There is a belief that we should know exactly how to plan out our finances for the future. We should know exactly what it’s going to take to be able to pay for the lifestyle that we want in retirement. A retirement that now likely lasts into our 80’s or 90’s. The fact is that a lot of this is based on theory and not on a wealth of experience. We will look at why we are still learning how to plan for our future in this week’s blog post!
It was not that long ago that most Americans did not even live to see a long retirement or any retirement. Before World War 2 most people worked until they died.
The US Census Bureau classified that more than a quarter of Americans living over the age of 65 were impoverished as recently as the late 1960s.
There is also a widespread belief that everyone used to have a private pension, but that is simply not the case. The Employee Benefit Research Institute explains that only a quarter of those who were age 65 or older had a pension income in 1975. Among those people, only 15% of household income came from a pension.
As someone who has worked in this industry for years, I was surprised to read these numbers in Morgan Housel’s book, The Psychology of Money.
As recently as the year 1900, male life expectancy in the United States was only in the 40s. Men did not have a life expectancy above the mid-60s until 1950.
If our expectation is that the retirement age is 65. It was not expected that men in this country would actually see retirement until the 1950s.
This does, at least in part, explain the issues that we have today in trying to plan for our future. We have never had to plan for it before.
When you hear about the arguments over Social Security, we are talking about a system that was designed during a time where people living into their 80s and 90s were the exception and a rare one at that.
It may not be the expectation for people to live into their 90s these days, but it is not all that surprising either. We must consider how this affects our planning moving forward.
That which has worked in the past, may not work in the future. Financial Planning is an ever-changing landscape. Even the beliefs from 10 to 20 years ago (in terms of portfolio design and income distribution rates) have changed significantly.
The tools that we use today, to plan for the future, only came into existence in the last half-century.
In 1978, Congress passed The Revenue Act of 1978 in which Section 401(k) cleared the way for the establishment of defined contribution plans. The idea was employees would be able to contribute their own money in a tax-advantaged way to an account to supplement any other retirement benefits they had with tax incentives for the employer to also contribute.
The Result? Over the past 43 years for the typical U.S. employee, the responsibility for developing a sustainable retirement income has shifted from the employer to the individual.
The ROTH IRA was only introduced in 1998. Which means it was introduced after my oldest child was born!
Now throw on the facts:
- Healthcare costs are skyrocketing.
- The cost to send our kids to college is spiraling out of control.
- The already mentioned longer life span.
You can see that we have several obstacles to overcome with tools that we don’t have a long history of using to navigate.
We also have a host of other factors that will affect the markets and our planning moving forward.
We have historically low-interest rates currently.
We have a new wave of retail stock traders affecting the market (see the recent Gamestop craziness).
We have greater political uncertainty in our country, although more normal than a few months ago than we have had in quite some time.
Whether or not these conditions continue is really anybody’s guess. However, they do have a real meaningful effect on financial planning moving forward. It is essential that anybody who is doing financial planning, whether for themselves or for others, stay on top of the latest information and research how to deal with the upcoming situations.
Everything that we have designed in financial planning and portfolio theory, up to this point, is really based on what would have happened if we would have had a bunch of people living into retirement. Based on looking backward.
You cannot drive a car looking in the rearview mirror. We cannot automatically assume what would have worked in the past will work in the future. We have never had this many people retiring, living into their 80’s and 90’s and under this set of economic circumstances.
All of this can seem daunting. We live in a world that changes faster and in greater magnitude than ever. At times it is overwhelming and can cause us to react too quickly to the news and at other times paralyze us into inaction with information overload.
Give yourself the grace to make mistakes in trying to figure it out. We are all on a crazy ride together. Just know that to do all this correctly will take effort and perseverance on your part. You can do this alone, but you don’t have to. As always please feel free to reach out if I can be of any assistance in helping you navigate these turbulent waters.