The Good Ol' Days Weren't Always Good!
And Tomorrow Ain’t As Bad As It Seems! Billy Joel still sings. And it’s still true. A friend recently lamented the loss of pensions. “We have nothing to rely on!” she exclaimed. “Our parents generation had pensions and social security. We might not have either.” This friend is right – but only superficially. The truth is that companies’ pension obligations eventually overwhelmed many a once-strong balance sheet. They couldn’t afford to keep funding future commitments, and investments often could not/did not perform as well as actuaries might have hoped. As to the federal government’s promise to provide a social security pension to each of us, at least they didn’t even try to invest the money. Social security depends on younger workers paying in to support retirees; an aging population is undermining its ability to fulfill promises. Believing in and planning on the reliability of a pension was nice for our parents; discovering that those promises might not be fulfill-able is dreadful.
Most workers today still plan on receiving social security and are trying to make up for a lack of pensions with 401k contributions. Now that the stock market has laid waste to more than a decade of investing, we’re feeling vulnerable, but at least that vulnerability is evident to us. When pensions became under-funded due to sub-projection investment returns, that reality was hidden in footnotes and (often) implicit in a swooning stock price.
I take a Sadder But Wiser position. I know professional investors and pension funds can’t produce 8% annual returns. I know the government doesn’t even try. I am banking that, at best, my 401k plan will total what I contributed to it in my working years – no plans for compound annual returns. Likely, I’ll be positively surprised. But I don’t like deluding myself. I am not fantasizing that saving 10% of my salary for 40 working years will provide 100% of my income needs for 40 years in retirement. The math just doesn’t work.
Freed from the illusions of the past, here’s my plan:
1. Work longer. If I have just 20 or 25 years in retirement (matched with 45 or 50 years of working), I’m much more likely to cover my costs of living.
2. Save more. Saving 20% of my salary – not always easy – is a much more appropriate objective than the traditional 10% or 15%. Some of that money will have to be in savings outside my 401k.
3. Reduce costs of living in retirement. Not by luck, this objective meshes with #2. If I learn to live on less while I’m working, I will be better able to comfortably live on less in retirement. If I’ve paid off my mortgage by the time I retire, I can have actually reduced my costs of living after my work years.
None of these steps is glamorous. None of these steps requires the market to recover immediately. But they do reflect a gift from this financial debacle: a more realistic view of investing, saving, and retirement planning.
By Marie Claire Allvine