The Retirement Trap

What would your savings look like if you spent the last 30 years unemployed? I know mine would be very zen–like the sound of one hand clapping. And yet that’s what you’re planning to do as you consider retirement. If you retire at 65 it’s not out of the question that you’ll live to 95. More likely that you’ll live to 85, but do you really want to be scrambling for bucks at 90? The simple reality is that retirement is a concept rooted in the turn of the last century, codified in the USA by the social security act in 1935–when the average life expectancy was 61.7 years. You were supposed to save for retirement, with a pension from the big manufacturing company you worked for all your life, sweetened by savings and a little social security to help anyone that fell through the cracks. Then die shortly after retirement. In fact more than half of the prospective retirees were supposed to die in the traces, a couple of years before they were booted out at 65.

It’s obvious that the situation has changed completely. There’s simply no way that saving at the typical rate for Americans working at a typical middle class job can support that person in retired splendor, walking with their elegantly aged, active, slender, vibrantly healthy wife on a secluded beach for 30 years. First, most of us would go nuts staring at waves and gulls for more than five years, and second, those beaches would be very crowded. Worse yet, for most Americans, retirement means scaling back on activity, accepting the “limitations” of aging, and eating junk while staring at the boob tube. The dirty trick of an extended lifetime for most people is that it’s just a lot longer time to be old and sick.

So lets accept the premise that retirement is not really going to work for many people. How are you going to avoid the trap that confronts a huge number of people? Keep working? For a lot of people that’s not an option. They either have jobs with a mandatory retirement age or they work in a job with physical requirements that get harder to meet as they age.

Save more? Well, that’s a good start, but as many people discovered in 2009, saving in the way that most people do, by stuffing as much money they can into an IRA or 401K can be pretty disappointing.

Spend less? Another good start, but Alpo sucks, and some of the biggest expenses you have are either invisible to you or are hard to avoid.

Work at something else? It’s very likely that anything else you do is going to pay less than what you do now. Going from a position and expertise you spent 30 years acquiring to something new is not a recipe for instant success.

This paints a grim picture, but your reality doesn’t have to be grim. I think the key to retirement success is to plan well for it, and be very realistic about every decision you make. Plan everything–income, expense, activity, interests, where you live, how you save, how long you will work–with a clear understanding that you are looking at 30 years of a very different kind of life than you are living now.

The next article in this series will look at all the elements in detail, but here’s a basic index to what I will be writing about:

Saving and investment–Every element of this matters. You can’t just turn your money over to someone else and expect good things to happen to it. The cost of your investments is as important as their performance, and tax issues are critical.

When To Retire–You probably want to recalibrate your thinking on this. We’ll step through some options.

Activity and fitness–Nothing will kill your savings faster than illness. And medicare won’t bail you out. You need to stay physically active and fit. If you aren’t fit now, it’s time to start. The cost of obesity is not the food you eat, it’s the toll on your body.

Post retirement earning–Uncle Sam might penalize you if you start collecting Social Security and then rejoin the workforce.

It’s not what you make, it’s what you spend–Changing your lifestyle to suit your cashflow.

Here’s the basic, basic, bottom line rules:

1. Your total draw on your savings can’t be more than 3% per year. This includes the expenses of investment but not taxes. If your financial advisor is charging you 1.5% to manage your money and they invest it in mutual funds that have an average expense ratio of 1.5%, then there’s no money for you. Fire them and invest the money yourself in stock and bond index funds that have an expense ratio of less than .2%

2. You can’t owe anything. No loans, no mortgages, no credit card balances. It makes no sense to have loans at rates that exceed the return on your investments. The only exception could be a locked in mortgage at a crazy low rate.

3. Keep sufficient liquid, low risk funds to last you two years.

4. Don’t buy individual stocks, alternative investments, or any risky investment.

5. Don’t have a broker.

6. If you need financial advice use someone who charges an hourly fee. No long term charges. A CPA can be more useful than a financial planner.

7. Funds should be held by an independent custodian. If you use a financial manager (DON’T), never write checks directly to them.  The fund family must be reputable and low cost. I like Vanguard, but any company with a similar size and operating principles may suit.


There’s a lot more detail of course, but that’s a good start. Build a budget, have a plan, get in shape, pay off your house, invest wisely, and work as long as you want. And maybe a little longer.


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