Sunday, July 31, 2011

Worrying about Saving for Retirement

Do you worry a lot about saving for your retirement? Neither do I. Are we idiots?

No. Some of us will die before we can retire. Some of us will die only a few years later. People born during the baby boom---the group about to reach retirement age now and in the next few years---can be expected to live another for 20 years or so. Except if they are already dead, that is. According to the U.S. Census Bureau, those currently alive have a better life expectancy than those born in the year they were born. What this means is that even though life expectancy for baby boomers was circa 70 years when we were born, it now is circa 80 years simply because we (individually) aren't dead yet.

This presents an interesting puzzle. People are always dying. Although we have a better chance of living to be 80 than we did at birth, again, some of us won't make it. So how do we plan for retirement? Most personal finance counselors would advise us to plan as if we are going to live to be 90 or even 100. Some of us will, and we don't want to run out of money and have to live on cat food in some miserable rented room in a rat-infested inner city slum. Just painting a horrifying future to contemplate. No worries. It won’t happen to you.

Anyway, if you retire at 65, the magic number that no longer holds any magic, you’ll still have to wait a year or two to collect your full Social Security, so why do it? If you retire even later, at age 70, you can collect a higher Social Security benefit because you waited, and you’ll have had more years in which to put away more savings. Sounds great, yes? It is, unless you’re one of the unlucky baby boomers who dies about when expected when we were born, or even earlier. In which case you just wasted your last years working when you could have spent them living it up in retirement. Dang.

Truth is, the joker in the deck is not really whether you die when expected circa your 1946–1964 birth, but whether you get seriously ill. It is possible to spend down quite a decent fortune on medical care unless you spend it first on very good medical insurance. And, supposedly, unless you make the effort beforehand to invest in preventative health care and self care, such as eating right (however that is defined this week), getting regular exercise that doesn’t tear up your body, and so on. Still, whether you get cancer or have a heart attack or are run over by a truck remains rather random.

Meanwhile, what should you do about saving for retirement? And about working until retirement? Look at your own personal circumstances, not those of the mass of Americans. Some of us will receive substantial pensions. Some of us have very nice savings, inheritances, paid-off houses, and more. Some of us have hardworking or wealthy spouses, or grown children who've made it big and can turn around and help their parents. Our circumstances vary. Why shouldn't our preparations for retirement vary, too?

Mainstream media advice-givers keep painting a picture of gloom and doom, saying our money will inevitably run out. These experts tell us not even a million dollars in savings is going to be enough. A million dollars. It still sounds like a lot of money to most of us, because it is. Advice-givers usually offer whatever the current wisdom is about investing. Sometimes it’s not good advice because the deal is not in our favor. Sometimes, the tide of affairs works against us. Hasn't anyone yet figured out that if millions of people flock to a sweet deal, the sheer weight of their participation causes it to tank? Regardless, nobody can foretell the future. Seemingly solid investments can and do go sour. Companies that are deemed rock solid go bankrupt.

Should we be terrified of our future unless we are immensely wealthy? Are we all going to die broke? I don’t think so. The scary part about retirement is not running out of money, because we all will have some income. Even people who do not qualify for Social Security (and that would be who?) are likely to qualify for other government assistance. What is scary about retirement is the finite quality of our income. Those of us who have never successfully lived within a budget finally have to learn a new approach to spending. That’s a lesson the baby boom generation has been spectacularly bad at learning so far.

We could try that now. Live within our means, or a little under, and save the difference. Build up a cushion for the future. Who knows? We might save up that million dollars yet. Some of us will sleep better, too.