As you may be aware, the leading edge of the baby-boom generation is approaching 60
years old and thus closing in on the traditional age for retirement. For these future
retirees, a number of factors are occurring simultaneously which have made the process
of retirement planning immensely more complex and challenging. Increasing life
expectancy, expectations for continued low interest rates, a spend now/save later
mentality and the demise of the traditional pension plan, taken together have created the
“perfect storm” to undermine a financially secure retirement for many of us.
Nevertheless, by properly addressing the following 5 key risk factors, Longevity,
Inflation, Asset Allocation, Excess Withdrawal and Health Care Expenses, a safe haven
may be created which is designed to provide retirees with a lifetime of income. In future
communications, I will outline strategies to deal with each of these 5 elements of risk.
EVERYBODY’S BUSINESS; How to Avoid Living Like a Poor Student at Age 70
By Ben Stein
Ben Stein is a lawyer, writer, actor and economist. E-mail: firstname.lastname@example.org.
I am going to make this really simple. It is fine to have no money when you’re young. It
is not fine to have no money when you’re old. It is even fun to be poor when you’re in
college or right out of it. But to be retired and in your 70’s and not know how you are
going to pay your bills — that is terrifying. In fact, it’s a grotesque nightmare.
What is life like if you are old, weak, tired, not in great health, lonely and have no
money? You are miserable, and you are in fear and you are gaunt on the inside.
Unfortunately, this is not just a paranoid fantasy about my own life. This is going to be
the reality of millions, maybe tens of millions of baby boomers unless they get their
backsides into gear and make some serious changes in their lives.
You can look at it anecdotally, or you can look at it statistically. Anecdotally: If you are a
woman in your mid-50’s living on a salary of $150,000 a year, and if you wish to
maintain your living standard when you retire at age 65, you will need about $200,000 a
year to live on, assuming inflation raises prices by 3 percent a year. If you assume you
will get about $15,000 a year from Social Security, you will need about another $185,000
a year. To have that much income with today’s interest rates, you will probably need
about $4.6 million in the bank. Do you have it?
Or, we can look at it statistically. About 77 million baby boomers are racing toward
retirement. That’s people roughly between 40 and 60 years old. More than 34 percent of
the ones over 55 report having financial savings (not counting their home equity) of less
than $50,000. Only 21 percent have more than $100,000. The average Social Security
benefit as of 2003 was only $895 a month. Only roughly one in eight workers as of 2001
had a pension with a defined benefit (as opposed to a defined contribution).
We can look at it another way. If you had to retire in 10 years with (now let’s be really
generous here) twice the savings you now have, and would receive interest of 4 percent
on it, how close would you be to having a living income, i.e. an income you could live on
at your present style of life? Be honest.
You can look at it still another way. The average family in the New York area earns
roughly (and I mean really roughly) $50,000 a year. You would need to have at least
$1.25 million in principal to yield that income at 4 percent. Do you have it?
Or, let’s look at it yet another way: you’re a successful lawyer or executive living on
$500,000 a year. A lot of people within the sound of my voice are at that level. To sustain
that level of income at 4 percent, you will need about $12.5 million in principal. Are you
even remotely close? Counting your pension and Social Security, are you even close? Are
you even halfway there? If not, what are you going to do?
This is the bore of the gun pointed right between the eyes of the baby boomers. With the
low interest rates of today and tomorrow, with the lavish way we have come to expect to
live, with a stock market that is sluggish, let us say, what on earth are we going to do
By the way, all of my numbers assume you do not want to consume your capital, and
believe me, you don’t. If you are a woman who retires at 65, you have a better than even
chance of living to 85. If you are a man, your chances are still better than 4 in 10. In those
20 years, prices could easily double. You want to be adding to your savings in retirement,
not depleting them. For a couple who reach 65, there is a 45 percent chance that one
partner will live to 90. Prices will have risen spectacularly.
You will need substantially more than you did at 65. (Plus, some of you might have kids
you want to leave money to. It’s a thought, anyway).
What’s the solution? Major league retirement planning right here and now. Right this
second. Make a plan with an adviser you trust and for whom you have gotten superb
references. Make it a plan with a lot of diversification of stocks, bonds, mutual funds,
foreign, domestic, emerging, variable annuities (but study them carefully — there are
immense variations among them), real estate and even cash.
The plan has to allow for expensive, long-term medical care. It has to provide for the
possibility of losing your job at some point before you reach retirement age. The plan
cannot count on miracle cures from the federal government. The federal government is
just a means of transferring money from wage earners to retirees — and the wage earners
are not going to want to bankrupt themselves for the baby boomers (who got all of the
good music anyway).
There is a great Chinese proverb: no money, no life. It applies in spades to older people.
In a free society we all make our own reality, and (as I am fond of saying) we can make a
reality where we are secure or a reality where we are in terror.
It’s up to us, and the time to start is right now. Even if you are far behind, start now. Even
if it takes sacrifice, start now. The alternative, poverty in old age, is just too grim to
contemplate. There are no magic bullets. It is up to you. Now.
Copyright © 2004 by The New York Times Co. Reprinted with permission.