Friday, October 15, 2010

Adjusting the Dream of Retirement

Since the advent of blogs, the ability to complain has gone beyond grumbling to your co-worker and on to the world stage.  Much of the complaining has been egged on by writers looking to fire up your anger and make you face the consequences of a period of time when wealth seemed like it was attainable for everyone. The sad truth is that this simply was not possible for everyone and for the vast majority of us, the reality was a harsh and somewhat rude awakening.

Outraged, we looked to the government to save us from ourselves and when they admitted that this was not possible for everyone, we did what was expected: expressed our outrage. In a recent post on the AFL-CIO blog by former news reporter Mike Hall, the suggestion that Washington should wake-up and come to terms with a $6.6 trillion retirement deficit lays the responsibility on the wrong party. yes, that is a lot of money. Yes, it has impacted everyone (with the exception of the highest wage earners).  And yes, it does make me just as angry as you might be.

But I blame myself and in many instances, you should blame you.  Mr. Hall suggested that this multi-trillion dollar deficit will prevent us from the "hope to maintain your current standard of living when you retire".  To do that, you would need to have enough income in retirement to match what you currently earn.  With few exceptions, your retirement income is designed - and if properly funded - to replace only 70-80% of what you currently earn.  With few exceptions, the vast majority of us do not plan our retirement based on these assumptions.

Let's consider those assumptions.  Retirement still is and always has been a combination of elements working in tandem. The first is your own ability to live within your means.  This allows you to build some sort of savings/investment plan to meet your needs when you no longer want to work.  And for the majority of the current workforce, some reliance on Social Security.

It is amazing how many people who are close to retirement believe that Social Security will somehow survive without some adjustments. Minor tweaks to Social Security will happen.  But it will have the greatest effect on those who are still decades away from drawing on the program. It does remain solvent and will do so in the near future - long range though, several things have to happen.

The size of the group contributing needs to increase. If the government does anything it should be to focus on the current wave of cash hoarding by the country's largest corporations. This means more employed workers contributing which means more revenue.

You will always be able to take the early draw on SS.  While most experts agree that this is not a good idea, they are referring to the workers who can continue to work beyond the targeted retirement age. Plan your retirement based on this early withdrawal number. True, it is worst-case scenario but the true essence of plan is based on this concept; not shooting beyond what it possible.

You can also help your cause by contributing to an IRA or if your employer allows you, to their 401(k) plan.  Five percent a paycheck does not alter your take-home pay. While the $6.6T number quoted in Mr. Hall's piece seems daunting, it creates sensationalism and lacks solutions. Most of us need to keep in mind that a great deal of the wealth recently amassed and lost was due to a bull market that lasted between 1982 and 2000, much of which was due to the elimination of pension plans and the forced march to defined contribution plans. We can't go back.  But we can move on.

As for pension plans - still the great economic stabilizer - they are under pressure to reduce their impact on the employer.  If such a thing comes to pass, what it won't take away is what you already earned, just the projection of what you could have earned.  While austerity is a difficult pill to swallow, there are ways to increase your retirement opportunities.

Adjust the dream you may have harbored and do not want to let go. Get your house in order by imagining living on 30% less income than you do now. Underspend and over save/invest. Get healthy and stay that way - medical costs will have the greatest impact on your retirement income and doing this could save you thousands of dollars in medical bills that otherwise could have been spent on living expenses.

There is no quick or easy answer and like most problems facing the American worker these days, it relies on realistic assumptions, workable plans and a measure of hope that we will survive the current economic situation. I'm not sure the government can rescue us all - which means that some of us will need to learn how to swim.

I have some additional thoughts on the subject here.

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