Believe it or not, retirement is still a relatively new concept, by historical standards at least. People have only really been “retiring” for about 150 years – back to the time of Chancellor Otto Van Bismarck.
In 1883, Chancellor Otto Von Bismarck of Germany had a problem. Marxists were threatening to take control of Europe. To help his countrymen resist their blandishments, Bismarck announced that he would pay a pension to any nonworking German over age 65. Bismarck was no dummy. Hardly anyone lived to be 65 at the time, given that penicillin would not be available for another half century. Bismarck not only co-opted the Marxists, but set the arbitrary world standard for the exact year at which old age begins and established the precedent that government should pay people for growing old.
As you can see, the original retirees weren’t retiring into a life of leisure; they were basically awaiting death. Thankfully we are far removed from what life was like back then in almost every way.
But as time has passed, we face entirely new challenges. Contrary to the experience of retirees from more than a century ago (if we should even call them retirees at all), the modern retiree has many more challenges to face aside from the decline of their health.
Even since just a generation ago, the retirement environment has changed dramatically.
Thirty years ago, for Americans retiring in the late 1980s and early 1990s, retirement seemed pretty simple. Most retirees had a pension plan they could count on, an ongoing bull market in both stocks and bonds, quality health insurance and the restored health of the Social Security program following the 1983 reform.
Fast forward to today.
The modern retiree faces an uphill battle. Pensions – the incomes retirees of generations past could depend on – are quickly being eliminated from all but the most stable employers as companies seek to save costs.
Pensions, as a group, have been following a recipe for disaster as their investment management teams have been managing assets via the rearview mirror by purchasing the best-performing assets of the prior decade. In most cases, this has been detrimental to their performance and has therefore caused the respective company to either reduce benefits or eliminate the pension program entirely.
Even for the few employers that have actively maintained a pension plan, given the transitory nature of modern employment (and perhaps thanks to a less than stellar work environment), many employees are no longer working their entire careers at a single employer.
Following a 30+ year bond bull market, interest rates are at or near historic lows. In the late 1980s, the 10-year Treasury yielded between eight and nine percent all while the inflation rate hovered around four percent.
In other words, a worker retiring in the 1980s could invest their entire portfolio (theoretically) in Treasuries earning eight percent, withdraw four percent and allow the additional four percent to accrue for later retirement years. This was essentially a no-risk portfolio.
Nowadays, the 10-year Treasury is yielding less than two percent with inflation hovering around two percent. Not ideal if you’re planning to retire using conventional strategies.
It’s pretty clear that a generous pension and a high-interest bond market are two comforts the modern retiree does not have.
Beyond the bond bear market that is likely to ensue (due to rising rates), we have a stock market that has consistently been at or near market highs for a few years now. While the data would show that this scenario is not indicative of pending doom and gloom, it does make folks nearing retirement and their advisors uneasy because what’s around the bend is unknown – and always will be unknown.
After a decade of fearing the return of the deep bear markets similar to 2000-2002 and 2007-2009, many portfolios have not kept up with the market due to this continued fear despite knowing that fighting the last battle is an ever-popular but losing strategy in the long run.
Making matters worse, there are the perceived risks surrounding Social Security with the Trust Fund on track to run dry around 2035. While this is a popular concern among retirees, it is not as dire as many people think.
Most of the above observations sound quite negative, but there is good news. Thanks to continuing medical advances, people are living longer lives than ever before. However, this good news poses its own unique challenges. What would ordinarily be viewed as a blessing is coupled with rising health care costs and potential long-term care needs.
To astute observers, much of the new construction around most major cities is the building of additional assisted living facilities and nursing homes. If anyone can sense what’s coming, it’s people seeking to profit from this inevitable trend.
Lastly, as retiree life spans have increased after their working career has come to a close, the modern retiree must find a way to find fulfillment outside of the workplace. Many Americans rushing to leave their office for the last time may find that life is not quite what they expected upon leaving.
Many retirees find that their life’s purpose is in their rearview mirror and are now met with a new relationship at home – one with virtually 24/7 interaction. This relationship is neither good nor bad, but different and one that often takes some time getting used to.
With six Saturdays and a Sunday each week, finding life satisfaction and fulfillment becomes a primary goal amongst the challenges listed above. Retirement isn’t just about retiring from something as it is retiring to something.
Having a plan that effectively deals with these issues is likely to be the defining factor of whether the modern retiree comfortably makes it through retirement, or doesn’t. The modern retiree needs to balance each of these issues and risks with the need to grow their assets (to ward off inflation) while protecting their income. This is a balancing act I hope I can play a small part in with various articles here on the blog.
My goal here isn’t to provide a doom and gloom view of retirement – long time readers of this blog know I preach optimism and believe all these issues are able to be overcome with good planning.
Because there is an obvious recency bias to all blogs given how blog posts are displayed, I thought it might be helpful to provide a consolidated one-stop shop article for each of the challenges mentioned to hopefully help you make some sense of these challenges and what you can do about them. Feel free to reach out with any feedback or questions.
Articles Addressing the Above Challenges:
- A Portfolio Strategy for 30-Year Retirements
- Retiring at Market Highs
- Will Social Security Still Be There When I Retire?
- Should You Wait Until 70 to File for Social Security?
- How to Pay for Long-Term Care
- Should You Take the Pension or the Lump Sum?
- What To Do In Retirement?
This post is not advice. Please see additional disclaimers.