glad you made that bet.
Also, a serous mistake my clients make is in knowing when they'll retire. Many of them say things like "I'm going to work until the day I drop dead", as if someone is hanging around waiting to employ their feeble pre-corpse. No. You become unemployable long before you think you will. You are selling your labor and there is no guaranaty anywhere (for anyone) that you will obtain a buyer at the price you are asking. I routinely see people "retire" earlier than they planned.
My essential question about retirement is, how long can I keep working? My aunt literally worked until the last day of her life -- she was found after her boss called the police that she hadn't come in that morning, and could they check her trailer? That's what I'm shooting for.