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MSN Money shares…
There is no grand, overarching, systemic retirement crisis.
But that’s actually bad news. Because instead of one grand crisis — for which we might find one grand solution — there are at least five separate crises, and each demands its own solution.
The retirement crisis means very different things to a 65-year old who has saved diligently but is seeing the income from a retirement portfolio fall; a 45-year-old who is wondering how to put enough money away for retirement when the definition of “enough” seems so fluid; and a 25-year-old who is, justifiably, so cynical about all the accepted wisdom that saving anything at all seems like it’s for saps.
Ideally, I’d describe the individual retirement crisis that faces each of us. But because I don’t know the financial situation of each of my readers — and because I am constrained for space even on the Internet — I’m instead going to break down the retirement crisis into five pieces. Call them The Five Stages of Retirement Grief. I’ll try to describe each one, then suggest some approaches to individual solutions.
Crisis No. 1: Shrinkage
The problem: You’re retired or on the verge of retirement and you’ve done everything right. You drew up a financial plan and saved diligently. But your plan has run into a shrinkage problem. The 5% or 7% or whatever return you assumed just doesn’t look like it is going to be there in the future. Certainly, you weren’t planning for three-month Treasury bills to be paying you 0.08% or 10-year Treasurys 1.61%. And you’re worried by projections that say the real return on stocks going forward is going to be more like 5% (if we’re lucky) than the 7.5% real return that has been the assumption of choice recently. (That assumption replaced the 10% assumption that was the common wisdom in the years before the 2000 bear market.) And the rate of return you’ll actually get makes a huge difference. At 7.5%, a $2 million retirement portfolio throws off an annual $150,000 in income. At 5% the annual cash falls to $100,000. At 4%, it’s $80,000.
Crisis No. 2: Whoops
The problem: You haven’t been quite as diligent as you should have been and now you’re on the verge of retirement. When you crank the numbers, they just don’t add up. That $750,000 you were supposed to have looks more like $400,000, thanks to recent bear markets and higher-than-expected college expenses because Johnny didn’t get that lacrosse scholarship but decided to go to Johns Hopkins anyway. (Of course, you could have said no.) You’ve been through your budget, and even when you take into account lower expenses since the kids will be out of the house (you really, really hope) and you and your life partner will be able to cut out all those work expenses, it looks as if you’ll have a tough time making ends meet.
Crisis No. 3: Too much on your plate
The problem: You’re a long way from retirement, you’ve done your homework, and you know not only that you should save and invest but even how much. But, while you’re putting something away, it’s not as much as it should be. There’s the money that has to go into the kids’ college funds — because you know they’ll be behind a very big eight ball if they don’t go to college. (And then there’s all the money that you are tempted to spend on tutors and lessons and the like so they can get into the best college possible.) The health insurance at your job isn’t as good as it once was, and it costs more. The lower prices at Costco (COST -0.43%, news) and Family Dollar(FDO -0.21%,news) sure help with the family budget, but gas to drive there isn’t cheap and the car is getting on in years. The car isn’t the only thing that’s aging, of course, and you worry about paying for the gym and health care. The family needs all its wage-earners to stay healthy enough to work for a good long time.
Solutions to these crises
Are there solutions that will help with these problems and these five different crises? Sure. And while the exact mix of elements that you would find most valuable in building a solution will vary with your crisis and problem, the elements themselves form a relatively limited collection.
Solution No. 1: You can always live on less — although I’ll bet that wasn’t what you were looking forward to during what were once called your golden years. But a crisis isn’t exactly designed to respect your preferences and, hey, if the problem is that you need to replace capital that you’ve lost or to compensate for capital you didn’t save earlier, putting some creative thought into reducing your spending is a very good investment.
Solution No. 2: You can plan to work longer, although hopefully not until you fall over. The key word is “plan.” The economy hasn’t gotten any friendlier to older workers just because it’s become more hostile to younger ones. Companies would still prefer to replace higher-paid older workers with younger workers, turn higher-paid older employees into lower-paid contract workers, or, best of all, turn higher-paid older employees into lower-paid younger contract workers. My point is that you cannot assume, given demographic trends, that there will be an available job for as long as you want to work. So if working longer is a major part of your retirement plan, you’re going to have to invest something in making sure you can find a decent job when you need it. That investment doesn’t have to be money spent on taking courses. Instead it can be a second job that pays you while you build new skills or that lets you create a broader track record of accomplishment. This is the economy that the smartest 28-year-olds that I know assume is normal. Nobody in that age group assumes that a job will last or that today’s skills will be enough for tomorrow. Second jobs, volunteer work, freelance gigs — all these are part of the mix. (And, of course, don’t forget that your health is the biggest single factor in your retirement plan. A good part of your health as you age is determined by the luck and genes, but you can do things to tilt the odds in your favor. Those things are a good investment in your retirement.)
Solution No. 3: Look to increase the returns from your portfolio. Part of this is what we at Jubak Asset Management call searching for “smart beta” investments. Not all parts of the financial markets go up together. What you want to do is be in those sections that are going up when they’re going up. This doesn’t mean aggressively day-trading or eschewing long-term investing. In fact, a smart beta investment can be a bet on a long-term trend placed when that trend is still taking shape and the stocks you use to play it are cheap and out of favor. You buy luxury retailers when everyone hates them — like now — and you don’t chase the low-end retailers that everyone currently loves. You ease your way into oil and energy stocks when they’re out of favor — maybe not quite yet, but soon — because you know that this sector swings from gloom to boom. You know that someday the eurozone crisis will have receded far enough so that stocks from faster-growing emerging markets will beat the performance of slower-growing developed markets. You buy gold when inflation is hardly a glimmer in anyone’s eye.
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