Monday, November 21, 2011
Do you really think you will ever retire?
by Gary North
"MarketWatch" ran an article on the attitudes of retired Americans ages 55 to 75. The title is accurate: "Retirees are confident, but workers can't retire." But the subtitle points to the problem facing these people: "Retirees' finances recover, but one-in-four workers plan to work until 80."
The article reports on two surveys. The first is a survey of over 1,500 retirees in 2008 and 2011. These people had $100,000 or more of investable assets in 2008. Age range: 55 to 75. Think about this. Some of these people had retired at age 55. This is surely not a normal segment of the population. Second, they had at least $100,000 to invest. Is this sample representative of retired Americans?
Figures from 2007 – the year before the recession hit in full force – indicate that the median net worth of households whose heads were 65 to 74 years old was $239,400. The word "median" refers to an average where half the sample population is above and half below. It gives a much better indication of the condition of the average Joe than the mean average, where the figure is the total wealth divided by the number of families in the sample.
This median net worth statistic included the equity in homes. To estimate investable capital, we must subtract the equity value of the homes from the total net worth figure. According to this chart on Wikipedia, the median sales price of a home in 2007 was $250,000.
Combining the two figures, at least for those home owners who had paid off their mortgages in 2007, the net investable capital of families headed by people 65 to 74 in 2007 was negative $11,000. This is an optimistic estimate. Not all people in this age group owned debt-free homes.
So, the survey of 1,500+ Americans with investable capital of $100,000 or more is so utterly unrepresentative of retired Americans that it should be considered a survey of attitudes of rich retirees.
The MarketWatch article did not mention any of this. It simply reported on the survey's findings. It began:
The financial crisis of 2008-09 hit retirees hard, but a majority of them now express confidence about their finances and have adopted more prudent spending habits, according to a survey that followed the same group of higher-income retirees from 2008 through 2011.
The recession did hit retirees, but it did not hit them all that hard. If a person did not own stocks, then the recession was not a game-changer. Yes, it popped the real estate bubble. According to the Wikipedia chart of home prices, the median home price in 2009 was the same as it had been in 2004. It had peaked in early 2007 at $250,000. So, the perception of declining wealth was there, but it was about 10%; $250,000 to $225,000. The #1 asset of the family was declining, but it did not decline as sharply as the stock market did.
For those families that had money in the stock market – maybe 20% of retirees – the perception of decline was much greater in 2009. But these people are not representative of most retired Americans. Again, the opinions of people with investable capital of over $100,000 are a curiosity suitable for "lifestyles of the rich but not famous."
The article contrasted these people – not representative of middle-class retirees – with middle-class workers.
Meanwhile, a separate survey of middle-class workers finds that 25% say they expect to work until they're 80, and three-fourths of those surveyed said they'll work for at least a portion of the traditional retirement years.
Let us consider the second survey's findings. About 25% of middle-class workers expect to work until age 80. This means that about 75% think they will face no serious problems at retirement.
Let us compare what we know about the net worth of families headed by people over age 65. They are in the hole financially: negative net worth. Their main asset – a home – continues to decline. There has been no rebound since 2009. There is no end in sight. There is not a trace of optimism regarding a great reversal and the return of the housing bubble. So, to the extent that these people had any hope of increasing their net worth through home price appreciation, their dream is shattered. Meanwhile, they are more than $11,000 in the hole. Their homes are down by $25,000. So, they are probably closer to $35,000 in the hole. They are still in debt, and their net worth is declining.
Nevertheless, three-quarters of those workers in the survey think "no problem." In other words, they have no more clue about what is going to hit them at age 62 – when most of them will opt for early Social Security payments – than the author of the article did, who neglected to look at the statistics for median net worth and median housing prices.
The article continued in this optimistic vein.
In the survey of retirees, 85% said they are very or somewhat confident they have enough savings to live comfortably throughout retirement, up from 79% who said that in 2009, and almost matching the 88% who said that in the spring of 2008, before the worst of the crisis hit.
They are more confident now. The stock market recovered. Housing prices are down, but people with $100,000 of investable capital are so rich that housing price declines do not threaten them. In other words, when you are part of the mean average rather than the median average, you are sitting pretty. You are aging. The clock is ticking. You think you will not run out of money before you run out of time. You may be right . . . if you have $300,000 of investable assets. If you are at the low end, you have a problem.
All this has nothing to do with Joe Ex-Lunchbucket, who has no investable capital and is $35,000 in debt, who is living in a depreciating consumer good. He has no job. His one asset is declining in value. This asset is in fact a money pit. He has to keep it in repair. As home-owners know, houses decline in the same way people decline. The older they are, the faster they decline.
The typical retired American today is in a no-win situation. His expenses are rising. It costs money to stay in his home, which is declining in value. He may wind up in a retirement facility that costs $4,000 a month – almost $50,000 a year. He can sell the house. The proceeds may last four years if he moves into a retirement home. Then what?
Consumer prices are rising slowly. His income isn't. He is in defensive mode. He has no hope of increasing his income unless he goes back to work. His skills are rusting rapidly. He cannot get back into his old job. He can be a Wal-Mart greeter. He can work in a fast-food restaurant, but oldsters rarely do.
In the face of this, we read a happy-face article on rich retirees, as if their newly recovered optimism means anything for the average retired American.
"These are people who had $100,000 or more in investable assets so they felt pretty secure before the recession," said Steven Siegel, a research actuary with the Society of Actuaries, a professional association based in Schaumburg, Ill. "The recession scared them," he said. "What they've done is made some adjustments and they're getting back to where they were."
Well, goodie for them. But the future that faces the middle-class workers whose opinions are revealed in the second survey is the future that has arrived for the family where the husband is age 65 to 74. It is a grinding future that is virtually guaranteed to bankrupt these people if the men live to age 80. The widows will live to 84. But they are several years younger than their husbands. Their money will have long since run out by age 84. Where will they live? That depends on the wealth of their children.
In all of this, there is a quiet assumption: the Medicare system will remain solvent. Also assumed: the U.S. government will be able to run $1.3 trillion annual deficits indefinitely. Another assumption: T-bill rates will remain at 0.1% indefinitely. These assumptions are statistically ludicrous for anyone who is still in the work place and is under 60 years old.
The bright spot in the survey: 46% of the retirees said they have no debt, up from 34% in 2008. At the other end of the debt spectrum, 11% said they have $100,000 or more in debt – but that, too, is down, from 15% who said they carried that much debt in 2008.
Wait a minute! Over half of these retirees are in debt. These wealthy retirees are still in IOU mode. Think of the masses in the median net worth range. How well are they doing? Where are their $100,000+ of investable assets? Missing in action. Back to the rich ones:
Younger retirees are much likelier to have debt: 61% of those aged 65 to 70 said they owe money, compared with 42% of those 71 and older. The survey did not specify what types of debt.
These people have debts. The interest rate they pay on their debt is eating them alive. Mortgage debt is deductible from gross income, but mortgage debt is less likely for people over age 65. So, their interest payments are worse: net losses. Their investment assets must produce income after taxes sufficient to pay off principal and interest. What investment assets might these be? Not stocks. Not bonds. Then what?
These people are consuming their capital. Every interest payment is a drain on their net worth. They are no longer in the workforce. They are sitting in a financial bathtub. They have removed the plug by being in debt. Their wealth is going down the drain, but the spigot is turned to a trickle.
The article says that, back in 2008, 38% of those surveyed said they bought whatever they want. In 2011, this was down to 26%. So, most of them say they are watching their spending. Talk is cheap. Interest payments aren't.
They are facing capital depletion. Remember, over half are still in debt, and way more in the under-70 group: 61% vs. 42%. Today, 44% say that Social Security and pension income combined are not sufficient to cover their basic living expenses. So, the spigot is not replacing the water flowing out of the tub.
These are better-off retirees. Think of the situation facing the average retired, ex-middle-class retiree. His outward appearance may be middle class. He lives in the same home. He wears the same clothes as he did when he was in the work force. But his car is aging, his home is aging, and he is aging.
First, 25% think they will work until 80. The older ones are more realistic. In the 40 to 59 age group, over half – 54% – say they will need to work. They are surely correct. But they must begin planning to do this now. They should not assume that they will be physically able to do this. They are getting older.
There is another consideration. The attrition process goes on in the world of business. Companies go bust. They also get bought up by larger firms. Owners of medium-size firms sell them to fund their retirements. The employees then face pink slips. The new owners bought the firms to cut costs and thereby profit from the investment. They fire workers who are no longer vital to the new, scaled-down operation.
There is little job security today. For mid-level salaried people over age 65, there never was. But now the corporate attrition process is an escalating threat. The person who sees his job as a post-64 safety net may be counting on a source of income that will be cut off without warning.
The laid-off salaried worker age 65 or more is in a terrible situation. The employers want young men who will work harder and cheaper. Unless the old-timers can keep up with the market's innovations, they will be paid ever-more than they are worth. The companies will want to get them off the payroll.
What are these people doing about this? Nothing much.
Sixty-nine percent of those surveyed don't have a written financial plan, and of those, 60% say it's because they are "overwhelmed," it's "pointless," or they are "too far behind to catch up."
They are correct. They are too far behind to catch up. So, they have only one option: to follow a plan to remain in their existing jobs. If they lose their existing jobs, they will fall off the edge of the precipice. They will find themselves competing with young workers and other fired workers.
Until now, the older workers left the job market. But the younger ones today see that this will not be possible. They will stay in the market.
So, here is their situation. They have no savings to speak of. Their houses are falling in price. The unemployment rate is 9%. The economy is flat-lining. The number of future competitors is increasing. The skills required just to stay even are getting more rigorous. Workers in India are able to compete in digital-based occupations. They work cheap. Price competition is increasing because of the Web. Profit margins are tightening.
For the mass of salaried employees, their careers are based on relatively passive order-taking and repetitive operations. Both of these are being replaced by computerized systems.
When the survey respondents were asked about their biggest retirement fear, 42% said "I can do all the right things today and it still won't be enough for tomorrow."
So, they think the system is rigged against them. They have lost hope. They did not perceive early in life that things do not take care of themselves. They counted on Social Security, but they never looked at the numbers. The article says that 37% said they have no fear because "it will work itself out." They have been saying this since age 18. They think the federal government will be there to make their golden years comfortable.
Then we read this: "29% of people in their 60s have saved less than $25,000 for retirement." This is the real world – not the world of those with $100,000 in investable capital.
The journalistic reports on retirement are upbeat. They appear in popular media that sell advertising space for "investing for retirement." They cater to the 20% who do have assets of over $100,000 to invest.
As it becomes clear to younger workers that the existing government-funded system is rigged against them, that the system really is a Ponzi scheme, they will revolt. They will vote for candidates who tell them that their futures are being sacrificed in the name of statistically doomed programs that will go bust when they retire. They will then vote in their own self-interest.
The two big welfare systems still find political support because those on the dole or close to it vote in their own self-interest. They vote in higher percentages than younger workers do. But, statistically speaking, they are in the minority. Those on the positive end of a Ponzi scheme always are. When the voters who pay the taxes finally realize that the Ponzi scheme really will go bust before they cash in, they will elect Congressmen who turn off the spigot in the financial bathtub.