I’m assuming roughly 100% of people reading this post envision some sort of eventual retirement. You might view this as a subject only worthy of future consideration, but it will happen. There’s no way you could be making a living wage in your 70s and 80s, right? In this post we’ll examine why you might be out of a job sooner than you think, and perhaps without a safety net. But this isn’t all dark clouds and cold rain my friend, for we can solve this dilemma with such little effort. And we can start today. Let’s go!
The Good Ole’ Days
For generations, Americans followed a relatively straight-forward and predictable path. Get a good job, earn a pension, and then retire. According to The Balance and Investopedia, pension plans reached their height from about 1960 through the 1980s, when roughly 50% of private sector employees had pension plans. That is no longer the case, and today about 10% of private sector employees are now offered a pension.
Americans companies have shifted the burden of volatility and saving for retirement to the employee, in the form of 401(k) accounts and other similar programs. It’s our duty to recognize two important realities of the American (and increasingly global) workplace:
(1) We have to prepare for our own retirement; and
(2) Fewer workers are retiring on their own terms.
Now, this isn’t necessarily bad news for those that are savvy enough to take full advantage of these evolving systems. Instead of working decades to secure a modest pension, you might be able to fast-forward your time in the traditional workplace without sacrificing any financial security. But let’s first continue with the bad news.
The Pension Dilemma
I was flipping through an article by the Wall Street Journal a couple of weeks ago (October 7, 2019). The article discussed the decision by General Electric (GE), a classic and gigantic American company, to freeze the benefits of its pension plan for 20,000 employees. GE is also offering lump-sum payments to 100,000 former employees who have not yet started withdrawals on the fund. BORING!! Who cares about old people and their retirement accounts BRO?
Well, we all should care. GE’s pension policy is dying on the vine in the late October sun. Other former pension plans have already fallen victim to the frost of fall, withered and devoid of life. Here’s the reality for most American workers: when you leave your W2 job, whether by choice or not, you are on your own.
Are you putting the balls in motion to be ready? Will Grandpa Joey thank 30-year-old Joey for tossing a few bucks into the market each month instead of letting life’s shiny toys catch his attention?
Forced Retirement
As I’ve previously mentioned, my industry experienced a sharp down-turn starting in 2015, resulting in dramatic changes to the workforce in the years since. I’ve witnessed and scraped my way through many rounds of layoffs, corporate restructuring events, and consolidations.
At my job in 2015, some of the first to go were largely retirement-age employees. Call it age discrimination, call it whatever you will. When companies are forced to lower G&A budgets, those making large advisor-level salaries have fat targets on their back. Of course executives and upper level managers make high salaries, but they’re never the issue (sarcasm).
And at some level, I get it. I saw many of these folks doing work that could easily be replicated by someone with far less experience (and thereby far lower salaries). Experience only matters to a point in an ever-changing world, and many were shown the door with little compassion for their vulnerable position in the open market. Some of these workers were in striking distance of retirement, hung out to dry in a time when no one would hire them for anywhere near their current salaries, perhaps not at all. Sound familiar to anyone?
As I write this, the corporate wheels are grinding for another major shift in my career. I’ll tell you more about that when the time is right. But damn, I’m so glad I’ve followed this path of financial security right about now! Job security is no longer guaranteed, which brings me to my next point.
Older Workers Being Pushed Out
The statistics support that companies are increasingly focusing their efforts away from seasoned veterans. A study by Propublica and Urban Institute found that more than half of workers age 50 or older are being pushed out of long-held jobs before they are ready to retire, suffering irreversible financial damage. And of those who lose their jobs, only 10% are able to again find work with pre-setback earnings levels. In essence, the likelihood of a career above the age of 50 is quickly being distilled down to a coin flip.
The job market is changing dramatically overnight, and many of the skills and ideas of decades past are being replaced with familiar words: automation, machine learning, big data analytics, algorithms, and frankly…robots. Scary? None of this should frighten you if you’ve taken even moderate action on your financial health. Of course, if you haven’t…
But We Think We’ll Retire Anyway
Interestingly, a 2018 Gallup Survey found that the average non-retired American believes they will retire at or around age 66. Participants under the age of 30 are even more confident, suspecting that they will retire earlier (on average age 63). That’s a concerning disconnect: young people aren’t saving, are assuming they will retire “sometime in the future and probably early,” yet the data suggests they will be shown the door well ahead of expectations.
Uh oh.
What Should I Do to Allow For a Retirement?
The solution is simple. Save and invest, and start today.
Forget about early retirement and some of the other unconventional stuff I write about on this site. You can be completely dismissive of that portion of the equation. The issue is that far more of us assume we will be a beneficiary of financial independence — in the form of traditional retirement — than current behaviors predict.
What if you are shown the door at age 53 with little savings? Will you be able to find work to support you and your family? Do you see many 70-year-old employees (or older) in your line of work? Let’s be real: providing for a full cost of living becomes very difficult in our later years if we haven’t been saving all along.
Let’s examine the power of setting aside some of your money and letting compound growth do the heavy lifting. You’ll soon see that there is a MASSIVE incentive to start this process as soon as possible. Let’s go!
The Power of Compounding Growth on Your Retirement Ambitions
Age 25 Example: Margaret #1 and the 40-Year Investment Timeline
Let’s take a hypothetical 25-year-old woman for example, and we’ll name her Margaret. Margaret lives a middle-class life, spending $25,000 per year (yes, that spending can afford a middle class life). She makes a very modest post-tax salary of $35,000, allowing her to save $10,000 per year.
Margaret is a smart cookie, and she decides that instead of blowing that extra $10k on stuff that doesn’t bring meaningful value to her life, she’s going to invest that surplus in her company 401(k) instead. Let’s also assume her investment returns generate, over the long-term, 7% per year. Margaret invests the initial $10,000 and continues to invest $10,000 annually in monthly increments of $833.33.
Now let’s assume that for whatever reason, Margaret is never really able to save and invest more than $10,000 per year for her entire career. I know, that’s silly, but I can’t be bothered with a complex model and I think you’ll get the point here shortly. By age 65 (generally considered a traditional retirement age), 40 years later, Margaret will have $2,146,087 available to support her livelihood!
Over this time Margaret has only contributed just under $410,000. However, the long-term snowball effect of compounding growth provides Margaret with a very comfortable retirement.
Let’s assume Margaret’s yearly spending ($25,000) has grown with inflation at 2% per year. In 40 years, she’s probably spending somewhere in the range of $55,000 per year. By this time, Margaret has saved 39 times her annual spending, about a 2.6% safe withdrawal rate.
Verdict: Margaret is very solid, and could have retired years ago.
Age 35 Example: Margaret #2 and the 30-Year Investment Timeline
Margaret is a great person and she can really hold a truly enthralling conversation, but she’s sort of terrible with money. From age 25 to 35, she’s been crushing it on income, raking in close to a 6-figure salary. Unfortunately after all this time, she has nothing to show for it. She’s bypassed participating in her company’s 401(k) plan, not able to stomach the idea of a lower take-home pay figure on her paycheck. She does have a truly fabulous chic uptown apartment though, with really cool furniture.
Or hell, I changed my mind. Maybe Margaret avoided corporate life and has instead spent the better part of her last 15 years living the climbing life, scraping by on low-paying jobs and living in crappy apartments with few creature comforts. The story matters not: Margaret doesn’t have any savings.
But she’s going to change things starting today. Grandpa died and bestowed her $10,000 dollars, and she’s going to honor his wishes to invest in her future. So she throws it towards the same investment vehicle described above, and continues to invest $10,000 per year ($833.33 per month) from age 35 to 65 (30 years).
When Margaret reaches age 65, she will have about $1,020,700. While that still seems like a hefty sum, Margaret has diminished her returns by 52% simply by starting to invest ten years later. Her income has nothing to do with it — it’s all about savings rate. Sadly for Margaret, her nest egg will only support about $40,000 in annual spending, which in 2049 dollars is going to be tight living.
Verdict: Margaret doesn’t have enough to retire. I hope her job is secure.
Time in the Market Dude!
Now, it’s important to understand that I’ve clearly over-simplified this model. That’s okay: the message is that time in the market is what can make an enormous difference in your long-term financial stability. The more weeks, months, and years that pass, the more of your future that you are leaving on the table.
Point-Forward Economics
A common economic analysis, point-forward economics, asks us to forget about what we’ve spent to date and analyze only the expected returns “from this point forward.” If you are more of the Margaret #2 variety and feeling a little guilty about your choices, that’s the past, my friend. What matters are the choices you start making today. It’s time to take a “point-forward” view on your life.
I don’t regret the things I didn’t buy. But what I do regret is that we didn’t take action on investing our savings sooner. Even just a few years sooner would have made a massive impact on our position of financial strength today.
Maybe you need to work on the saving part first, and that’s fine. If you are in debt you absolutely must get that monkey off your back first (mortgage excluded, a discussion for another time). You can use some of these same tactics to get out of debt as you can to secure financial freedom.
The Psychology of Saving For Retirement
Margaret #1 is looking great and all, but there’s one key assumption here. Margaret left her money alone. Here’s what you can’t do if you want compounding growth to work for you.
- Don’t wait for the “right time” to start investing. You will only know it was the right time in hindsight, long after that time has passed.
- Don’t sell when people on TV say a recession is coming (like every day right now).
- When stocks take a dive, don’t fear the end is coming. Again, don’t sell.
- Don’t chase the new “hottest stock.” Simple, broad, and low-fee passive index fund investing is the way.
- Always remember that gains and losses are unrealized until you click the sell button. The market is very volatile over the short-term, but we’re only concerned about long-term trends (at least 20, but more like 40 years). Again, don’t sell due to scary short-term trends. This is a long game.
- Best of all, for most people there is no reason to hire a financial advisor.
As a matter of fact, with all this negative market news lately, I insist you take part in this hilarious but incredibly important guided meditation by the legendary JL Collins below. And damn, that voice!
Summary
That’s it guys. As usual, I’m getting a little long-winded. But here’s the skinny:
- Employers are reducing the workforce of employees age 50 and above at an alarming rate. If this trend continues, many of us may struggle to find full-time work long before traditional retirement age.
- Pension plans are being broadly eliminated, shifting the burden of saving for retirement to the employee. Are we saving and investing enough?
- If you choose to act now, the compounding growth of even modest investment in the market can have a profound effect on long-term financial stability. Delaying has exponential adverse affects.
But hell man, after meditating with JL Collins above, I’m feeling pretty good. I invite you to allow the warm waters of financial stability to wash over you, starting today. Come on in, the water feels great! Until next time…Oooommmm. Namaste, good people.
Remember, the best laid plans mean nothing if you can’t take action today. Have questions? Need some feedback? Hit us up on the Contact page.
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Thanks guys, see you next week.