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Realistic Retirement Planning
As John Lennon wrote, “Life is what happens to you while you're busy making other plans.”
TBL was favored with many new readers and subscribers again this week. Welcome! If that includes you, or if you haven’t been around for all 149 editions of TBL over the past three years, my “origin story” is here. A baker’s dozen of some particularly well received issues of TBL are linked below to give you a sense of this place.
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Realistic Retirement Planning
My children have consistently (and kindly) remarked about how grateful they are to have been able to graduate (with honors) from fine universities without any debt. They each have good and fulfilling careers. None of them ever moved back home. All married well and have provided the blessing of grandchildren (each of our three kids and their spouses have three children).
We are blessed.
Providing college for them was a key goal for my wife and me and I am (obviously) proud that we accomplished it and even prouder of the accomplishments of our children. However, achieving that goal came at a cost. Our retirement planning took a hit to do so.
The Retirement Confidence Survey from the private, nonprofit Employee Benefit Research Institute has gathered opinion data for over 30 years from workers and retirees as to what they believe their financial status to be. The most recent survey results show that worker confidence in having enough money to live comfortably throughout their retirement years is reasonably high. Over 7 in 10 workers are at least somewhat confident, including almost 3 in 10 who are very confident. Retirees also remain confident, with nearly 8 in 10 confident they will have enough money to live comfortably throughout retirement, including 1 in 3 who are very confident.
However, most workers – nearly 6 in 10 – reported that preparing for retirement makes them feel stressed. Nearly half of workers say debt has negatively impacted their ability to save for retirement and more than 1 in 4 retirees say debt has impacted their ability to live comfortably in retirement.
More importantly, the high confidence levels may be misplaced. According to Fidelity, the financial services firm that administers about $10 trillion in assets and has more than 40 million workplace participant accounts, the average 401(k) balance is only around $100,000 and the average Boomer balance (a demographic that is in or near retirement) is only around $200,000. At current interest rates, that sized nest egg would provide me with about only $1,250 per month in guaranteed income – much better than when interest rates were near zero, but still not a lot of money.
Moreover, one-in-five respondents thought a financial professional would recommend a withdrawal rate of 10-15 percent of retirement savings every year, which is, of course, a recipe for disaster. Add-in the fact that only about 14 percent of private sector workers have access to a defined benefit (pension) plan and that, according to the Social Security Administration, its retirement benefits are only designed to replace about 40 percent of the average worker’s wages, and it should be clear that Americans are in much more trouble than they know (and not just because over 60 percent of Americans live paycheck to paycheck).
There is thus very good reason to believe that Americans generally underestimate the amount of money they will need to retire comfortably.
Much retirement planning advice focuses on saving more and saving earlier. It’s excellent advice. Not nearly enough of us save and not nearly enough of us save enough. But this advice isn’t always realistic and often comes couched in unjustified criticism.
The first major financial goal my wife and I set after we were married was to buy a house. We wanted our own home near good schools before we had children. Interest rates were high, unlike now, so there were relatively safe, liquid, and convenient ways to save that provided excellent returns. However, real estate values were climbing rapidly and mortgage rates were exceedingly high. After a couple of years of very diligent saving (while adding nothing to retirement savings above the level needed for the 401(k) employer match), we were able to save enough to make a down payment and buy our first house.
One might quibble with that choice, and fewer young couples would likely make a similar choice today, but it was a reasonable choice under the circumstances. The house offered us a place to raise our children in a good environment near family and other support systems. It was the right decision for us.
Obviously, young families are expensive, and ours was no exception. Retirement planning continued to mean little more than the company match until later, after college planning was more firmly grounded. Providing for our children, including college, was a more urgent concern for us.
Many retirement planning advisors insist that college assistance should only come after maxing out the 401(k) every year, but we were not willing to go that route at the expense of our children’s prospective education. Our priorities were (and are) different. Again, one may reasonably disagree with that choice, but it was an entirely plausible one, especially since I did not and do not ask anyone to feel sorry for us or to prop us up financially on account of it.
Many alleged experts in retirement planning are far too willing to offer advice without seeming to recognize the competing interests faced by those hoping to plan well. Much of what is called advice is really hectoring about the need to save more and to save more sooner and does not seem to recognize that alternative choices are not necessarily or entirely wrong.
Steve Sandusky makes a terrific point in his excellent Good to Know newsletter.
“As I think about the nature of retirement planning, it is highly left-hemisphere focused. It’s all about finding ‘your number,’ developing detailed spreadsheets, determining assumptions for growth rates, tax rates, withdrawal rates, inflation rates, modeling spending patterns during go-go, slow-go, and no-go years, running Monte Carlo simulations until you reach an acceptable probability of success, and adding in some ‘cushion’ just in case.
“But let’s face reality. Your life cannot be spreadsheeted.
“What’s missing from retirement planning, and financial planning in general, is the value, nuance, and context that right-hemisphere thinking brings to the table.”
Once more for emphasis: Your life cannot be spreadsheeted.
Sandusky’s primary point is about seeing the “big picture” in retirement planning while finding and getting to “enough,” which is a moving target It’s a fantastic point.
It also means being more realistic. None off us is homo economicus. Neither are we idiots. We are humans with competing strengths, interests, needs, goals, and opportunities.
A more realistic approach to retirement planning will not be all that different substantively. In general, people should save more and start saving sooner. But a better approach will meet the people who need good advice “where they live,” without judgment or condescension, while remaining forthright about the challenges that await.
Not everyone with a less than perfect retirement plan gets into that situation on account of foolish decisions. My wife and I made some difficult choices. We remain convinced that, for us and for our family, they were the right choices. Since then, aggressive saving, good health, and accommodative markets during our peak earning years have helped a lot, though they were anything but assured. We are in a good place now, but success was hardly a sure thing. We did well and had good luck on our side.
I love the conceit behind the fine indie film, Safety Not Guaranteed. The words of the title are found in a mysterious classified ad in a local paper seeking a partner for time travel. The ad states that applicants will need their own weapons and, ominously, “safety not guaranteed.”
That’s a pretty good metaphor for retirement planing, investing, and for life in general.
It would have been better for our retirement plan had we done more and done it sooner, but thankfully we are in a position where we can still be optimistic about our retirement prospects.
Not everyone can give retirement planning the kind of focus and attention that they might otherwise like to. Too many Americans face job uncertainty, problematic debt, and real economic, familial, or health-related hardship. Some of us had what to us were more pressing priorities. We knew the risks we were taking and accepted them.
More realistic retirement and financial planning will seek to offer the best and most creative approaches to the vexing problems we face without presuming that we have been irresponsible simply because our planning is not yet as advanced as we might like it to be.
Our lives are constantly challenged by the tension between now and not yet, present and future. Arbitrarily to highlight a few obvious examples: retirement planning; work/life balance; career advancement; education; sustainable living; getting and staying healthy; and matters of faith. The ability to delay gratification is powerful and necessary for success.
Sometimes, however, “now” is an acceptable answer.
Totally Worth It
Feel free to contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Praise, condemnation, and feedback are always welcome.
In 2022, the three worst performing of the 11 major S&P 500 sectors were Communication Services, Consumer Discretionary, and Technology, which were all down over 28 percent. In the first quarter of 2023, these sectors were the top three performers, rallying more than 15 percent each. Meanwhile, Energy, the top-performing sector of 2022, with a gain of over 50 percent, was down over 5 percent in Q1 (h/t Peter Mallouk). Past performance is not indicative of future results, yet again.
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The reward for owning stocks over bonds hasn’t been this slim since before the 2008 financial crisis. The equity risk premium – the gap between the S&P 500’s earnings yield and that of 10-year U.S. Treasury notes – sits around 1.59 percentage points, a low not seen since October 2007. That is well below the average gap of around 3.5 points since 2008.
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“Made for spirituality, we wallow in introspection. Made for joy, we settle for pleasure. Made for justice, we clamor for vengeance. Made for relationship, we insist on our own way. Made for beauty, we are satisfied with sentiment. But new creation has already begun. The sun has begun to rise. Christians are called to leave behind, in the tomb of Jesus Christ, all that belongs to the brokenness and incompleteness of the present world ... That, quite simply, is what it means to be Christian: to follow Jesus Christ into the new world, God's new world, which he has thrown open before us.”
~ N.T. Wright, Simply Christian: Why Christianity Makes Sense
May each of you have a blessed Easter.
As I get older and my days more obviously disappear like shadows after the dying of the light, I care more about meaning and mattering.
Good Friday especially gets me thinking that way.
To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers hope. And may love have the last word. Now and forever.
Thanks for reading.
Issue 149 (Good Friday, April 7, 2023)