The Retirement Cage – 3 reasons to get out!

The Hutch Report

In order to understand retirement and what it means to you, it is necessary to understand where it comes from and why we even have retirement.

Otto Von Bismarck was the Chancellor of Germany back in the early 1880s. During his tenure he encountered a problem.  Marxist unrest was spreading across Europe and some of his own countrymen started calling for socialist reforms. In order to avoid the potential for more radical reforms Bismarck concocted a social insurance program that was unique and had never been seen before,  wherein the national government would contribute to the pensions of nonworking older Germans.

Bismarck announced the idea in 1881, and along with the German Emperor William the First, the pair made their case to the German Parliament (Reichstag), that “those who are disabled from work by age and invalidity have a well-grounded claim to care from the state.” Germany initially chose 70 as its retirement age, and didn’t lower it to 65 until long after Bismarck was dead. The choice for the age of eligibility was actually more of a clever cost-saving measure: it closely matched the average German life expectancy at the time.

In the US, during the Great Depression, elderly Americans rallied behind Francis Townsend, a physician who proposed a government-funded pension plan that would send $200 a month to all citizens over the age of 60 (enough for a comfortable middle class lifestyle) and require them to spend the entire check within 30 days of receiving it.

In 1934, thirty states had old-age pension laws. In about half of those, retirees aged 65 and above were eligible for aid. In the rest, the minimum age was 70. President Roosevelt thought Townsend’s proposal of 60 was too low (and that the whole plan was fiscally irresponsible) but felt that 70 was too extreme, so he pushed for the middle path. When the Social Security Act passed in 1935, it specified 65 as the age at which retirees could receive full benefits. So it was essentially a compromise.

Life expectancy in the 1930s was 58 for men and 62 for women, which suggested that most wouldn’t even live long enough to collect their first Social Security check. According to studies conducted by the World Health Organization current life expectancy levels in the US are 76.5 for men and 81.2 for women.

So now we know where the idea comes from we can look at some of the problems that have evolved.

The Money is Running Out

This is the new Economy and not everything is as it seems. For years, State and local governments have waved generous retirement benefits in front of workers. The workers accepted these offers without stopping to wonder if their state or city could keep its promises when the money came due. Although state governments have many powers, creating money from thin air is not one of them. This is only a power that is granted to the Federal Government. Now that the bills are coming due, the state’s’ inability to keep their word is becoming obvious. The fact is, many of these pension plans are now “underfunded.” This underfunding dilemma can be faced by any type of defined benefit plan, private or public, but it is most acute in governmental and other public plans where political pressures and less rigorous accounting standards have resulted in excessive commitments to employees and retirees, but inadequate contributions. Many states and municipalities across the country now face chronic pension crises.

Illinois is, at the moment, the worst offender and the poster child for what can go wrong. However the problem of public pension programs being underfunded is not confined to Illinois by any means. Other states are in almost as bad shape and thousands of cities and counties also have underfunded pension plans. Some estimates place the national shortfall of state and local public pension funds at about $1 trillion but that is an optimistic view.  A more pessimistic, or realistic, view, places the shortfall closer to $5 trillion. If that higher number is correct, which depends on assumptions about expected future rates of both funding and investment returns, the unfunded pension liability of state and local governments is equal to one quarter of the national debt. Under these more realistic/pessimistic assumptions, Illinois would be over $610 billion short on its pension funding, an amount equal to almost seven years of all state revenue.

To make matters worse, we are living much longer than pension systems were designed to support. The number of years of retirement income that had to be paid in 1960 was about five to eight years of payments, on average. Looking at life expectancy in 2017, we can see that pensioners are already living eight to 11 years longer – and in the case of Japan, the number is as high as 16 years longer. What this means is that pension systems are now having to pay benefits for two to three times longer than they were designed for.

There are three main sources of income during retirement: government-sponsored pensions; work or occupational pension plans; and personal savings. However, because we are living so much longer these days, the gap between savings and what will be needed during retirement is widening, even in countries that have the best-developed pension systems. If your savings account balance is looking sad, you’re not alone. According to a 2016 GOBankingRates survey, 80% of the baby boomer generation, those coming up on retirement, have less than $10,000. 69% of Americans have less than $1,000 in their savings accounts. What’s more, 34% have no savings at all.

Psychological Effect of Retirement

So now we have determined that relying on a fat pension and savings for your retirement is not the best option. To add to the pain, the actual concept of retirement has in fact been the cause of a variety of psychological effects among retirees. According to a new report released by the Institute of Economic Affairs (IEA), following an initial boost in health, retirement increases your risk of clinical depression by 40 percent while raising your chances of being diagnosed with a physical condition by 60 percent. It also: Reduces your likelihood of being in self-reported excellent or very good health by 40 percent and raises your risk of taking medication for a diagnosed physical condition by 60 percent. The study’s author, who called retirement’s impacts on health “drastic,” suggested a later retirement age may actually be preferable, noting: “New research presented in this paper indicates that being retired decreases physical, mental and self-assessed health. The adverse effects increase as the number of years spent in retirement increases.”

In conclusion, retirement is not actually the “Golden Years” of enjoying life that the marketing of pension funds and plans have always made it out to be. Having a purpose in life is essential. Work, to many of the population is part of that purpose. Take that away and you are actually taking a piece of your life away.

The World Changes

So if you hold the mindset that you can start to enjoy life or travel when you retire and see the world, you may find that you have waited too long. Your physical health may not permit you to do all those things that you had planned throughout your life. You may not have the same motivation or energy level to start ticking off all those things on your bucket list.

The world changes and is forever changing. The twenty-first century began with the invasion of Iraq in 2003 and the global financial crisis of 2008 – with regional, economic, and political instability spreading to many parts of the world. From a financial meltdown in Iceland to political crisis in Brazil, from the destruction of Yemen to the dysfunctional birth of South Sudan, from the rise of nationalism and of religious fundamentalism, to the weakness of international organizations, the last few years have been ripe with new crises. These crises cause the destruction of what were once peaceful nations and force the migration of people to other lands which in turn cause additional economic pressures.

You may have dreamed of seeing Egypt but were waiting for retirement to experience the wonder of the Pyramids, one of the 7 wonders of the ancient world. Well, since the Arab Spring, Egypt may no longer hold the same charm that it did 30 years ago when you talked about your retirement dreams. This is one example of many. Hong Kong has been handed over to the Chinese, China has undergone radical changes, Venezuela seems to be on the verge of a failed state and Syria has been pretty much bombed to smithereens.

Don’t expect to have a perfect situation waiting for you in the future where you are suddenly going to be able to pickup and takeoff to experience all the things you always dreamed of. We have provided three strong examples which clarify why we believe this. This makes for great marketing copy but it is far from the realistic view that we are seeing. Don’t plan for retirement, plan for life and life doesn’t happen after 65, it is happening right now. Live your dreams now, not later.

So, with that, we leave you with this famous quote that has been falsly attributed to John Lennon around 1980:  (In fact, the general expression can be traced back more than two decades before this time. The first known appearance was in an issue of Reader’s Digest magazine dated January 1957. The statement was printed together with nine other unrelated sayings in a section called “Quotable Quotes.”)

“Life is what happens to us while we are making other plans”— Reader’s Digest

The trouble is most of us don’t realize this except in retrospect and then life has already happened. Don’t make the same mistake.