401ks

We’re Getting Old

In 1965, a Frenchman by the name of Andre-Francois Raffray thought he had made a very good deal; he had purchased an apartment from an elderly widow for about $500 a month. Up until 1975, France had no form of Social Security, and retired individuals had to rely on their savings and a process called En Viager. En Viager allowed a younger person to purchase a home in monthly increments paid until the death of the current resident. Mr. Raffray offered the 90-year-old Jeanne Louise Calment $500 each month in exchange for her apartment, which was worth about $90,000 in ’65. Unfortunately for Mr. Raffray, Ms. Calment lived to be 122 years old, the longest lifespan of any human. In fact Mr. Raffray died before Ms. Calment did. By the time of her death, he had paid about $184,000 for an apartment in which he never had a chance to live.

This rather highlights the potential problems with a system like En Viager.

In fact, it highlights many problems with the US perception of retirement as well. Every year, the expected lifespans of retirees is extended by three months. In 2016, it was theorized that the first baby who would live to be 150 years old was probably born. Modern medicine, healthy lifestyles, and access to amazing technologies have ensured that our lifespans are continuing to lengthen. That means that budgeting to die at 90 could mean you fall very, very short of your actual date of death (morbid as that thought may be).

In the US, Social Security usually represents about 40% of your income; your savings have to make up the other 60%. For many of us, Social Security will be significantly less than 40% of what we will need in retirement.  Unfortunately, four of ten Americans reach retirement age without any savings whatsoever, and others are only able to provide themselves about 20% of their yearly income in retirement. It is no wonder that a Fidelity Study on Wellness found that 57% of the surveyed don’t “feel good” about money, and 42% would go so far as to say they are “anxious” about it; a horrifying 24% said that they avoided medical treatment because of money.[1]

On that topic, the longer our lifespans, the more likely we are to face expensive medical treatment during our “golden years.” Even if (and this is a very timely conversation, so my apologies to those who look back with the benefit of hindsight) the Affordable Care Act continues to fund Medicare, a couple in 2016 would only receive approximately $260,000, and it is likely that President Trump will continue to propose legislature which will defund the Medicare Program. Yet on average, affluent individuals can pay over $1,000,000 in premiums during retirement.

It isn’t a circumstance which inspires confidence. There is no easy or guaranteed solution to increasing retirement savings. If you’ve read my blog 10 Is the New 4, you know that I believe we are too focused on “safe” money with low risk and low returns. I believe that in order to get the retirement fund that our parents had by putting away 4% of their income, we now have to put away 10% because low-return investments are being pushed onto people who could benefit from greater potential risk for greater potential returns.

Additionally, if the secular bull market ends as I feel is the highest probable end with high inflation, the purchasing power of that safe money will be significantly reduced. Think of the 1970s when inflation reduced purchasing power by 40% to 60%. That would mean instead on needing $1,000,000 for medical premiums a retiree will need 2 to 3 times that amount.

Obviously everyone needs to weigh their own risk tolerance and needs, but I have found that too many investment advisors provide low benchmarks and low expectations when we should be providing higher returns to our clients – because that, I believe, is what is in their best interest in the face of possibly 30 years of retirement.

If I were to tell you that you are saving for 30 to 50 years of unemployment, and would get an unemployment stipend equal to about 40% of your current income, would you look at those savings the same way?

[1] “Measuring and Predicting Financial Wellness.” Fidelity Investments. July 2016. Accessed on 9/6/2017. https://sponsor.fidelity.com/bin-public/06_PSW_Website/documents/PDF-Measuring%20and%20predicting%20financial%20wellness.pdf

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