Thursday, June 12, 2014

Boom and Bust?

10,000 baby boomers retired yesterday. Another 10,000 retired today and an additional 10,000 will retire tomorrow.

We are in the early stages of what will be a massive number of people leaving the workforce and beginning "life without a paycheck".


The retirement trend will continue for another decade before it begins to level off but the effects of this age wave will continue for years to come.

By 2050 it is projected that there will twice as many Americans over the age of 65 as there are today. We are talking about 90 million people or 20% of the nation's population.  To put that in context, the U.S. population was only 150 million in total in 1950.  It will be as if the entire United States resembles Florida's demographic makeup today (actually Florida's age 65 and over population is only 18% today.)

If you don't think this is a tidal wave consider the fact that Cerulli Associates predicts that the 401(k) system will become cash-flow negative beginning in 2016.  Simply stated, there will be more money being withdrawn from 401(k) plans from people retiring than there is money being put into 401(k) plans by those still working. Cerulli projects that $366 billion will be withdrawn in 2016 compared to $364 billion in inflows.

How well are all of these seniors prepared for retirement? Few outside of the public sector has a pension plan to rely on. What lies ahead in the future?  Social Security and Medicare programs will undoubtedly face severe financial strains.   Where will the money being withdrawn from 401(k)'s be invested? What will that mean to the equity and bond markets? Can seniors really rely on the "promise" of Social Security and Medicare?

There are many clouds on the horizon for those people retiring right now. Where can they earn a "safe" yield in a low interest rate environment? What about inflation? What about health care and the effects of Obamacare on the system?  1 out of 3 practicing physicians are over the age of 55 themselves. One survey I saw predicts a shortage of 120,000 doctors by 2025-that is a mere nine years away. What about the long-term value of the dollar?

I am getting a headache, get me a doctor! There are gray skies on the horizon everywhere you look.

As troubling as the questions are today, a secure retirement has always been an elusive goal for most Americans.

Despite what you often hear about the demise of defined benefit plans, the fact is that even in their hey-day in the 1970's, less than 50% of American private sector workers were covered by a retirement plan.

Nevin Adams of the Employee Benefit Research Institute calls out other retirement myths and reminds us that the "good old days" were really not that good for retirees if you consider the facts.  Here are a few facts that dispel the "myths" and explains that the present 401(k) retirement system has a number of advantages over the pension system.

  • There are actually more private sector workers participating in a workplace retirement plan today than there were in 1979. A pension plan did you no good if your employer did not offer it.
  • Median job tenure has hovered around 5 years since the 1950's.  It actually is 5.4 today-slightly higher than the long-term average.  Short tenure and job hopping quickly kills the typical defined benefit plan for a worker. In fact, with the old cliff vesting rules in place before the early 1980's, you might have to work years before becoming eligible for any benefit.  For example, my father did not become vested until he worked 20 years with his employer.  If he left at 19 years, he was entitled to zilch.
  • Between 1987 and 2012, fewer than 1 in 5 private sector employees spent 25 years or more with one employer.  Therefore, few workers would have received a "full" pension under most pension calculation rules even if they were in place.

You will notice that all of the facts above cite private sector retirement arrangements. The fact remains that most public sector employees are still covered by a pension plan while less than 15% of private sector workers are.  However, public sector employees have their own worries heading into retirement. Will they collect all that they expect?  They won't in Detroit.  And I suspect there should be significant worries as well for public sector employees in Illinois and a few other states.

We can only hope that all those boomers aren't busted before it is over. 

My advice? Have a big number set aside before thinking about retiring. I have done a lot of financial modeling for retirement for various people and I think most people need investable assets of about 10 times their final income to be reasonably confident that their nest egg at age 65 is big enough to sustain them through their lifetime in retirement (assuming no pension but considering full social security). 

Those with lower incomes can get by with a little less as social security payments will replace more income.  Those with higher incomes may need a higher multiple as social security provides a smaller income replacement ratio. The same goes for your retirement age. If you retire before age 65 you will need more than 10x. The longer you defer retirement after age 65, the multiple needed gets progressively lower with each year of added work and pay.

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