If you’re depending on social security or a traditional pension plan to pay for your retirement, chances are you’ll need to work until you die.
The Social Security Board of Trustees projects that the Social Security Trust Fund, which currently has $2.8 trillion in reserves, will run out by 2035. Unless Congress makes some painful adjustments to the program soon, payroll taxes will only finance 80% of promised benefits. In other words, social security recipients could experience an instant 20% decrease in benefits beginning in 2036. That’s only a little over 16 years away.
But what happens if the number of workers paying into the system starts to fall? The Pew Research Center predicts the number of working-age Americans (age 25-64) will increase from 173.2 million in 2015 to 183.2 million to 2035. But many of them could be unemployed or underemployed, further straining social security funding.
Blame technology for this emerging trend. Researchers at Oxford University estimate that a stunning 47% of US jobs could be automated within the next 20 years. By 2035, restaurants will be staffed primarily by automated servers. Hotels will be equipped with electronic self-check-in systems and robotic butlers. Middle managers, sales agents, writers, bookkeepers, and even doctors will be replaced with robots. Millions more people who make a living driving a vehicle could find themselves replaced by self-driving cars and trucks.
Thus, it’s likely Social Security will be insolvent well before 2035. Indeed, the non-partisan Congressional Budget Office projects an insolvency date of 2029.
The news is just as bad, if not worse, for “defined benefit plans” that are meant to pay guaranteed benefits for life post-retirement. Unlike social security, the money you pay into a defined pension plan is supposed to be saved, invested, and then paid out to you.
But it doesn’t always work that way. Take United Airlines, for instance. In 2002, the company filed for bankruptcy. Three years later, a bankruptcy court gave the company permission to terminate its pension plans. The plans were taken over by Pension Benefit Guaranty Corporation (PBCG), a federal agency.
A few years later, I had a consultation with a retired pilot who had worked for United for more than 30 years. He had been guaranteed a pension of $120,000 annually when he retired. But the maximum pension benefit PBGC can pay is only about $60,000 annually. His pension benefits fell by half.
Defined benefit plans for state, county, and municipal government workers are in even worse shape due to an explosion in unfunded liabilities – payments that governments are obligated to make to retirees but don’t have money set aside for. In 2017, unfunded liabilities reported by these pension systems came to $1.28 trillion. New Jersey, for instance, only has about 36 cents available for every $1 of pension obligations.
But the real gap is much larger, perhaps as much as $6 trillion. That’s due to the promises politicians made to government workers for guaranteed pension growth, along with unrealistic investment projections. Most funding formulas for these funds presume an average annual growth of 7% or higher. This assumption significantly lowers the tax dollars that need to be collected to fund the plans.
Unfortunately, most public-sector pension plans don’t generate average returns nearly that high. CalPERS – the California Public Employees' Retirement System – is a great example of this reality. America’s largest pension fund, CalPERS projects an annual return of 7.357%. But over the last 10 years, CalPERS generated only a 4.1% average return.
To see a picture of the future for America’s government pension plans and how they’ll be funded, look no further than Detroit, which declared bankruptcy in 2013. Retired city workers were forced to accept a 4.5% cut in pension payments, an end to cost-of-living adjustments, and no health insurance benefits after retirement. In the end, Detroit’s bankruptcy wrote off $7.8 billion in pension and health insurance obligations to retirees.
It’s no wonder why working has become the new retirement. The highest proportion ever of Americans over 65 are still in the work force – nearly one in five. The number of senior workers has grown far more quickly than other age groups. In 2017, nine million seniors were working, more than double the number in 2000.
There’s a final nail in the coffin for traditional retirement planning. Biotechnology promises to significantly boost lifespans in the years ahead. Pension administrators have all failed to take the high probability of longer lifespans into account when calculating the long-term viability of their funding models. But they should, because medical breakthroughs promise significantly longer lifespans in the next few years.
In my own retirement planning, I’m counting on living to 100. And I don’t want to run out of money at age 95.
But will you really need to work until you die? If you don’t want to, you’ll need discipline and strategies to generate income and cut expenses without affecting your quality of life. Once you’ve saved at least 25 times your annual expenses, you can probably retire. This figure assumes you can generate safe and consistent annual returns of 4% (i.e., the amount you’ve saved divided by 25). That’s not as easy as it once was, especially with falling interest rates. Saving 30 or even 35 times your annual expenses lowers the return you’ll need to live off your savings the rest of your life.
You can deduct the amount you earn working or receive from social security or a pension from the annual income you’ll need to finance your retirement. But you should consider the possibility that these income sources won’t continue to pay out indefinitely, at least not at current levels.
You can also reduce the income needed to sustain yourself in retirement if you can cut expenses. The biggest expense for most of us is housing. On average, Americans spend about one-third of their after-tax income on housing. In high-cost cities like San Francisco or New York, it’s even higher – as much as 50% of after-tax income. One obvious way to reduce housing costs is to relocate to where it’s cheaper to buy or rent a home.
Another way to save big is in transportation expenses. Most middle-class families in the US own two vehicles – sometimes more. With low-cost transportation alternatives like ridesharing and car-sharing apps, it’s easier than ever to become a one-vehicle – or even zero-vehicle – household.
Finally, a fundamental strategy to reduce spending is to eliminate debt. The higher the interest rates you’re paying on borrowed money, the better an investment paying off that debt represents.
What should you invest your savings in? The mainstream financial press loves stocks, and it’s easy to see why. Since 1871, the US stock market has generated a compound annual growth rate of 9.2% annually. Adjusted for inflation, the return would still be about 7% per year.
However, stock prices are volatile, and with the American market trading near all-time highs, buying stocks now is a riskier investment strategy than it would have been at the depths of the last recession. If you’re relatively young and have a long enough time horizon, though, stocks have always been an investment winner.
If you don’t mind a more hands-on investment, rental real estate is another excellent option to consider, with annual returns of 5% or more. But property prices in most of the US are also at or near all-time highs.
The trends that are forcing older Americans to work well past the age they would otherwise retire aren’t going away. Indeed, they’re getting worse. But if you can safely retire by saving 30 times or more your annual spending. The biggest risk, of course, is that you’ll run out of money. But the benefit is that you’ll be able to focus on things that are important to you and those you care about – not just keeping up with the Joneses.
