Retirement in 2020?

[bongo2]

For simplicity in this post I'm going to call those 65 and over "retired" and everyone 19-64 "working."

In the last 40 years the number of workers per retiree has crept downward very slowly from 5.9 in 1960 to 4.9 today. *When you consider women entering the workforce and the proportion of the population under 19 dropping 30% this has not increased the burden on workers at all. *The number of retirees per worker is going to remain fairly constant until 2010, and then drop dramatically over the next 20 years to about 2.8 in 2030. *This represents a 75% increase in the retiree burden on each worker in just two decades. *It is my feeling that society will not be able to support this boom in retirees at the current typical retiree standard of living (which is far far higher than any time in history), and it is going to become much harder to live off of pensions and investment income.

This problem is usually discussed in the context of social security and medicare. *While it is almost certain that something will have to change by 2020 in those government programs (and probably well before that), I think the problem extends further. *The problem lies not just with public pensions, but with a small number of workers supporting a large number of non-workers. *It doesn't matter whether that support comes from investment returns, investment returns funneled through private pensions, or the government. *All of these areas of support are going to have to be depressed from their current levels in order to discourage people from retiring.

My question is this: what form will that take, and how can I protect against it?

As I mentioned before, I think the benefits offered by SS and Medicare will need to drop. *Another possibility that comes to mind is that interest rates may remain low for the next couple of decades. *More dramatically, inflation may shoot up to reduce the value of current debt holdings. *And lastly, the stock market could drop or remain stagnant for the next couple of decades.

What do you guys think of those possibilities? *Am I worrying needlessly, or is this a reasonable expectation for the next 30 years? *Is there anything to do to enable me to retire during that time, besides hoard more money than the next guy?

I would not worry about it. The big US companies will ship all their jobs overseas or hire illegall immigrants.

Also most of the baby Boom Generation has not saved for retirement and will still be working into their 80's albeit with canes, walkers and afternoon workplace naps

cut-throat is basically right. BTW, why are you worrying about 2020. You better start worrying about today.

John Galt

[wabmester]

My SSI doesn't kick in till 2028. I assign it a value of zero for planning purposes. About the only sure thing you can say about the retired baby boomers is that a LOT of money will be flowing through the healthcare system, so load up on healthcare stocks as a hedge, and buy real estate in popular retirement destinations.

I don't understand your concern about investment returns somehow being dampened to discourage retirement, and nobody has a crystal ball that goes that far out, but here's a solid long-term prediction for you:

The economy will have a huge boom just before 2038, when long retired Unix programmers are called out of retirement to fix legacy software with the soon-to-be infamous 2038 bug (2038 is when the system clock stops working on virtually all current unix-based systems).

[sgeeeee]

You mention one of my fears (well . . . fear may be too strong a word). But I think we may well face several years of hellatious inflation. Workers will be in short supply and big demand, and that translates into increased salary demands. Increased ss and medicare taxes will only increase the demands for higher salary. When workers have more money, prices will rise and we'll see inflation.

You prepare for this by being invested in equities that will follow inflation. . . as well as in I-bonds and TIPS.

Come to think of it, that sounds like a balanced portfolio.

[Telly]

bongo2,

I don't know what to make of a lot of the "projections" that are thrown around in the media.

Either the boomer generation will have the most $$$ of any retirees, or they are far behind on saving, and will have to work till they drop.

And the whole SS projections... The trouble with "projections" is that they are an extrapolation of yesterday and today. Unforseen circumstances obviously not included! Nor are there changes that people will make along the way if things go far from what people want.

Anyone who lives in a southern border state knows the "aging population" is a bit of a crock. We see continued and increasing immigration from all locales south of the border. And not only from the south... from asia and africa too! And the birthrate of the immigrants is high!

There must be some giant state up north somewhere that is filled up with lots and lots of old people to balance this .

Hi Telly! Re. your observations about "southern
border states" and immigration, it's a worry. Worse
yet, I see no solution. In spite of this, we're still
headed for Texas. I told my wife tonight that I had
never met more friendly helpful people, than in the Lone
Star state. Texas! You gotta love it!

John Galt

[sgeeeee]

Quote:

. . . Re. your observations about "southern border states" and immigration, it's a worry. *. . .

Maybe it's not a worry but a solution. If not for immigration, who would pay our social security and medicare bills?

[FI3]

Bongo2

I've thought alot about the very subject you mention here.
Jane Bryant Quinn had a column entitled "Retire Early? Think Again" in the 21 July 2003 issue of Time. Unfortunately the
article is now longer accessible on the web, but you can check at the library. Quinn's premise is as you stated: starting in 7-10 years when the baby boomers
start retiring in force, we'll start to see the impact. Quinn's bases most of her article on a study done by the AIMR Journal
"Demographics and Capital Market Returns". I find the study more in depth and interesting than Quinn's artice. Here's the
weblink for it:

http://www.aimrpubs.org/faj/issues/v.../f0590020a.pdf

The authors of the study pose the problem in terms of a "dependency ratio" which includes not only the retiree/working populationratio, but also the children/working population ratio. The authors also examine three types of solutions to the dependency ratio:
financial, macroeconomic and demographic.

You have to read the study to understand the context, but the bottom line for the early retiree (assuming the study's assumptions are correct) is starting about 2015 we'll start to see high inflation coupled with a loss of value in investments (kind of like now except besides small investment returns there will be high inflation
to boot).

I've seen the posts here that ER members don't think it's relevant to look that far in the future, but I think it's worthwhile considering if you plan to be an ER in the next 10-20 years.

It's of interest to me because if I'm going to retire (from paid employment), I'd rather not go back to work
again unless I choose to do so. Anyone that leaves his profession for 10 years and then tries to re-enter that job market will find it tough going. Sure, they can get a job, but it's likely to be a lower paying entry level job.

What's the solution? Quinn and the study conclude baby boomers will have to work longer (not shorter) than their parents. I don't think that solution will go over well on this forum. There may be ways for the ER to counter higher inflation.

Joe Dominguez in the book "Your Money or Your Life" talks about how inflation at the microeconomic level (the individual) is
largely a state of mind and can be countered with "increasing financial consciouness".
Whether you believe that or not, there is some validity to riding out high inflation by avoiding the high inflation areas (in the study, areas cited were leisureand service industries - health care is another potential high inflation area - there may be ways to mitigate costs there as well).

The demographic issue is there. Whether it will be the type of problem stipulated in the AIMR study and Quinn article remains to be seen.

I think it's best that ERs and potential ERs at least be aware of the situation.

[wzd]

The demographic change is a very good point and one to consider carefully. When there are more consumers (i.e. retirees) than producers, the prices tend to rise. This predicts a return of higher inflation. However, any change like this will not occur overnight; therefore the question is what will such a trend cause. Most trends have self correction built in, unless governments do something to defeat the self correction. What will happen to this trend and how will the government make it worse?

Well, as prices rise, and the already retired will be hurt a little. However many will have inflation correlated investments such as TIPS, real estate, even equities. But what about the average Joe who has saved 50k in CD's, and has a pension and SS lined up? Well, maybe the retirement at 65 that he was looking forward to doesn't look so good after some inflation! So, one correction factor will be that marginal retirees will keep working, and there are a lot of those.

Now consider the trunking company as an example. With fewer people driving trunks to move goods for the retirees around, the drivers want more money. Well, ok they get it, up to a point. Then the question becomes how to move the goods cheaper; well, any good company will work hard on finding a way. I can't say what it will be, whether special visa's for training immigrants who will commit to driving for some number of years or technology such as robots and trains will work. Whatever it is, the marketplace will react with innovation, as always, when presented with enough financial incentive. I believe that a key fact of technology is that fewer people are required to support the subsistance of the nation today than in the past, and that it is a continuing trend. It probably won't continue fast enough, but it will help.

We will not get from today to 2020 by turning a page. There will be continual changes, and reactions to those changes along the way. This will be a much slower change than many of the other changes we have seen in our lifetimes.

Now for the flip side: What is the most dangerous thing that could happen along the way to 2020? Well, I mentioned government earlier. One of the powerful lobbies will gain power, and it has the potential to really hurt us. Guess which one - AARP. Only by governmental changes to increase SS, protect retirees, etc., will real trouble come. If they hold off the impacts too much, then there will come a catch up/payback time. The impacts of trying to control the finances of the nation are more subtle, less understandable, less predictable, and much more dangerous than anything else. And AARP will represent a large and growing segment of the population. I can't begin to guess what the result will be.

So, our future is threatened not by the demographics, but by the peers we left behind when we retired. Poetic justice? Time for me to go pour a wee dram for meself. (not to suggest that the above ramblings have been influenced by such).

Wayne

[Bob_Smith]

Good points Wayne.

And regarding SS, here is a 2003 quote from the OASDI Trustees regarding what would happen to SS benefits if nothing were done:

"--If no action were taken until the combined trust funds are exhausted in 2042, much larger changes would be required. For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2042. In this case, the payroll tax would be increased to 16.94 percent at the point of trust fund exhaustion in 2042 and continue rising to 18.9 percent in 2077. (It's 12.4% now)

--Similarly, benefits could be reduced in every year beginning in 2042. Under this scenario, benefits would be reduced 27 percent at the point of trust fund exhaustion in 2042, with reductions reaching 35 percent in 2077."

So even if nothing were done, early retirees would receive full benefits for 38 years from today, followed by a reduction of roughly one third beginning in 38 years (when I'll either be 89 or dead). Chances are there will be some gradual adjustments on both ends and it won't be terribly grim. *

Social Security also says this:

"Many reform plans, including those put forth by the President's Commission to Strengthen Social Security, preserve scheduled benefits, including cost- of-living increases, for near-retirees. Depending on the proposal, a "near-retiree" is defined as someone aged 50 to 55 and older." *

I'm 51 and keeping my fingers crossed.

Regarding my un-indexed pension, I'm spending about half, with the other half invested in a sinking fund. Hopefully that will see me through on that portion of the financial plan.

And I'm also hoping that a portfolio with a heavy dose of TIPS, stocks, and some REITS will survive.

So I agree with Wayne. Changes won't occur overnight. And I don't think the reductions will be as draconian as many are visualizing. I expect some reductions, but I don't believe that we'll all need to go back to work or postpone retirement. ER still looks good. No working to age 75 or moving to Costa Rica for me.

[Ted]

Quote:

*All of these areas of support are going to have to be depressed from their current levels in order to discourage people from retiring. My question is this: what form will that take, and how can I protect against it? As I mentioned before, I think the benefits offered by SS and Medicare will need to drop. *Another possibility that comes to mind is that interest rates may remain low for the next couple of decades. *More dramatically, inflation may shoot up to reduce the value of current debt holdings. *And lastly, the stock market could drop or remain stagnant for the next couple of decades.

I've said most of the same things myself, including that immigration is not a prudent solution because it will only make the problem of supporting the retired population worse when the immigrants retire themselves. *I don't think that we could just send them back where they came from when they get too old to work.

I think that the financial squeeze will come in some combination of higher taxes on workers and reduced real returns on investments. *Also, I think that the consumption of wealthier retirees will be curbed by a reduction in the rate of growth of social security benefits, combined with higher taxes on them.

As always, its a matter of competition between everyone as to who can accumulate the most assets by the time they retire. *The more you succeed in accumulating, the better off you will be relative to others, but probably not as well off in material terms as most retirees are today.

For society as a whole, the best that we can do to prepare for this is to apply sound economic policies that encourage intelligent investment, which will translate into more output per worker in the future. *This includes making the educational system more cost-effective, and taking advantage of the benefits of free trade. *One of these benefits is that we don't need to devote our human resources to relatively simple manufacturing tasks that can be performed at lower cost in foreign countries. *

[farmerEd]

>>As always, its a matter of competition between everyone as to who can accumulate the most assets by the time they retire.

That is one strategy and there will be winners and losers..another strategy(or an additional strategy because you can do both), is to not only accumulate what you can, but also reduce your expenses everywhere possible, but do it a way that you can still enjoy retirement. (who wants to ER if it means they have so little they can't enjoy themselves)

Of course, everyones idea of retirement is different, and if sailing around the world on the QE2 in the high-end staterooms and jetting off to exoctic and expensive locations is your idea of retirement, than you better save a bundle. On the other hand, if traveling by camper is more your style, and you can live in a low tax area, in a house that is paid for with private sewer and private water and maybe even wood heat from your own woodlot for example, for those fit enough...you can get by on a lot less. Remember for every 10,000 per year that you do not need to spend, that is pretty much the same thing as having an additional 250K in the bank, so if you can be happy on a 30K retirement expense level, you can do just fine with about 750K in the bank. On the otherhand, if your retirement lifestyle requires 100K per year, you will need closer to 2.5M in the bank.

So its not really a total matter of accumulating more assets than the next guy. To be more accurate, its accumulating enough assets to support the lifestyle that will make you happy enough to still be glad you ER'ed.

The other thing that occurs to me is that again, if your lifestyle requires 100K to support, and something goes terribly wrong (i.e. extended bear market or whatever) and you find you can only get 60K per year from your investments, at age 60-65-70 its going to be hard to make up the 40K shortfall....on the otherhand, if you only needed 30K and you lost the same % of buying power, you end up with 18K in earnings, and as much as you may hate to do it, how hard is it going to be to make up 12K per year? You can do that at Walmart if you really needed to; but making up 40K when you have been out of the workforce for 10-15-20 years will be a lot harder...

SO accumulate what you can, but also develop a lifestyle that can be had on the cheap, but still pleasurable. That would be my advice.

Quote:

so if you can be happy on a 30K retirement expense level, you can do just fine with about 750K in the bank. On the otherhand, if your retirement lifestyle requires 100K per year, you will need closer to 2.5M in the bank.

When anyone talks about 'spending' X amount per year, they usually do this with the assumption that they will want to spend the same amount at age 85 than they did at age 55.

My spending plan has me spending more at age 55-75
when I can still travel and enjoy it. After age 75, I'll probably enjoy sitting on the porch more.

[Ted]

Quote:

My spending plan has me spending more at age 55-75 when I can still travel and enjoy it.

I agree with this philosophy, but the problem in implementing it is that the spending in early retirement has more of an impact on one's chances of sustaining their withdrawals than the spending in later retirement.
With FIRECalc, for example, reducing spending in real dollars in later retirement won't allow the "safe" level of initial withdrawal to be increased all that much.

An additional thing that I do to "permit" myself to spend more in early retirement is to assume that I would take out a reverse mortgage on my house if I lived long enough to be running out of money. Another argument in favor of spending more in early retirement is the sobering but true fact that a lot of us won't live long enough to enjoy spending our money.

Ted,

I understand the mathmatics that you're talking about, although it does make some difference.

And, I am a firm believer in not Saving Sex for your old age also!

[unclemick]

What!!! Are you people telling me they don't issue viagra in rest homes-- if so I ain't a going.

Re. Viagra, my wife works in a nursing home. She had a resident whose chart said he could have it
"as needed". I said "What did he need it for?"
She had no idea. Now, that's a little scary.

John Galt

And another thing...............I can't get past this idea
(frequently expressed here) that "I am going to do this or that when I am _________". I seems to me that
someone who was smart enough to ER should know better. I suggest you all forget about planning what
you will be doing in 10 or 20 years, and focus on today.
Head out on the highway and fire all of your guns at once, but save some ammunition just in case.

John Galt

[bongo2]

Thanks for all your responses. I like the comment that you won't need as much money when you're 80 as when you're 60. All the financial writers seem to think that a poor 80 year old is in terrible shape, but when I look at my grandparents (in their late 80's) they sure don't get out much, and I don't know what they'd do with more money. On the other hand it's always tough to go back.

As far as SS goes the trustees are required to use certain assumptions, and I'm sure they would all agree that there will be trouble long before 2040. If you think about it SS is currently 35% of federal revenue, and 22% of federal expense (FY2003). In 2040 if SS stays at 35% of revenue, then it would be 48% of expense (using that assumption of a 27% required decrease you mentioned). That's a swing of a quarter of the budget. Non-SS taxes are scheduled to go down between now and then, so the impact may be even greater.