A friend recently asked me,
“How is anyone going to be able to retire?” Since 2008, the
retirement landscape has changed radically.
article, How Retirement Was Invented provides
“In the United States,
starting in the mid-1800s, certain municipal employees…started receiving public
pensions…. By the 1920s, a variety of American industries…were promising their
workers some sort of support for their later years.
…. The federal government
started creating what would become social security…. When the Social Security
Act was passed in 1935, the official retirement age was 65. Life expectancy for
American men was around 58 at the time.
started to live longer. By 1960, life expectancy in America was almost 70
years. All of a sudden more people were living past the age where they had
permission to stop working and the money to do it. Finally, they began to
retire in large numbers-to stop working, to embrace leisure….
For a few decades, older
Americans lived without working, enough that we’ve come to expect
that we should be able to retire, even if that may no longer be financially
possible for many.” (Emphasis mine)
Most people expected to
retire at 65, with an employer funded pension, guaranteeing them benefits for
the rest of their life.
In 1978 congress passed
legislation (Section 401k) allowing employees to avoid being taxed on deferred
compensation. Most of corporate America got out of the pension business,
grandfathering in older employees, and switching younger people to a 401k. Some
offer matching provisions, encouraging employees to save for their retirement.
The old rules don’t work
For the 401k program to
work, financial planners preached “the magic of compounding”. The
mantra was, “Save now, let your money grow and you can retire
Live off the interest;
NEVER touch the principle. This was the holy grail for my parents. Interest
from their Certificates of Deposit (CDs) coupled with their social security
provided them all they needed.
You can always count on 6%
safely. You worked hard to save; don’t lose your money. From late 1969
until mid-2000, treasuries paid 6% or more, with FDIC insured CD’s and
top-quality bonds a bit higher.
100 minus your age. If you
were 65, 65% of your portfolio should be in safe fixed income investments, and
35% in the market to hedge against inflation. If you bought solid dividend
payers, they would also provide income.
Earn 6%, withdraw 4%, and
leave the remainder for growth. This was the rule for
withdrawals from your IRA or 401k each year, believing you would NEVER run out
The magic rule of 72! If
you earned 6% (considered a sure thing) it took twelve years to double your
money (12 x 6 = 72). If you earned 7.2% you would double your money in 10
|The rule remains, but the numbers have changed!|
When the Fed jumped in
during a recession, interest rates came down.
7/31/2000, ten-year treasuries paid 6.04%. Investors could expect their
money to double in 12 years.
7/31/2008, treasuries paid 3.99%. It would take 18 years to double your
7/31/2020 they paid .55%. It now takes 131 years to double your
The world changed with the
2008 bank bailouts. Check the red line below, it’s scary!
At current rates it is impossible to safely double your
money in your lifetime.
Is retirement even possible for the middle class?
Central banks, with
government support, cut interest rates to historical lows. They not only don’t
keep up with inflation, they also make it impossible to compound your savings –
without taking some previously unnecessary risk.
It gets worse. Wall Street
On Parade reports, “As Retirees Anguish Over a Sub
One-Percent Treasury Note, U.S. Companies Are Suspending their Dividends at a
Rate Not Seen Since the 2008 Crash.”
The unintended consequences
Most pension funds are
woefully underfunded; they can’t earn enough to fulfill their promises without
taking risks that could get the managers sued.
Expect the Social Security
retirement age to be moved back, all benefits taxed, means testing for benefits
and it will NOT keep up with inflation (despite the indexing provision).
Expect the government to
inflate their way out of debt, just like every country with fiat currency – a
politician’s paper promise.
Chuck Butler warns,
“The Fed is hell bent and whiskey bound to see inflation rise. The Fed
heads, believe that they know when to pull away the punch bowl that’s feeding
the inflation…. Well, I’m from Missouri, and the Fed Heads are going to have to
show me that they have chutzpah to pull away the punch bowl, once they’ve given
everyone a heaping cup full of inflation….”
challenge is significant.
first social security payment will be the most valuable. With each passing
month, the buying power will be reduced by inflation.
MUST factor inflation into your formula.
accumulated wealth will not grow without putting a lot more at risk than
How to get the job done
If you don’t have the
benefit of a guaranteed government pension, there are some things you can do.
It’s challenging, but not impossible.
Don’t give up! Previous
generations lived through famine, depression, pandemics and survived. They
changed with the times, went about their business….and thrived. You will
Expect an economic downturn. Chuck Butler
adds, “The Bank for International Settlements (BIS) told us many years ago
that “When government debt exceeds 85% of GDP, economic growth
slows.” When the debt level grows too large, the economy has to slow down…
We’ve moved into the 130% of GDP (not using the Covid-19 GDP numbers).”
Despite the political
rhetoric, it’s just a matter of when the downturn arrives. Be prepared, not
surprised, which leads to the next point.
“If you live like no one else, later you can live like no
– Dave Ramsey
Get out of debt as quickly
as you can. I recently wrote about
“Debt Slaves” and how to escape the trap. Get started now!
Downsize and be done with
it. Your retirement savings probably won’t meet the safe 6%
projections you counted on. Set your retirement lifestyle for what you can
The 2017 net worth calculator indicates
a net worth (excluding your home) of around $2.5 million puts you in the top 5%
category. If you saved that much, you did good!
6% would have provided
$150,000 in safe income. Today’s rates generate $17,250. The government poverty level for
a family of 2 = $17,240. While that is maddening, it is more the reason to live
below your means and save as much as you can.
Prepare a retirement budget
and make it work.
Keep working as long as you
can. Find something you enjoy, that is not stressful. We have retired
friends who love to garden. They grow herbs and spices, selling them at local
farmers markets. Their income, coupled with social security, means they don’t
have to dip into their savings to live. The longer you work, the better; just
make it fun!
Build a conservative
investment strategy for today’s world. Safe, fixed income
products will not beat inflation. If you want 4% interest or more, the
probability of default rises significantly. Expect bond defaults to start
rising. Don’t get caught chasing yield and then losing out.
Use short term CD’s for
cash holdings. Risk as little as possible, while providing enough income to pay
the bills. Avoid dipping into savings as long as possible.
Find solid dividend paying
stocks. Some companies do well in bad times and continue paying their
dividends. Seek them out, invest in them and monitor your investments closely.
Get good help in finding those opportunities.
Avoid catastrophic losses. While
you must take risks to grow your wealth; preservation of capital is critical.
Set stop losses where appropriate, and keep them up to date.
Allocate a portion to
metals and metal stocks. Inflation is a major concern. I recommend
owning metal and metal related dividend paying stocks. The mining stocks not
only keep up with inflation, they also provide yield.
Jeff Clark reminds us,
Silver is the best performing asset class of 2020, gold is 2nd and
Nasdaq 3rd.” Gold will never go to zero….
Friend John Williams shows
us gold has outperformed the Dow since January 2000.
Look for bargains. One of
the best investment books is Benjamin Graham’s book, “The Intelligent
Investor”. Investopedia tells us:
“The investor should
look for opportunities to buy low and sell high due to price-value
discrepancies that arise from economic depressions, market crashes, one-time
events, temporary negative publicity, and human errors. If no such opportunity
is present, the investor should ignore the market noise.”
Here is one example. Silver
dropped to $12.04/oz. in March and has more than doubled since then. WPM has
risen ahead of the silver price as investors are anticipating a further rise in
WPM – WHEATON PRECIOUS
If you see a bargain, don’t
go overboard, but act on it.
Is it possible for the
middle class to retire?
Sure, those that educate
themselves, realize they MUST manage their money conservatively and live within
their means will do just fine. IT CAN BE DONE!
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