The Retirement Bubble

I trust my American readers all had a great Labor Day weekend! We don’t have that here in Panama (or elsewhere, for that matter), but those of us gringos living here are aware of it, even as we steam along our way. I have a couple comments to share today.

I was reading a web columnist today with a very strong political opinion. That is not what interested me as much as a single sentence he included in his column.

As anthropologist Jared Diamond put it in his classic “Collapse,” our fate depends on leaders with “the courage to practice long-term thinking and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions.”

Perfect! Thank you, Mr. Diamond. As I have mentioned here before, without any reference to any individual politician, political party, or ideology, there is no clear global leadership and precious little national leadership, if any, that we can depend on to deal effectively and in the near or mid-term with the global finanical crisis, much less any personal financial crisis we may be experiencing or fear in the future. I do not waste my time questioning their good intentions or their intelligence, I just see no effective leadership that can deal with the huge debt mountain on which North America and Europe rest. The only truly successful approach to that debt mountain is to pay it off and take the decline in living standards that will be required to do it. Don’t hold your breath.

I have said it before in one form or another and I will say it again now. You are your own best leader. Like it or not (and most of us would prefer not), you literally must be the captain of your own ship now and for some years. Don’t depend on politicians, “gurus”, commentators, financial planners or any other group whose income depends on your paying them to fill this role. Yes, among them are those who can help, although you will have to be very careful in choosing, but none of them can be your leader better than you. Sure, you may not want to do it and you may feel inadequate to do it, but it is part of everyone’s reality today. If you need “training”, the best training is to do it and learn from it.

In short, you and I must have “the courage to practice long-term thinking and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions.”

A completely different subject arises due to some poll results provided recently by the Gallup Poll. Although in the US, I suspect much of it is very relevant to Europe and to Canada, our northern cousins. Gallup regularly polls on the subject of “wellbeing” (or well-being, if you’re old-fashioned like me) and they have been doing it for years. One of the ways they look at this topic is by occupation. They survey eleven general occupational categories on different questions related to their feeling of well-being. They then make a composite score, combining them all. Here it is:

As has been the case in past years, business owners top the charts. I would like to share one more of their charts reflecting occupations by “job satisfaction”. Take a look.

The great majority of the business owner category is made up of small business owners, reflecting the reality of the total business market. They may have 50 or 20 or 100 employees or they may be the only person working in their business. The number of employees is immaterial; we are just talking about owners here.

If you zip around financial websites, you will hear that it is small business owners who have suffered far more over the last three years than owners of large businesses. Indeed, they are often referred to as one of the groups most severely hurt by the current crisis. Yet, look at them. They continue to lead all other categories in their sense of well-being and in their job satisfaction. In fact, they are always in at least the top three of any sub-category used by Gallup.

There is a message in that, one that I can understand perfectly as a small business owner myself who has been negatively affected by the crisis. We would rather go through an ugly business environment as owners, not employees. We may take the worst hits financially and face the more agonizing decisions (because they affect so many others), but we would still rather be owners.

Being a small business owner is not a recipe for certain success. I know that by experience. Being a small business owner is not stress-free or even less stressful than other occupations. I sure know that too! But we are indeed captains of our own ships. We are our own leaders not only by necessity, but by choice.

Whether you ever set up your own small business yourself is entirely up to you and, for many of you, may be unnecessary. That is not a recommendation by itself.

But it is good to know that being your own leader, even if things are bad, is preferable and more satisfying than depending on some other leader. Good to keep in mind.
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If you’d like to read a summary of the full Gallup report, you can find it here.
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In my last post, the article I discussed mentioned a recent study by McKinsey and Company, a leading management consulting firm, titled, “Why baby boomers will need to work longer”. Nothing like getting to the point right from the start! Let me share some extensive excerpts from that report, resulting from a survey of 5,100 households with members between 50 and 70 years of age. Bold type emphasis is mine.

The twilight of the US baby boom generation is approaching, and with it deep, structural economic shifts whose impact will be felt for decades to come. New research from the McKinsey Global Institute (MGI) shows that there is only one realistic way to prevent aging boomers from experiencing a significant decline in their living standards and becoming a multidecade drag on US and world economic growth. Boomers will have to continue working beyond the traditional retirement age, and that will require important changes in public policy, business practices, and personal behavior.
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MGI research highlights a further problem: two-thirds of the oldest boomers are financially unprepared for retirement, and many are not even aware of their predicament.
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The fact that boomers have consumed more and saved less during their working lives than previous generations did compounds the demographic challenge for the US economy. Typically, households accumulate savings at an accelerating rate, reaching a peak during their prime earning years. They subsequently draw down those savings in retirement. The collective savings rate of the boomers, however, didn’t peak during their prime earning years. In fact, the missing boomer peak accounts for most of the collapse in the US household savings rate from its high of more than 10 percent, in the mid-1980s, to about 2 percent today.5

Many are not even aware of their predicament. In our survey, about half of boomer households expressed confidence in their financial future. But by our calculations, less than half of those confident households are adequately prepared.
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The single most important step that unprepared boomers can take to improve their financial well-being is to postpone retirement and the draw-down of their savings. If they worked long enough to increase the median retirement age from 62.6 today to 64.1 by 2015, they could continue accumulating assets longer and avoid tapping them until age 70. That combination would dramatically reduce the share of unprepared households—to 40 percent, from 69 percent, if households don’t tap their home equity, and to 31 percent, from 62 percent, if they do. Although that increase in the median retirement age may not sound like much, it typically shifts slowly; in fact, it took three decades (from 1970 to 2000) to fall by the same amount. The challenge now is to reverse that trend, but much more rapidly.

Well, quite a situation, eh? Yes, indeed, and they do a decent job of highlighting how unprepared and unaware so many current and would-be retirees are as to the challenge lying ahead of them. What about solutions?

First, they list quite a few measures that could be taken by government and by corporations to make it easier and more attractive to people to delay retirement. I think they are fine, but I seriously doubt they will happen quickly enough, if at all, to help many of us facing this today. I certainly wouldn’t count on it. I strongly encourage people not to assume that the nation’s powerbrokers are going to take care of them in the future. Given the economic difficulties faced in North American and Europe currently and the likelihood that they will not be overcome easily in a year or two makes that assumption not only dangerous, but foolish until we have clear evidence otherwise.

Second, I appreciate their suggestion that increasing the median retirement age from 62.6 to 64.1 (a year and a half), no easy task if history is any guide, would help, but I also note that even “tapping” their home equity leaves 31 percent in serious trouble. Folks, yes, there is a Retirement Bubble and, yes, it will collapse. That is what their comment says to me. Even if you and I avoid that and join the 69 percent, assuming their best-case scenario, we will all be negatively affected by millions of desperate and angry old folks. Not a nice thought.

Third, and this is the hopeful note, they also mentioned, The low savings rate and extensive liabilities of the boomers have left about two-thirds of them unprepared for retirement. We reached this conclusion by assessing the level of postretirement income and assets that the boomers would need to maintain 80 percent of their peak preretirement spending.

Okay, their study is based on that need for maintaining 80% of peak preretirement spending. I have read the reasons why they and others have chosen 80%. That is based on life in the US. Lowering that percentage, even by 10%, would have a dramatic impact. Lowering it by 20-30% would be a game-changer.

But how to do that? One simple approach is to move somewhere that offers a cheaper cost of living. As has already become popular in the UK and some other nations, and is now drawing increased interest in the US, many people choose to get expensive medical and dental work down outside North America and Europe. It’s called “medical tourism” and it is growing quickly. Why stop there?

In another article of mine at Barron’s in 2007, I described my US firm’s research indicating a growing trend toward increasing numbers of Americans looking at relocation outside the US, many in less expensive nations. A follow-up study we did in 2009 indicated that the financial crisis had surprisingly little effect on this trend. I suspect this approach may become more popular in the future as a means of lowering that 80% requirement. It’s one reason I live in Panama, although not the primary one (I just like it here!). There can be other suggestions as well that don’t require moving, but figuring out how to lower that 80% without taxing the rest of the population is an important topic and one that I expect to address here in times to come.

This report is obviously not “good news” to most people, I suppose. But it is, in at least one sense. Every serious attempt made to address the Retirement Bubble through research, not just emotions, is worth applauding.
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If you’d like a full copy of the McKinsey report, you have to register at their site. It’s free, but that decision is up to you. If you’re interested, just go here and fill in the information required on the right-hand side.
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Dan, a regular reader here at the blog, thoughtfully sent me a link to an interesting article by Virginia Postrel at a website called “Big Questions Online”. Titled, “Live Longer and Prosper”, here are some excerpts. Some may have a familiar ring to them.

[Referring to a columnist worried about the "“Floridization of America"] Buried in this column is a crucial assumption: that people over 65 will be retired. They’ll withdraw from active engagement with younger colleagues, from productive problem-solving, from the world outside their seniors-only enclaves. They’ll spend 20 or 30 years playing golf, watching TV, and chasing people off their lawns. They’ll occasionally visit the grandkids, but mostly they’ll wait to die. They won’t learn anything new. Even ignoring the question of how to pay for those retirements, that assumption makes neither economic nor psychological sense.

She adds a quotation from another source that gives us an indication of the economic impact of a simple change in retirement age.

“A two-year increase in the median retirement age over the next decade would add almost $13 trillion to real US GDP during the next 30 years,” argues a McKinsey Global Institute study titled “Why the Baby Boomers Will Need to Work Longer.” The alternative is a significant economic slowdown.”

In response, she comments,

Nudging the median retirement age up from today’s 62 to 64 might indeed do wonders for the economy. But to stave off psychological ennui, we’ll need to aim higher — to assume that, as long as they’re healthy enough, people will continue to work into their 70s. Just as we ask children, “What do you want to be when you grow up?” we should start asking adults (i.e., ourselves), “What do you want to be between ages 50 and 75?”

The point is not to make irrevocable plans, any more than we expect all those four-year-olds to become fire fighters or movie stars. It’s to change the pictures in our heads, to give up the images that “Floridization” evokes, as either a warning or an implicit ideal. People do not automatically become crotchety, backward-looking, and idle when they reach their 60s.

She goes on to discuss a couple alternatives, nothing all that surprising, but if I keep quoting her, I will end up republishing her article. It’s not that we necessarily agree on the best approach, but that is no surprise. There is no “best approach” for everyone.

The value in her comments is that she faces the situation squarely and does not mince words. She is quite right. We are not going to have a generation of retirees who will “spend 20 or 30 years playing golf, watching TV, and chasing people off their lawns.” That is not at all likely. For practical purposes, we should ignore it as an alternative. A few people (very bored and boring people) may pull this off, but it just does not compute for the overwhelming majority. The money ain’t there to support them and when the money is there some day (one can hope), we will have plenty of good reasons to spend it on other priorities more important than financing the Floridization of the US.

I salute Virginia Postrel for writing as she has. Like my article at Barron’s, it will reach only a small portion of the public, but every bit helps. If you read this blog long enough, you may feel that there is a lot being written on this topic out there. You would be wrong. It is still new territory for journalism. If mentioned at all, it is typically a sentence or two dropped into a much longer “old people are going to bankrupt us” article.

But there is more there today than there was a year ago and there will be more to come. I have absolutely no desire to be some kind of “voice in the wilderness”. The more people out here, the less wild it gets every day.

If you would like to read Ms. Postrel’s article, you can find it here.
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In these extra-ordinary times when nearly all global leadership is ordinary, at best, and as we no longer have a Cold War to focus us and provide some kind of “structure” to global affairs, people understandably react emotionally, rather than analytically. That’s why we have leaders, so we can go about our business without having to worry every day about what is happening “up there”. Well, that is not the case today. I am not referring to any specific leader, political party, or political philosophy. Blog readers come from several nations, but I suspect most of you understand what I mean.

This is particularly challenging for retirees and would-be retirees. Not knowing who to trust or what the future holds, and not feeling that there is anyone “in charge” who is straightening things out, folks in those positions are vulnerable to emotional whiplash. Since most of us have defined our lives and our retirements by the quantity of money we have, this worry takes center stage. It should be off to one side of the stage where it belongs, but it is right there, staring us in the face, and it is almost impossible to ignore.

As a result, I find myself, as well as others, frequently mesmerized by the “bouncing ball” of current events, markets, politics, and our life savings. Poll ratings go up and down, right along with the markets (stock, gold, oil, currencies, bonds, all of them). Plenty of folks are more than willing to make a buck off all this. Go out, make a prediction (the more dramatic, the better), then wait. If you get lucky and it comes true, you can really starting rolling in the money. If you are unlucky and wrong, never mind. Just blame someone or something else for your mistake and make another, even more dramatic, prediction. The predictions people will pay for are the most dramatic. If you are foolish enough to say, “Well, we’ll probably just see more of the same”, you can expect someone else to get the money.

Watching this all unfold on the political sites, the financial sites, the news sites and everywhere else can drive you crazy. Every day, the “bouncing balls” bounce again and again, and a ball is bouncing somewhere (probably several) at any given moment. Following the headlines on a site like MarketWatch or the Drudge Report can give you a headache.

This is especially bad for retirees who have nowhere to go each day. I know a number who sit in front of their computers and watch whatever bouncing ball interests them, bounce. Day after day. On weekends, they get together with their friends and discussing each other’s bouncing ball. When they are fearful of running short of money and determined to “bet” on which way their bouncing ball will bounce in the hopes of making a dramatic profit, this can become all-consuming. Sort of like a non-stop Super Bowl or World Cup where the game never seems to end.

In this day and age of shocking headlines, shocking attacks on others, shocking predictions of what is to come (all designed to make the “shocker” or the publication a nice profit), you can always find a variety of bouncing balls to follow. Getting too wrapped up in these bouncing balls is dangerous. Here are two particular problems that often result.

Some of us get so involved with “our” bouncing ball that we become the bouncing ball. I talk to folks like that. If their ball bounced up today, they bounced up too. If it bounced down, oh my, down they go. I know what “their market” did today almost as soon as I see them. Happy face? Up. Serious face? Down. They bounce right along with their balls. You can get hurt that way. Eventually, you may not bounce back.

Others refuse to look. They try to seal themselves off from all of the bouncing balls and do nothing out of the ordinary. Their problem is one I have mentioned before. They are not in denial; they are “in avoidance”. As a result, they are always threatened with being hit by one of those balls and taken completely by surprise. Being crushed by a bouncing ball coming down on top of you unexpectedly is no fun. Ask anyone who lost a pile in the stock market or real estate market, post-bubble.

What to do? If you don’t want to be caught off-guard by a falling ball, you can’t just avoid looking at them, but you don’t want to turn into a bouncing ball, yourself. So you do have to keep an eye on them. I do and it’s painful. The only way I have found to deal with it successfully, or as close to it as I can get, is to literally take time off.

Americans living in the US have a Labor Day weekend coming up later this week. Americans living outside the US and citizens of other countries won’t have a Labor Day weekend, but who cares? Go ahead and use it too, or pick a “three-day weekend” in your country, just don’t put it off forever.

Take this weekend and make a serious promise to yourself (and with your partner/family, if you have one). You will not read any article on any bouncing ball in any publication, on-line or off-line, and that includes Bob’s blog! None, nada, zero. But don’t just sit there. Plan to go somewhere and do something very different than what you would normally do. Why somewhere other than at home? To get you out of the ordinary, even if only for a half-day. Why something different? If it’s different, you have to focus on it. If it’s something you have often done before, it will not grab and hold your attention. You want your attention grabbed and held by more than ordinary life and bouncing balls.

It doesn’t have to cost you any big money. You can spend the day in a public park, whatever works for you. The idea is to separate yourself from all these bouncing balls and to do something different that interests you to give you a positive focus rather than just sitting, trying not to think, or just being “ordinary”. Something as simple as getting up in the middle of the night, heading out for a park or someplace apart from the ordinary, and sitting quietly, watching the sun rise can do it. I have done it and it really focuses the mind in a very quiet, but powerfully positive way.

We cannot escape the bouncing balls entirely. They are an omnipresent part of our lives these days. But we can pull our eyes off them and turn to something better, if only for a few hours or a day or two.

Oh, by the way, do you know what this is? It is the first tiny step taken on a Life Sabbatical. No big commitment. No tension. No goal-setting. Just doing something that interests you, but you have not taken the time to do before. Something out of the ordinary.

Take the time. This weekend.
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43 years ago in 1967, I was 22 years old. A few things happened that year that I can remember easily. The first was graduation from the University of Arizona. I remember no details. It was a necessary formality, but only a formality. It was also the year I arrived in Hawaii to begin training for Peace Corps. Some weeks later, it was the year I arrived in the Philippines to begin my Peace Corps service. I remember a lot of details. Peace Corps was a life-changing experience and a wonderful one.

But there is one other moment I remember. It lasted only a few seconds. Along with others in the movie theater audience, particularly those in my age group, I laughed at a single word. Why? Because that single word spoke volumes. Here it is:

Mr. McGuire (portrayed by Walter Brooke) is well-represented today, 43 years later. He may be a financial planner, a retirement planner, or he simply may be a retiree, among many possibilities, but he is here among us. His “word” may have changed (gold, oil, water, annuities, stocks, bonds, emerging markets, bio-technology, genetic engineering, and on and on), but the message is the same – it’s all about money.

But where is Ben Braddock (Dustin Hoffman) today? I’m sure he’s out there too, but not as many among my generation who laughed so easily, knowing what was really being said in that theater, 43 years ago. There is more to life than money. Money is important, but it is a tool, not a goal.

So who are you? Are you Ben? A retiree or would-be retiree who is trying to figure out how to get through the rest of his life? Are you full of questions and seeking answers beyond just money? Or are you Mr. McGuire? Do you “know” the one thing that will make the difference to your future and it’s all about money? Do you take people aside, the young perhaps, and share your “plastics” advice?

43 years and we still have a lot to learn. Sadly enough, my generation still has a lot to learn from itself. Money. A tool, not a goal.

There is no escaping the importance of money. The Life Sabbatical, after all, is a search for a new source of money. But it is much more than that and if you ignore the primary element of the Life Sabbatical, you do it at your own risk.

What element? Finding something you love to do and doing that. Even if it means a reduction in income from your last job (it usually does, especially at first), it is worth doing in ways that transcend income and deal with some of life’s real needs at any age: feeling good about what you’re doing; starting work with a positive attitude each day; growing personally and professionally while others stall out and decline; being proud of your accomplishments today, not just 20 or 30 or 40 years ago; looking forward, not backward.

There will always be people chasing that pot of gold at the end of the rainbow. And there will be others, creating their own rainbow.

So here is a thought for the weekend ahead. What is your choice? Is it all about “plastics” or is there a lot more to it?
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Readers write me from time to time and ask, why do you use three years as your suggested timeframe for a Life Sabbatical? Why not five or ten?” The choice of three years was completely arbitrary. If you prefer to take five (I do) or ten, that’s fine. But the great majority of folks I work with think in terms of one year. I call it “the tyranny of the calendar”.

So often, I hear people say, “By this time next year…” and then describe their goal. Folks, giving yourself only one year, even two, simply is not enough most of the time for most of us to accomplish anything really significant in a Life Sabbatical or toward any other major lifestyle change. It takes time. It took time when we were teenagers. It took time when we were in our 20’s and beyond. We may think we did it quickly, but unless we got lucky (and sometimes we did because we were eager to work and cheap to hire), it took us more than a year to make a major life change work for us, sometimes far more than three years, but certainly more than one.

I have discussed this in past months, but I am going to summarize it in one sentence today.

We need to give ourselves enough time to seriously investigate a new opportunity, fail, and still have time to begin a new search in a new direction.

That’s right, we need to give ourselves time to fail. Does that mean I think you will fail in your first try? No, not at all, but many of us will. It is just the human condition. If we give ourselves too little time, than the probability goes way up that our Life Sabbatical, for example, will end in failure, simply because we didn’t give it enough time.

Furthermore, in practice, I have seen many people struggle to get off on a three-year lifestyle change, but once they are on it, they enjoy it more than they thought they would and the length of time becomes far less significant. It’s the first steps that are the hardest and this is when most folks need to set their goal far enough ahead that they don’t start counting the weeks or days to the end of their sabbatical shortly after beginning. If you want to set a different timeframe, do it! Just make it long enough to allow you a second chance, if you need it. It’s all in your head, but that’s reality too.

So what about the “30″? What am I talking about? I have not stressed that much since I first wrote about it over a year ago in The 30% Solution. In brief, that concerns the question, “How much money should I be looking to earn from the results of my Life Sabbatical?”

Again, 30 is no more an absolute than 3. But I have met too many people who feel that they need to earn 75% of their former highest income or more when looking for a new future. Our society is so focused on money that to accept anything less in income just seems like we are giving our talents away for too little. It is that attitude that drives so many retirees to look for jobs in the same sector as they once worked, or for those planning retirement to choose to do the same work they have done before, but on an idealized “work when I want to” basis or the like.

If you love what you are doing or did before retirement, than why not? Actually, if you love it and are still doing it, why stop? Far be it from me to discourage you. But most people are tired of what they have done in the past, or are currently doing, and want something new. Great! But don’t expect to get the same financial return, especially when you are just beginning in this new field.. It seems like common-sense, but I am always surprised to find that many people somehow think their “salary history” is the key factor in their professional lives, not their “work history”. The latter can be adapted to many new fields, but the former is a reflection of an old status now left behind.

By setting a goal (you may begin by doing things for free as you learn) of 30%, two things can be accomplished. First, it gets you out of the trap of expecting too much when you offer too little in the beginning. Second, just like the three-year period above, a year or so into it and you will have a much better idea of what a “good” (as in “realistic”) income expectation is.

3 and 30. Just two numbers to help you get your head in the right place, not rigid rules that cannot be changed when there is good reason to change them.

Yes, I know that some of you are out of work right now and in trouble. For you, my “3 and 30″ makes no sense. I understand that. The Life Sabbatical is meant for people who think they have enough for retirement, but who do not want to risk being wrong years later when it is much harder to get started. For those who must look for more now, your Life Sabbatical will be something you do on those evenings and weekends when you have the time, while struggling to deal with a crisis. You will be laying a foundation for the full Life Sabbatical at a later date when your finances are more stable.

But for those setting off on the full Life Sabbatical, 3 and 30 can be useful guideposts on your way.
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I was reading an interview this morning in Australia’s Sydney Morning Herald with Tom Albanese, the chief executive of Rio Tinto, the mining firm. He made one statement that was a forecast for the next few years. He was discussing the high potential for extreme volatility in the mineral resource markets of the near future. “That volatility will lead to the need to be prepared for collective exuberance or collective despondency.” [my emphasis] Ah yes, how true, and not just for resource prices, but everything.

As some of you may have read elsewhere last week, we have a growing (and completely understandable) problem with 401(k) plans. As reported by CNBC…

A record number of U.S. workers are tapping into their retirement accounts to make it through the economic downturn, Fidelity Investments found in a survey released Friday. Among the 11 million workers whose 401(k) plans are run by Fidelity, 11 percent took out a loan from their plan during the 12 months ended June 30, the company said, up from 9 percent at the same point a year earlier. By the end of the second quarter, plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier.
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“People have been looking to their 401(k) plans as a source of relief to help them meet financial hardships,” said Beth McHugh, a Fidelity vice president who oversees the area. “For many individuals that is their primary savings vehicle.”

For many of these people, their “primary savings vehicle” for the last decade or so has been their job that supplied the money to save or their home where they “stored” their savings. With unemployment pushing 10% (or 18-20% if you include those forced into part-time jobs and those who have simply given up) and with real estate still in the dump (and not getting better, probably worse, as suggested in a summary of statistics at
Business Insider), we may or may not be shocked, but we certainly have no reason to be surprised.

Again as you may well have read already, this is not your run-of-the-mill recession. It is a “balance sheet recession” which is much worse. You buy stock, it loses half its value, you sell, you get half your money back, and you lose the other half. Do that in real estate and there is one big difference for nearly everyone. Your home loses value, but your mortgage doesn’t. The asset can decline in value without any warning, but the liability (the mortgage debt) cannot, unless you pay it off, or walk away, taking the credit rating hit. Thus, the “balance sheet recession”.

Call it what you will, it is a nightmare for far too many people today. Even for those unaffected, living in the midst of other peoples’ nightmares can be a very bad dream or worse, all by itself.

But this is expected, given circumstances. What hurts me is to sit across from someone who is still intellectually competent, in reasonably decent health, and who has a lifetime of experience behind her or him, only to listen to them dismiss all that and focus solely on the negative. They have no confidence in themselves. They don’t say that in words, they say it in their actions…or lack thereof.

Statistics are not important. You are one unique person or one unique couple. You already have a multitude of “bits and pieces” in your background that will help you build a much happier and financially secure future, but you don’t have all of them. The others are out there. You won’t find them reading Bob’s blog or a book, although they may help. You will find them by going out and looking for them. In the process, you will also discover those bits and pieces you already have which can be truly useful to your future. You are very likely going to be surprised, but there will no surprise for you, if you don’t get out there, look for them, and experience them.

So get out there. Let someone else deal with “collective despondency”.
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At Business Insider, Joe Weisenthal has written a brief essay titled, “Here’s The Depressing Reason We’re Never Going To Shrink The Size Of Government”. Here are a few excerpts:

Services performed by government are services rendered via some sort of central planning. Services performed outside of the government happen via social coordination, whether that’s a market system, or some kind of voluntary non-profit. Frequently non-government functions happen via both markets and voluntary coordination.

The problem is: That will take awhile, and pain tolerance seems pretty low these days, so it’s probably not going to happen.

Joe, I think I see your point. You buried it a little by talking about the “private sector” and “non-government sectors”. This is really about individuals, not sectors. Are we able to take care of ourselves? Good question.

Some us will have little trouble doing so, some will have much more trouble, some will be over-whelmed. Occasionally, someone visiting Panama will ask me what Panamanians will do if their economy tanks as America’s appears to be doing. I tell them, don’t worry. Panamanians had to survive Manual Noriega in the 80’s and the invasion required to remove him. Panama’s leadership and its household “leadership” still remember those days. If things go south again, they have the benefit of practice in survival. Indeed, that is probably the reason why Panama has done so very well while the rest of the planet has had to dig its way out of the hole it dug for itself. They didn’t dig one for themselves to begin with. They can say, “been there, done that, got the t-shirt” and they feel no need to repeat.

Young adults in North America and Europe will remember what we older folks are going through today (and putting them through in the process). They will be tougher than we are as a result of seeing and hearing our generation’s pain. They will feel no need to repeat our distress either.

And yes, Joe, I noticed “So for example, at one point caring for elders was the responsibility of younger family members. Dispensation of care was a private matter, and people knew how to do it.” It was indirect and probably unconscious, but whenever someone needs an “example”, we know where they will look. Just a nice indirect way of saying, “Look out, the retirees are going to crush us.”

Well, Joe, I wouldn’t worry about it too much. We aren’t stupid. We may be slow (but no slower than your generation), but we will come to grips with this reality and we will redefine “retirement” until we get something that works. The process of getting from “here” to “there” will not be a pretty one, but it is already underway. And for those coming up behind us, it will at least be one “gift” for them to help balance the pain.

Still, when all is said and done, you have made an excellent point, worthy of the attention of all age groups on both sides of the North Atlantic. We are all in this together and if it’s a disaster, we will have to deal with it together. We cannot expect government to do it for us.

And like it or not, painful or not, I have to believe you are wrong on one point. We will make it happen.
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Joe’s essay can be found here.
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Well, here we go again. Another journalist has discovered us, although at first glance it may seem otherwise. This time, it’s at the Wall Street Journal and, all day, it has topped the list of “most read” articles. It has a fun title, “Another Threat to Economy: Boomers Cutting Back “. Okay, Boomers are officially described by the Census Bureau as all people born between January 1, 1946 and December 31, 1964. In other words, everyone celebrating their 46th through 64th birthdays this year. I had my 65th, so I don’t quite make the cut.

“Boomers” include far more than retirees, right? Notice the segue in the first paragraph, confirmed quickly thereafter:

America’s baby boomers—those born between 1946 and 1964—face a problem that could weigh on the economy for years to come: The longer it takes for the economy to recover, the less money they’ll have to spend in retirement.

“We will have to learn to make do with a lot less in material things,” says Gary Snodgrass, a 63-year-old health-care consultant in Placerville, Calif. The financial crisis, he says, slashed his retirement savings 40% and the value of his house by about half.

Wow! That was fast! We went from boomers to “current and prospective retirees” pretty quickly, didn’t we? And who is our example? A 63-year-old health-care consultant. Oh well, two targets for disaster are better than one, I guess, but they don’t get equal attention here or for most of the article. Granted, the author (Mark Whitehouse) does mention in passing, But for many of the 36 million Americans who will turn 65 over the next decade—and even for the 45 million who have another decade to go… so the younger boomers at least get a brief mention.

Near the end of his article, after a list of scary statistics, Mr. Whitehouse does give a nod to even younger people, The impact isn’t limited to people on the verge of retiring. Younger people, too, will have to reduce consumption now to save enough money to get by in retirement. That’s nice of him, but did you notice how it all came back to retirement?

I appreciate people raising the seriousness of the situation facing us who are, or were, planning retirement and who are retired. It is a real mess for us, no doubt. I am the last person to disagree. But hold on. I can understand the focus on the next ten years, but the ten years after that, and the ten after that, and the ten after that?

Mark, the world changes quickly these days. We don’t always change as quickly as we should for our own sakes, but by the time those other “decades” reach retirement age (which may very well be much later than it is today, giving them even more time), much will have changed. So please, don’t worry too much about 25-year-olds. Retirement planning isn’t their challenge right now. Just paying the rent is enough for them to worry about.

Then there is the standard problem. The danger is pointed out in detail, but any positive response goes unmentioned. The only alternative to get any attention, delaying retirement by not quitting your job, gets dismissed.

Before the recession hit, many economists assumed people would solve their retirement problems simply by staying in the work force longer. Now, “the recession has blown that idea out of the water,” says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of a 2008 book that advocated working longer.

Just a minute. It may not be as easy as we would like it, but let’s not get carried away. Yes, he mentions that the over-65 employment rate has leveled off, even falling a little from 16.3% to 15.9%, but that small a drop doesn’t blow that alternative “out of the water”.

When I wrote my article on the Retirement Bubble for Barron’s, I used pretty strong language in the first half, but it would never have been submitted if I had nothing more to offer in the way of a solution than “you’re screwed”.

I referred to Megan McArdle’s article at the Atlantic as a “step in the right direction”, but this is not a step in any direction. It is a mish-mash of statistics, opinions, and confusion. The article should either have focused on boomers or on retirees, but not both. Actually, it is an article about retirees, current and would-be, partially obscured by the use of the word “boomer”.

in more than one way, it’s an attack. That was the first and last thing that irritated me with this article. Boomers (read “retirees”) who logically need to reduce spending just like everyone else are somehow a threat to the economy? To accuse us of being a threat to the economy because we are doing what we have to do (again, just like everyone else) is dumb. You might as well say that everyone who isn’t rich is a threat to the economy.

Mr. Whitehouse, has it ever occurred to you that it might be just as accurate, perhaps more so, to say that the economy is a threat to us?
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If you would like to read Mr. Whitehouse’s article, you can find it here.

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I am going to raise a topic today that I think is critical to those planning retirement or in retirement. I will try to do it briefly (for me!), but I definitely want to feel that RB blog readers are familiar with it. Yes, I discussed it some months ago and could just link to that, but this will be shorter and it will be right here when folks arrive and not require another “click”. I am referring to the difference between investment and speculation. It is not what you think it is.

99% of English-speakers define investment and speculation in terms of risk. Investments are supposed to be the least risky and speculations are supposed to be the most risky. Put that out of your mind for a few minutes (preferably forever). Let me present it as a series of “bullet” points:

- A speculation is something you purchase primarily for resale at a later date pretty much as it is (for a profit, you hope).

- An investment is something you purchase primarily to add substantial value to it for resale at a later date (for a profit, you hope), or for the income you can earn from owning it, plus the substantial value you have added.

- Purchasing a house for resale is a speculation. Purchasing land and building a house is an investment.

- Purchasing stock from an existing corporation by buying it from someone like you is a speculation. Purchasing stock in a start-up or an IPO (initial public offering) where the money goes directly to the corporation for investment is also an investment by you. 99% of stock is purchased by speculators, not investors.

- Is an annuity, for example, a speculation or an investment? A speculation is by far the most likely answer. You are adding nothing of substantial value and the people you buy the annuity from are probably speculating in markets to get the money to pay you (or fail to get the money to pay you). If they are using your money for a genuine investment, you already should be clearly aware of that (government regulations require it) and the specific investment(s) they are making. Otherwise, it is a speculation.

- Which has more risk? Well, which do you think is riskier, the purchase of stock in McDonald’s (a speculation) or your creation of a new fast-food franchise business (an investment)? Assigning a risk level is not the way to define the difference. Risk is a separate variable and is equally important in both investments and speculations.

- The overwhelming majority of today’s “small investors” are small speculators, but you can’t tell them that. They panic because they can’t break away from their mindset that a speculation is much more risky than an investment. No broker of any product is going to be in business for long if they present their products to clients as speculations. They know that. They act accordingly and appropriately to their need for your money.

- The strength of speculating is that someone else does the work.

- The weakness of speculating is that the future results depend on the actions of others over whom you have no control and little (usually “no”) influence.

- The strength of investing is that you control the investment and can make changes when necessary to satisfy your market.

- The “weakness” of investing is that you have to do the work.

- Both speculating and investing are perfectly legitimate ways to try to make money, but you need to know the real difference and take that into account.

- If you read a list of the wealthiest people, beyond those lucky few who inherit, you will read a list of investors, not speculators. Yes, some speculate now with their surplus money, but it was investment that brought them that surplus originally. Even inheritors typically inherit their money from investors.

You can read this in somewhat more detail at my commentary of a year ago, The Adventures of Tom and Jerry.

You are your own stock. You are your own real estate. You are your own commodity. You are truly your own annuity. It is not just about money, it is about you. Learned any new skills recently? Taken on any new challenges that require your personal and professional growth? Are you investing in your future when you have some control over the investment or are you speculating in your future and becoming ever more dependent on the actions of others, the “kindness of strangers” as I like to put it?

If you are a traditional retiree of the late 20th century or planning to do the same, in two, five, ten, or however many years in the future when you realize the probability that you will live longer than you thought before hits you, around the time you realize you don’t have enough money to deal with it, what will you see when you look back on those years? Will you be thankful you invested in yourself when you had the chance and now have new skills and experience to offer others? Or will you simply be old, with an old out-of-date resume?

Take your mind off money and ask, am I investing in myself? Tell others what you want to. Be honest with yourself.
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