The Retirement Crisis Is Overblown?

Yahoo has an article up that says the retirement crisis is way overblown. The short version from experts cited in the article is that the narrative simply does not show up in the Social Security Administration data and thus is incorrect. 

Chances are that the audience for this blog and plenty of other advisors and their clients may not have a great grasp of what the real story is, I certainly don't feel any great insight into the truth. One observation I have made in the past, albeit with a limited sample size, is that one way or another, people make it work because they have to, there is no alternative. 

Someone who is very undersaved versus where they should be at their age reasonably would view it as a crisis, someone who is on pace or ahead of the pace may not see it as a crisis. 

The comments on this one are worth reading. One reader suggested stress testing your numbers based on the following.

• Stock market decline of 20-40%

• Housing crash of 20-40% of value

• hyperinflation of 10-40% (depending on product)

• Loss of valuation of the dollar by 20-40%

Could your plan withstand all of these, he asked? He painted a very rosy scenario for his particulars and said that he is not totally in the clear against all four.

The idea of stress testing is smart but I am not sure I would use the reader's list. If you still believe in American capitalism (I do), there will be bear markets in our future but markets will recover over some time period. All you need to do is not panic. Stress testing or mitigating an adverse sequence of returns in your first couple of years of retirement as we discussed the other day is useful though. 

Would a decline in housing prices impact your retirement? Some people will say yes but some will say no. My hope at 59 is to be able to stay here until the end or at least until we are very old which might mean 30 years. Our house is paid for so I'm not sure what the impact would be if the number on Zillow went down a ton. Again, for some people it will matter.

The US issues debt in its own currency so true hyperinflation is off the table but a real problem with price inflation is certainly feasible. Price inflation has been a problem for several things for awhile, most notably for us with homeowners insurance and health insurance. I bought a sleeve of 18 hamburger patties at Costco and I was stunned that it cost $29. Where you have noticed unreasonable price increases, where is your ceiling? Is there a point you would go without? If we went without homeowners insurance, I would invest money to make our fire suppression setup more robust. We have a 2500 gallon tank, some hose and a nozzle. If at some point insurance becomes a problem, I might get another 2500 gallon tank, an inline pump and some rainbird sprinklers for example. That's more about planning I guess than stress testing. 

I don't think the dollar could go down by that much but something nasty that causes pain is feasible. Owning gold is something that should help, I say should but that is not assured. The idea of a dollar devaluation seems to tie in with a bad things happening with price inflation.

I would add to the reader's list to stress test not a crash in stocks but more like a prolonged malaise where markets compound at a much lower rate than "normal" and I would stress test a large cut to Social Security which we've talked about several times before. 

Here is a theory about Social Security being cut that I thought of today. Using my numbers, at 59 now, my age 67 amount is $3849/mo in today's dollars. I am slated to get that amount in 2033 if I took it at that age. Between now and then, that number will get inched up every year by some COLA amount. To make the example simple, assume that for the next eight years until I am 67, the COLA compounds at 2.5% per year. That would take $3849 up to $4251. Applying a 23% haircut to what would be $4251 would mean getting $3273/mo. Yes 23% from $4251 but only 15% from what my number as of today. 

Ok, so there's probably some mental accounting in there but a 23% cut wouldn't apply to the number you see on your statement today.

We talk regularly about what I think could be thought of as a different type of stress test. What happens if your Plan A simply unravels because your hand is forced at work any number of any other things that might be relevant. 

I've framed this as having a timeline for my Plan A which really only involves taking Social Security at 70 and continuing to work, I like my job and don't intend to retire. One thing that could derail anyone's Plan A is that they have a change of heart, they just decide that whatever they had in mind is no longer for them. I've seen this some with fire acquaintances trying to figure out what comes next. I know one or two people with Federal jobs who thought they'd still be working but now they don't know. 

We have talked before about thinking in terms of getting to the next milestone, can you make it to penalty-free IRA withdrawals if there is some sort of job problem, then could you make it to early Social Security at 62? After that I suppose age 67, if that is your full retirement age for Social Security. Sixty seven may not be relevant if someone's Plan A is to take SS at some earlier age. 

Between having a problem at work (if that happens to you) and being able to execute whatever you have in mind for Plan A is a time period to be reckoned with. Maybe that's between 60 and 66. For me, that would be between 59 and 70. Assuming all continues to go well, the time period obviously gets shorter and the potential problem gets smaller. 

Smaller problems is a big motivation for me which is why so many of these posts focus on figuring these things out early on. Part of my idea of financial independence is being able to weather a job loss. One firm I was at got shut down and you know I don't know how lucky we were or not to land somewhere else right away. Maybe we were very lucky or maybe it was no big deal, I don't really know but my wife and I would have been far from desperate if it hadn't worked out. That's not about being loaded, we're not, we're pretty comfortable. The form of financial independence I am describing is about planning, putting in some effort and living below our means which are all things that most people can have some control over.