I've been saving for retirement since my mid-20s, and I write a retirement-planning newsletter every month. Yet here's the thing: I don't plan to ever fully retire. And while most people list “retirement” as their number one investing goal, I don't think most other people should retire, either — at least not at age 64 for men and 62 for women, which are the average retirement ages these days, according to the Center for Retirement Research at Boston College.
I question the value and wisdom of retirement for financial reasons, for health reasons, and for “why should we encourage people to sit on their butts all day” reasons. However, in this post, I'll question retirement from a risk perspective: Can anyone really be sure that their savings and benefits will last for a few decades? Let's take a closer look.
1. Social Security has “issues.”
I've written before that all the talk of people getting nothing from Social Security is overblown; everyone will get something. But there are enough problems to suggest that younger and wealthier people should expect to get much less than their currently projected benefit. Not that the current benefits are enough to buy beachfront property; the average annual Social Security benefit is just $14,172. If that weren't scary enough, according to the Social Security Administration, more than half of elderly beneficiaries receive 50% or more of their incomes from Social Security; for 22% of married couples and 43% of unmarried beneficiaries, Social Security provides 90% or more of their incomes. The fact is, most Americans do not do a good job of planning for retirement.
2. Some people have pensions, but they have their own problems.
According to the Employee Benefit Research Institute, approximately 20% of the over-50 crowd receives income from a defined-benefit pension, with an average benefit of almost $18,000. However, the percentage of Americans who will receive a pension is shrinking. Plus, many of these plans don't have enough money to pay future benefits. (In fact, the massive underfunding of pension plans — particularly state and local plans — is one of the most underappreciated risks facing our country.) And when a company goes bankrupt, as retirees from Kodak recently learned, benefits can be reduced or eliminated. Most private plans are insured by the Pension Benefit Guaranty Corporation (PBGC), which has the power to take over underfunded plans or those of bankrupt or distressed companies. However, pensioners may not receive their full benefits. Furthermore, the PBGC is on the hook for $107 billion in payments yet has just $81 billion in assets. Government plans are not insured, but their sponsors can always raise taxes — though that's generally not very popular.
3. Savings to the rescue…or not.
I won't trot out all the stats about how people don't save enough, or how the baby boomers, as a group, are entering their golden years with too little gold (that is, net worth — I'm not suggesting that every retiree hoard the shiny metal). That's bad enough. My concern is that for these (often-too-meager) savings to last, investment markets have to cooperate, and, as we've seen over the past decade or so, they often don't. I'm not predicting Armageddon or anything like that; most of my longterm savings are in the stock market. But investing can be risky; we just don't know for sure how much a certain stock or even a bond will be worth a decade or two from now. Yes, you can play it safer with CDs or Treasuries, but only if your money will last as long as you do — and keep up with inflation — while earning 2%.
4. Or maybe my home equity will save me…oh, wait.
Several years ago, homeowners could take consolation in the rising value of their homes. Now, with prices down nationwide an average 30%, it's much more difficult to turn a nest into a nest egg. Of course, this wasn't supposed to happen. In 2005, Ben Bernanke, then an adviser to President Bush, said on CNBC, “We've never had a decline in housing prices on a nationwide basis. What I think is more likely is that house prices will slow, maybe stabilize…I don't think it's going to drive the economy too far from its full-employment path, though.” This just goes to show that even smart, well-connected people can get things very wrong, and that just because something hasn't happened before doesn't mean it can't happen.
5. Health care is unpredictable and expensive.
The big wild card in anyone's finances is health care — what illnesses or accidents will befall them, and how much of the costs will not be paid by insurance. Yes, most folks age 65 or older are eligible for Medicare, and approximately 25% of retirees also get help from former employers. But basic Medicare, by itself, does not provide comprehensive medical and dental care; that costs extra. Plus, the financial challenges facing the Medicare system dwarf any problems Social Security has. As for employer-provided retiree health care, that — like a pension — is a disappearing perk.
6. If I only knew when I'll die.
From a financial perspective, retirement is a mathematical equation that answers the question: Will I run out of money before I run out of life? You'll need a lot more money if you die a centenarian than if you die an octogenarian (which is how long the average person lasts, once she or he has made it to age 65). There are plenty of longevity calculators that will factor in your health, family history, and upholstery-potato habits to come up with an estimate of when you'll join that Great Spa in the Sky (I sure hope there are massages in heaven.). The standard financial-planning advice is that you should assume you'll live to 90 or 95. But the truth is, no one really knows their date of death, yet it's a very important variable in the calculus of retirement.
A caboodle of question marks
The bottom line is, no one can say for certain what their various sources of retirement income will provide a decade or three hence, or whether that income (whatever it is) will be enough to cover the income they'll need at that point. That said, there are plenty of ways to mitigate all the risks of retirement, which I write about in my newsletter and in my GRS posts. But for now, I'll just put the question to you: Do you think retirement is too risky? How do you plan to address any potential problems?
Finally, the message of this post is most definitely not “stop saving for retirement.” I continue to max out my 401(k), despite my hope that I'll be able to work forever. Nevertheless, many people are forced to retire due to bad health or a bad economy. Plus, I'm just 42. By the time I'm 72, I may have changed my mind — or my body has changed it for me — and I'll actually be ready to sit on my butt all day.