The Extinction of Retirement

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For the better part of a century, the foundations for a semi-comfortable retirement for many Americans have rested on the financial pillars of rising real estate and equity prices, positive real interest rates on savings, the continued solvency of public and private pension plans and the reliability of national entitlement programs (Social Security, Medicaid). But in the last few years, the economic sands have fundamentally shifted and these pillars are no longer sturdy, some have cracked completely. For many Americans, the traditional idea of a comfortable retirement filled with golf carts, cruises and fishing trips is going the way of the dodo bird.

Over the last decade incomes and job growth have stagnated, causing savings rates to drop. According to Jim Quinn, author of The Burning Platform, 60 percent of retirees have less than $50,000 in savings. Such sums won't last very long, especially when consumer prices are up 3.6 percent, import prices are up 12.5 percent and commodity prices are up 35 percent year over year. What's worse, any savings placed in a bank will pay next to zero interest and will likely not even pay for the fees associated with the account. With cash savings essentially non-existent, the other pillars of income take on paramount importance. But these former bastions of financial security are being washed away by a torrent of red ink.

For years, the essential Ponzi-like structures of Social Security and Medicare were concealed behind positive demographics. But once taxes collected from current payers fall short of the required distribution owed to current recipients, the ruse will be laid bare. That day is now here. With insolvency a real and present danger, at last a consensus is now forming that Social Security must be structurally altered if it is to survive.

But according to the Social Security Administration, in 2008 Social Security provided 50 percent of all income for 64 percent of recipients and 90 percent of all income for 34 percent of all beneficiaries. With these numbers, it's not hard to see how even small cuts will spark big protests. Now, try cutting the close to $20 trillion prescription drug program and the $79 trillion Medicare entitlements and watch the political sparks fly! However, given the realities, it's hard to see how the program can escape deep cuts -- Paul Ryan has it correct.

In the past, many retirees could count on accumulated stock market wealth to help fund retirement. Not so much anymore. As of this writing, the S&P 500 is now no higher than it was in January of 1999. For over 12 years, the major averages have gone nowhere in nominal terms and have declined significantly in real (inflation adjusted) terms. The dreams of becoming rich from investments have crashed along with Pets.com and Bernie Madoff. Then there is always the supposedly safest asset of all -- a retiree's home.

Despite a misguided faith that real estate prices could never fall, they have done just that... with a vengeance. According to S&P/Case-Shiller, the National Home Price Index has declined some 30 percent to levels not seen since the middle of 2002. And prices are still falling, with the rate of decline accelerating. The National Index dropped 4.2 percent in Q1 of 2011, after dropping 3.6 percent during Q4 2010. This means that only those retirees who have owned their homes for at least 10 years have any hope of selling at a profit. Ownership of significantly longer periods may be needed to have built up significant equity.

That leaves public and private pension plans. But here again there are serious issues. Let's just look at state public pension shortfalls. According to the American Enterprise Institute for Public Policy Research, "States report that their public-employee pensions are underfunded by a total of $438 billion, but a more accurate accounting demonstrates that they are actually underfunded by over $3 trillion. The accounting methods that states currently use to measure their liabilities assumes plans can earn high investment returns without risk." Huge returns without risk? Bond yields are the lowest they have been in nearly half a century! What world are these states living in? With few options, the states will undoubtedly look to the Federal government (taxpayers) for a bailout. Failing that, cuts are inevitable.

The sad facts are; Americans have negligible savings, the real estate market is still in secular decline, stock prices are in a decade's long morass, real incomes are falling, public pension plans are insolvent and our entitlement programs are bankrupt. If the pillars that seniors have relied on in the past fail to miraculously regenerate (and there is certainly no reason to believe they will), all that most retirees will have will be freshly printed greenbacks that come from a never-ending policy of government deficits and an obliging Federal Reserve.

Unfortunately, the inflation that will result from such policies will sap most of the purchasing power that those notes possess. In other words, for most people retirement is now an illusion, and many Americans will find themselves working far longer, for far less real compensation, then they ever imagined. The quicker we realize this, and plan accordingly, the better off we will be.

Michael Pento is the Senior Economist for Euro Pacific Capital.

http://www.huffingtonpost.com/michael-pento/the-extinction-of-retirement_b_877391.html

[mawilson 2,133]

Yep. We're gonna get squat when we retire. Which is why I'm doubly mad at today's retirees for not budging an inch while the country's going bankrupt.

Death panels couldn't come soon enough.

[Gary and Alla 3,694]

Yep. We're gonna get squat when we retire. Which is why I'm doubly mad at today's retirees for not budging an inch while the country's going bankrupt.

Death panels couldn't come soon enough.

Young people could just start smoking at a much higher rate. We should reduce cigarette tax to about 3 cents per pack.

[Bad_Daddy 2,209]

I should be fine...union pension ftw.

[scandal 951]

In the past, many retirees could count on accumulated stock market wealth to help fund retirement. Not so much anymore. As of this writing, the S&P 500 is now no higher than it was in January of 1999. For over 12 years, the major averages have gone nowhere in nominal terms and have declined significantly in real (inflation adjusted) terms.

The statement above may be true and yet misleading all at the same time. Stocks may have had zero nominal return and negative real return over the last decade, and yet still be a better and sounder overall retirement investment than the alternatives. A decade is simply too short a horizon to judge the compounded return of equities. The volatility and risk in the markets require a substantially longer time horizon.

As Jeremy Seigel pointed out in Stocks for the Long Term, equities beat every other asset class over durations measured in human lifespans. If you still have 20+ years to go till retirement, a broadly diversified portfolio of growth and value stocks, of bonds, cash and cash equivalents, with both domestic and foreign exposure, is the way to go. Maximize your tax sheltered accounts (401K, IRA, Roth IRA, spousal accounts), use low cost index funds, don't churn your account, use dollar cost averaging, and don't sweat the down markets. A comfortable retirement is still a very real option for anyone with the discipline to save and invest wisely. I am well on my way to having a comfortable retirement despite a divorce that removed a chunk of assets, and without expecting anything from Social Security or Medicare. If those programs are still there when I retire - bonus. If they're not, I'll be fine.

[TBoneTX 45,962]

I was tired yesterday and I'm tired again today, which makes me re-tired, si man.

[SuperDuper! 230]

Great news. We get to work our selves to death. The fact is , the average American now just collects a handful of retirement checks, and then dies.

Anyone boasting how great their retirement will be is just setting themselves up for bad Karma.

Edited June 24, 2011 by Boing!

[Vi-Jay 218]

The statement above may be true and yet misleading all at the same time. Stocks may have had zero nominal return and negative real return over the last decade, and yet still be a better and sounder overall retirement investment than the alternatives. A decade is simply too short a horizon to judge the compounded return of equities. The volatility and risk in the markets require a substantially longer time horizon.

You are stating facts relevant to wealth/ retirement accumulation portfolio's. A retirement accumulation portfolio for average middle class American, needs to be redefined 5-10 years prior to retirement. Depending on the amount of income needed, some to all of the portfolio should be reallocated to less volatile income producing assets.

The fact is , the average American now just collects a handful of retirement checks, and then dies.

You are joking, right?

Edited June 24, 2011 by Vi-Jay

[TBoneTX 45,962]

Anyone boasting how great their retirement will be is just setting themselves up for bad Karma.

This reminds me of a true story, si man:

A couple of years ago, I was in Florida, in the lobby of a large hotel. I overheard two seasoned citizens (SCs) who were walking nearby:

S.C. #1: So, what do you do now that you're retired?

#2: I take pills.

#1: You take pills? Do you do anything else?

#2: What do you mean, 'do I do anything else'? There's no TIME for anything else!

I had a hard time keeping from laughing, si man.

[SuperDuper! 230]

This reminds me of a true story, si man:

A couple of years ago, I was in Florida, in the lobby of a large hotel. I overheard two seasoned citizens (SCs) who were walking nearby:

S.C. #1: So, what do you do now that you're retired?

#2: I take pills.

#1: You take pills? Do you do anything else?

#2: What do you mean, 'do I do anything else'? There's no TIME for anything else!

I had a hard time keeping from laughing, si man.

Too true, good anecdote, TB!