The New Inequality: Retirement for Boomers

[gryffindor]

All of the recent news about pensions, state governments and the economic crisis (and a letter in newspaper that I can't remember well enough to find the link) make me think that the "new inequality" that will be emerging in the next 10 years will be around retirement insecurity and the boomers.

You'll have at least 3 groups of people

Government retirees will be on a defined benefit streams of income while everyone elses' taxes go up. This group will be relatively secure unless government bankruptcies force some radical action (e.g., State of California declares itself to be bankrupt and tries to go through courts to restructure pensions which are constitutionally illegal today). Probably the safest group of them all will be those on military pensions. Percentage of people at 65 = maybe 15%?

There will be the select few people who have saved enough money in the private sector through hard work and 401ks, entrepreneurship, etc. to accumulate assets where they can live near their baseline income at a 3-4% SWR. That group has been hit hard recently, but if they don't panic should be able to do ok, albeit at a different level than they may have been planning. Percentage at people at 65 = 15%?

The rest of the boomers will not have enough saved and have a significant amount of uncertainty and a lot lower set of assets. SWRs of 3-4% make it difficult for them to get there rapidly. Income testing of SSI and higher taxes will make it even worse. They will have to be working part-time on an ongoing basis. And will try to define the culture that working part-time is the best way to retire in fact due to reasons XYZ. Percentage of people at 65 = 70%?

No easy way for government to solve this one, the math is too difficult (let alone the social policy issues). But the political implications could be explosive. I think the financial implications for all the people on the board is that there might be a set of actions by the government that few people have taken into account in their planning. Diversification is a broader concept than just financial assets.

 

[Delawaredave5]

The rest of the boomers will not have enough saved and have a significant amount of uncertainty and a lot lower set of assets. SWRs of 3-4% make it difficult for them to get there rapidly. Income testing of SSI and higher taxes will make it even worse. They will have to be working part-time on an ongoing basis. And will try to define the culture that working part-time is the best way to retire in fact due to reasons XYZ. Percentage of people at 65 = 70%?

These people will be fine - working part-time at Walmart, SS, and sitting home watching TV (dreaming about "stuff"on QVC) when not working.

It is not the "retirement existence" I'd want but..... I know several retired folks doing this - own their houses, $700/mo SS, less than $100k portfolio.

There's a "4th category" - the "really stupid" folks that not only haven't saved for retirement, they also have $100k of credit card debt...

 

[FANOFJESUS]

I read somewhere that the average boomer has less than 50k saved for retirement.

 

[LOL!]

I don't see this as anything really new. In my daily life, I come across many people aged 60 to 90 who are still working. They are the hotel clerks, store cashiers, toll booth operators, assistants in health care profession, flight attendants, home improvement store clerks, etc., etc.

My MIL worked in her 70s as a hotel clerk on the overnight shift. She didn't need the money, but wanted to keep working and found a minimum wage job.

So perhaps we can open our eyes. There are many people of retirement age that don't have the same philosophy as many people on this forum.

 

[Midpack]

I don't know where the percentages come from (although believable), but I think the OP is right. Two comments:

1) If group #3 is that large, it will transform the workforce. 70% of Americans can't all be WalMart greeters.

2) Groups #1 & especially #2 (incl DW & I) will be in serious trouble because the politicians must pander to the majority to get re-elected. And guess who that is --- group #3, many (but not all) who are in their predicament through their own lack of planning. Get ready to be fleeced...no good deed goes unpunished. If you know how to protect yourself from the fleecing, let the rest of us in on it.

Are we headed down the path to a variant of socialism, the incentive to plan for a rainy day seems to be fading away.

 

[dex]

The rest of the boomers will not have enough saved and have a significant amount of uncertainty and a lot lower set of assets. SWRs of 3-4% make it difficult for them to get there rapidly. Income testing of SSI and higher taxes will make it even worse. They will have to be working part-time on an ongoing basis. And will try to define the culture that working part-time is the best way to retire in fact due to reasons XYZ. Percentage of people at 65 = 70%?

No easy way for government to solve this one, the math is too difficult (let alone the social policy issues). But the political implications could be explosive. I think the financial implications for all the people on the board is that there might be a set of actions by the government that few people have taken into account in their planning. Diversification is a broader concept than just financial assets.

You've hinted at the answer. People expect government to "solve" it. They will be declaired a victim class and be given money - paid for by later generations.

We are at a point in our history where no one is responsible for their behavior because they are victims of forces beyond them. Didn't save for retirement - tough economy all your life; low interest rates forced you to buy too much house that you lost, high credit card rates took your money also - all not your fault - you are a victim of life ...

 

[gryffindor]

My percentages were an intuitive estimate (which is why I put the ? after them). Since then I've gotten some better numbers from the Employee Benefit Research Institute

Employee Benefit Research Institute | EBRI

For 2007 Americans over the age of 55 -- assets not including home or pension
< $10k -30%
$10-25k - 6%
$25-50k - 13%
$50-99k - 10%
$100k - 15%
> $250k 26%

For 2007
Americans total age 65-67 or greater receiving a pension: 30% (17% in private sector / 13% in public sector)
Age 65-67 -- mean pension income $18k - private sector $12.5k ; public sector $23.7k

So around 30% will receive a pension
26% have assets that look like they will be able to retire OK (the > 250k group); if we assume that 30% of this group also is getting a pension (same distribution as the general population) then

we have about 52% of the population that will be be having difficulties

 

[ziggy29]

So around 30% will receive a pension
26% have assets that look like they will be able to retire OK (the > 250k group); if we assume that 30% of this group also is getting a pension (same distribution as the general population)...

I wonder about this assumption. It could be that those who are expecting a fairly generous pension have felt little need to amass a large retirement war chest. And in reality, when we hear the statistics about average size of retirement plans, it would make more sense to break it down by pension status. A 55-year-old with $50K in retirement assets and $60K in annual expected pensions may be fine; a similar person with no pension is going to be greeting at Wal-Mart for many more years.

 

[samclem]

If you know how to protect yourself from the fleecing, let the rest of us in on it.

Well, some ideas.
1) Not an individual action, but a group one: Be very involved in the political process. Specifically, give time and money to politicians and groups who support individualism over the group identities/class identity politics/celebrating victimhood. (As the situation develops, look for lower caps on individual contributions. Sold as "getting money out of politics" it will, in fact be a means of muzzling the successful and responsible for the benefit of others).
2) Hard assets? The government doesn't know how many gold coins/paintings/Holley carburetors a guy has at home. Converting "trackable wealth" to "non-trackable wealth" might be a viable strategy if the focus shifts from "taxing income" to "taxing wealth."
3) Annuities(?). Yes, risky. But there might be some advantages to converting a part of a (huge! Hundreds of thousands of dollars!) nest egg to a modest annual income to get below the radar. Obviously, you can't undo this, so it would take some deft reading of the political tea leaves. It would probably be a good (socioeconomic) diversification strategy for someone with a pile of dough and no pension. Even those with a public pension might want to have monthly income less reliant on the the shifting winds of politics: a private "pension" rooted in the bedrock firmness of American contract law. (Well, it was firm until the Chrysler shenanigans showed how the process can be subverted by determined politicians.)

 

[Gumby]

You've hinted at the answer. People expect government to "solve" it. They will be declaired a victim class and be given money - paid for by later generations.

You have identified the essence of Social Security. It was determined that, in general, older people did not have sufficient assets nor the ability to generate income sufficient to support themselves and that a government transfer payment (i.e "welfare") was required to remedy the situation. There was, of course, never any process for identifying whether the broad assumption was correct in any individual instance. People over 65 were simply designated as "victims" in need of assistance. And this assistance has always been, of necessity, paid by later generations.

 

[ziggy29]

You have identified the essence of Social Security. It was determined that, in general, older people did not have sufficient assets nor the ability to generate income sufficient to support themselves and that a government transfer payment (i.e "welfare") was required to remedy the situation. There was, of course, never any process for identifying whether the broad assumption was correct in any individual instance. People over 65 were simply designated as "victims" in need of assistance. And this assistance has always been, of necessity, paid by later generations.

Well, to some degree one has to go back to the realities of life and the work force in the 1930s. Prior to the rise of Social Security and defined benefit pension, unless you were quite wealthy you needed to work until you were dead or incapacitated, regardless of age. That was just always the economic reality for folks not in the upper class.

As I've said here before, I think at least part of the motive of Social Security was to reduce the labor pool. There were way too many people seeking jobs relative to the number of jobs available, and some thinking of the day may have decided that if you could [-]bribe[/-] give seniors enough of a stipend that they can afford to retire, you could thin out the ranks of job seekers and reduce the amount of involuntary unemployment. And if you think about it -- imagine there was no retirement system and imagine all those non-affluent folks over 62 being forced back into THIS job market -- it would get very ugly, indeed.

 

[Independent]

Well, some ideas.
1) Not an individual action, but a group one: Be very involved in the political process. Specifically, give time and money to politicians and groups who support individualism over the group identities/class identity politics/celebrating victimhood. (As the situation develops, look for lower caps on individual contributions. Sold as "getting money out of politics" it will, in fact be a means of muzzling the successful and responsible for the benefit of others).
2) Hard assets? The government doesn't know how many gold coins/paintings/Holley carburetors a guy has at home. Converting "trackable wealth" to "non-trackable wealth" might be a viable strategy if the focus shifts from "taxing income" to "taxing wealth."
3) Annuities(?). Yes, risky. But there might be some advantages to converting a part of a (huge! Hundreds of thousands of dollars!) nest egg to a modest annual income to get below the radar. Obviously, you can't undo this, so it would take some deft reading of the political tea leaves. It would probably be a good (socioeconomic) diversification strategy for someone with a pile of dough and no pension. Even those with a public pension might want to have monthly income less reliant on the the shifting winds of politics: a private "pension" rooted in the bedrock firmness of American contract law. (Well, it was firm until the Chrysler shenanigans showed how the process can be subverted by determined politicians.)

Okay, I'll add (4). We don't know exactly how any means-testing rules will play out, but let's assume they focus on assets and non-SS income. In that case, defer SS to age 70, spending down your assets and reducing your income from assets. You aren't as "rich" according to the formula.

(Of course, this doesn't do any good if SS income is included in the means testing, but even then they might focus on PIA instead of actual monthly benefit. Or, if not, at least waiting doesn't do any harm.)

 

[Lawrence of Suburbia]

I've heard at least one congressman on Air America, talking to Randi Rhodes(?), float the idea of "spreading the wealth" of retirees - in essence, redistributing part of the assets of "rich" retirees to assist the "poor" ones, via some gov't scheme. Tellingly, the radio host didn't really object to the idea...!

 

[Notmuchlonger]

I've heard at least one congressman on Air America, talking to Randi Rhodes(?), float the idea of "spreading the wealth" of retirees - in essence, redistributing part of the assets of "rich" retirees to assist the "poor" ones, via some gov't scheme. Tellingly, the radio host didn't really object to the idea...!

My only problem what is considered rich..

 

[ziggy29]

I've heard at least one congressman on Air America, talking to Randi Rhodes(?), float the idea of "spreading the wealth" of retirees - in essence, redistributing part of the assets of "rich" retirees to assist the "poor" ones, via some gov't scheme. Tellingly, the radio host didn't really object to the idea...!

Well, in terms of FIRE planning, I know I've started considering all the possibilities. In one form another, I definitely see more means testing in the future.

But then again, we live cheaply, have no debt and could live well on $40,000 a year. Between my wife and me -- our future income, our retirement savings, two Social Security checks and one small pension and possibly two -- we can easily engineer our income down into that range if need be, and I can do things like convert IRA savings into an SPIA if need be.

I can't control what will happen in the next 2-3 decades, but I can try to structure our assets and retirement income stream in a way that will cause us the least amount of pain.

 

[Lawrence of Suburbia]

My only problem what is considered rich..

If you're on this forum, you probably are.

Let's hope that idea gets strangled in the crib; sheer confiscation of wealth, obviously, and unthinkable in the "old" America. Trouble is, in the "new" one, Chrysler (or is it GM?) bondholders only get fifteen cents on the dollar or whatever, and the union gets 50% of the company. Contract law, and the rights of shareholders? Dead. We live in a new situation; all the verities we grew up with no longer have any value to the powers-that-be.

 

[Lawrence of Suburbia]

What's an SPIA?

 

[ziggy29]

What's an SPIA?

Single Premium Immediate Annuity. Basically, you give them a chunk of your nest egg and they give you back an income stream for life. Obviously these products are designed to make money for the insurance company, but it is one possible way to "insure" against the possibility of a long lifespan causing you to run out of money. If I can get favorable (higher) Treasury rates in the future I'd consider using one of these for maybe 1/4 to 1/3 of my retirement income needs. Not now, though, since the rates on long Treasuries still kinda stink, recent yield increases notwithstanding.

 

[Gumby]

Well, in terms of FIRE planning, I know I've started considering all the possibilities. In one form another, I definitely see more means testing in the future.

I'm almost certain there will be means testing. Most government welfare programs are means tested (agricultural subsidies being a glaring exception). Why should social security be any different?

 

[FIREd]

Since few people in the 30's lived long enough to receive SS benefits for any significant amount of time, I believe that SS was created mostly as a longevity insurance program and not as a primary source of funding for decades-long retirements, which is what it has become over the years for many people. Full retirement age should probably be pushed in one's 70's or even perhaps 80's in order to return SS to what I believe was its original vocation.

As for the OP, I have no doubt that a significant percentage of people will end up in group#3. SS will provide them with just enough income to survive and they will have to find alternate sources of funding (work, reverse mortgages, kids, etc...) to have a shot at anything but the most Spartan lifestyle. But they lived through prosperous economic times with plenty of job opportunities and a 20-year raging bull market which could have boosted their retirement savings substantially. Had they taken advantage of these opportunities to save and invest, instead of ever seeking a more grandiose lifestyle, we would not be having this debate. So I am not enthused at all by the prospect of bailout out these people.

 

[Rustic23]

Let's face it SS was created to keep politicians in office. Nothing more Nothing less. Now, it is time to pay for it, and current politicians are scrambling to find a new way to buy your vote. And, the vote they will be trying to buy is Group 3.

As to the comment ' It just depends on what you define as rich' plays to the heart of the problem Not in my back yard! As long as it is above me screw them. For centuries Americans were smart enough to realize that this was bad thinking. Now the current generation thinks this way. IMHO it is the start of the death of the U.S. as we know it.

 

[gryffindor]

I don't know how to protect myself from the fleecing that's likely to happen. But I can think of a couple of assumptions that may not be valid and lie at the heart of some people's retirement planns.

State pensions are stable. If states do go bankrupt, there is likely going to be some way for states to reduce the value of the pensions. I have a good friend who is an ER doc who is in late 40's and counting on the value of his California Costra County pension to fund 80% of his early retirement at 55. Given what's happening in California, that's a big assumption

Can rely on payouts from annuities themselves. Many of the annuities out there were insured by AIG; I haven't seen how many people have gotten hurt by this, but there's not the same degree of protection in that contract as there is by FDIC insurance. Relying on the strength of a single financial institution with your annuity could be a big risk

Value of the currency. If the government has thrown $1 trillion to cover liabilities without really writing them off at some point the dollar will depreciate dramatically.

So here are a couple of hypotheses I have for me, not advocating them for others

1) Higher international equity exposure that is unhedged to give you currency exposure-- the world is not going to completely fall apart, but US economic strength relative to others could stumble significantly.
2) Higher inflation protection - commodities, REITs, TIPs
3) More liquidity - am looking to make sure my investments are more liquid to be able to react more quickly
4) Looking to diversify by institution, not just by asset class

 

[Notmuchlonger]

Let's face it SS was created to keep politicians in office. Nothing more Nothing less. Now, it is time to pay for it, and current politicians are scrambling to find a new way to buy your vote. And, the vote they will be trying to buy is Group 3.

As to the comment ' It just depends on what you define as rich' plays to the heart of the problem Not in my back yard! As long as it is above me screw them. For centuries Americans were smart enough to realize that this was bad thinking. Now the current generation thinks this way. IMHO it is the start of the death of the U.S. as we know it.

Nah the death of America started in the 60's

 

[Notmuchlonger]

I don't know how to protect myself from the fleecing that's likely to happen. But I can think of a couple of assumptions that may not be valid and lie at the heart of some people's retirement planns.

State pensions are stable. If states do go bankrupt, there is likely going to be some way for states to reduce the value of the pensions. I have a good friend who is an ER doc who is in late 40's and counting on the value of his California Costra County pension to fund 80% of his early retirement at 55. Given what's happening in California, that's a big assumption

Can rely on payouts from annuities themselves. Many of the annuities out there were insured by AIG; I haven't seen how many people have gotten hurt by this, but there's not the same degree of protection in that contract as there is by FDIC insurance. Relying on the strength of a single financial institution with your annuity could be a big risk

Value of the currency. If the government has thrown $1 trillion to cover liabilities without really writing them off at some point the dollar will depreciate dramatically.

So here are a couple of hypotheses I have for me, not advocating them for others

1) Higher international equity exposure that is unhedged to give you currency exposure-- the world is not going to completely fall apart, but US economic strength relative to others could stumble significantly.
2) Higher inflation protection - commodities, REITs, TIPs
3) More liquidity - am looking to make sure my investments are more liquid to be able to react more quickly
4) Looking to diversify by institution, not just by asset class

I have my doubts about California pensions too. However this state continues to amaze me. Politicians finally said the public has spoken on the latest vote for tax increases that were slammed down. This was after they already decided to raise vehicle registration fees and increase the sales tax. One of the comments was something to the effect " Gee we might need to cut back a few social programs or something"

Ya gee you really think so..

 

[haha]

I don't know how to protect myself from the fleecing that's likely to happen. But I can think of a couple of assumptions that may not be valid and lie at the heart of some people's retirement planns.

State pensions are stable. If states do go bankrupt, there is likely going to be some way for states to reduce the value of the pensions. I have a good friend who is an ER doc who is in late 40's and counting on the value of his California Costra County pension to fund 80% of his early retirement at 55. Given what's happening in California, that's a big assumption

California is seeking a bailout. If the California taxpayers are already dry, the US taxpayer will pick up your friend's retirement long before the public retirement systems will ever be controlled. See Italy for a good example.

Ha