Picture the scene: My wife has a group of friends visiting. I come home from work, greet everyone, and have a glass of wine to be sociable. At some point I announce that I’ll retire to my study for the evening. What does that verb mean – to retire? It means to go away or apart; to withdraw; to be in a place of privacy or shelter. It can also simply mean that I’m going to bed for the night. It isn’t until about three generations ago that the definition expanded to mean cessation of paying work. Before that, for all of human history, people simply worked until they could no longer. Retirement, as we currently think of it, is a relatively new concept. When extended families lived together on the farm, everyone worked and contributed in some way. When the same families moved to the cities at the beginning of the last century, it was the same way. So how did our current concept develop?
You mean I’m not working but you’ll still pay me?
During WWII, the government imposed wage and price controls. So if I was making widgets at XYZ Company, what would induce me to move to ABC Company? It couldn’t be a higher salary – that was illegal during wartime. But it could be a pension – ABC Company could promise to continue paying me for years after I’d ceased working there. It was in this way that the defined benefit pension came into popularity, and continued through the last generation.
Rise of the 401(k) in retirement
Private industry has moved away from the pension in favor of the 401(k) arrangement. This is a sea-shift in retirement planning. In the former, the company, in effect, said that it would assume the risk of providing for a worker’s retirement. In the latter, the company says that you’re on your own – the responsibility lies squarely on you the individual to fund your own later years as you see fit. I don’t see this as an issue of right or wrong – it is simply as it is. Now, relatively few private employers provide pensions. The entire airline industry took itself through bankruptcy to shake off the expensive obligations of these plans. Now private industry focuses on the profit sharing plan with 401(k) arrangement – where the worker has incentive to assure the profitability of his employer, and can also choose to defer into his own account. It is pretty much only governmental employers who still widely offer defined benefit pensions.
What about Social Security?
Social Security remains an important benefit for anyone contemplating retirement. For someone with a retirement lifespan of 25 years, using a 6% rate of return, the present value of a $2000/month social security benefit is $311,966! That is significant. And yes, I do believe it will be there in some shape or form for those in the workforce today. There is zero political will to reduce benefits in any way. Watch my YouTube video, Will Social Security be Around When I Retire?
So now back to the beginning: what does it mean to retire today? At a social security retirement age of 66, living another 30 years is not uncommon – in fact, it is becoming common. So from the point of view of financial planning, Can I afford to retire? is not the most relevant question. Instead ask: Retire to what? This is the question that more fully addresses what could be the most enjoyable and productive 30 years of anyone’s life. It is our hope at CameronDowning that our clients will have taken the bull by the horns, as it were, and provided for themselves in their later years. Would you like to retire to the University to attain that advanced degree? Or retire to extensive international travel? Or retire to a life of good works in the community? An exciting retirement can await anyone who plans properly.
Questions? Shoot us an email: [email protected] Also visit the CameronDowning website, where you can see all of our blog posts, and make an appointment to come see us.
— Glenn J. Downing, MBA, CFP®
*Photo by Chris Potter