Retirement: 1950s and Now

http://www.cbsnews.com/news/vital-retirement-lessons-from-the-1950s/

Here’s just one example of the modest resources many retirees had to get by on: In 1950, the average Social Security benefit was $29 per month. In 2012 it was $1,262. In 2012 dollars, that $29 translates to about $280, which means the average Social Security benefit in 2012 is worth about 4.5 times the average benefit in 1950.

The Millionaire Next Door suggests that kids given cash by their parents are less likely to earn and save than kids given nothing.  What about social security and government benefits?

My grandfather’s situation provides a good example of how people retired at that time. He worked for 30 years as the superintendent of schools for the local school district. He retired at age 64 with modest savings, a small Social Security benefit and a paid-for home. In his later working years, he started a cottage-industry educational-supply business that he continued running well into his retirement years. He earned needed income from that business until he couldn’t continue any longer at age 75.

He passed away at 86, so his full-time retirement lasted just 11 years, longer than the average retirement in that time, which was eight years for men attaining age 65 in 1950, according to a report from the Stanford Center on Longevity.

Social security seems like a really bad deal.

http://www.reuters.com/article/2012/10/18/us-column-miller-socialsecurity-idUSBRE89H0YG20121018

A single-earning couple with medium wages, born in 1943, will see a 4.59 rate of annual return, while a single female born the same year – also with medium wages – can expect a 2.49 percent return. (Spousal benefits are also available in cases where a lower-earning spouse had some earnings but so much less that their worker benefit is less than half.)

The odds here are especially good for women, since they have a higher likelihood of surviving to retirement age and longer lives after retirement. That gives them higher rates of Social Security return – a medium-earning single female born in 1943 can expect a 2.49 rate of return compared with 2.09 percent for her male counterpart.

And it rewards people for less effort/productivity.

–Lower-income workers come out ahead. Low-income workers enjoy higher rates of return by design, because Social Security’s benefit formula is weighted toward lower-earning beneficiaries and their payroll tax contributions will be relatively lower. A very low-income couple born in 1943 will receive a 6.79 percent annual return, compared with 3.92 percent for their high-earning counterparts.

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Payday. “Back to Zero” Day.

In the past, I’ve always been kinda non-plussed about the paycheck that happens near the beginning of a month.  Most of this paycheck goes to pre-existing obligations: housing, bills, etc.  The second paycheck was *way* more exciting.  No house payments!  Wooo!  Free money!  Except for those times when I spent a bunch of money in anticipation of receiving the second paycheck.  Then the second paycheck was boring just like the first one.

These days, every paycheck is boring.  Essentially for the same reasons.  I’ve spent all my money in anticipation of being rich later.  In the short term, I’ve spent all the money in anticipation of paying off my mortgage in 2 years.  The other day, I calculated that based on what I spend, my salary is about $60k, the same salary I started with in 2007.

[Note: after I pay off my mortgage, I’ll be able to live on the equivalent of a $41k… that’s some pretty cool flexibility.]

I was speaking on the phone w/ a friend the other day, trading financial sins.  He told me he used the cheap ATMs when he was running low in his bank account, because they don’t really check the balance, so he’d be allowed to overdraw his account.  The bank reorders the transactions to maximize the number of overage charges.  He’d call the bank and negotiate them from $150 to $60.  What a win!  Then he’d go and get a payday loan to cover it.  So his paycheck would be $300-$400 less when it came in.  That reminded of a Facebook post by another friend who asked if he should take out a payday loan.

I’ve never taken out a payday loan, but I’ve been in the same situation.  I vividly remember calling USAA one Christmas and complaining to them about a hold that was placed on my money (that cause my balance to be too low).  They reminded me I could get $2000 cash from my credit card… so of course I promptly maxed that out.

This morning, my checking and savings accounts added up to $5700.  My Edward Jones account outside my IRA is $10k.  That’s more than I’ve ever had in these bank accounts.

The Reality of Old Age

My grandfather was a surgeon.  My mom was a nurse.  My stepfather is a physician’s assistant.  All of these people have said they don’t want too many life-saving measures in their old age, because they’ve seen the suffering and waste that happens when we fight against the inevitable.  They’ve learned to value quality over quantity of life.

A friend in college became a nurse.  She posted this today.

This scenario is so commonplace I could scream: Nursing home won’t address pain adequately (i.e. with something stronger than percocet/tramadol) AND refuses to give more tramadol citing the metabolite build-up and cognitive issues. Is also requiring that a cognitively impaired/delirious pt ASK for pain medications before administering them, as they are PRN. Wants to shove patient onto hospice because they can’t be bothered to do their job. We scramble to accommodate a patient in the throes of an acute existential/spiritual crisis, with uncontrolled pain and delirium. I’m sorry to trash facilities like this, but it happens all the time. This is healthcare in America. Eat your vegetables and stay active–it may be your only shot in hell of avoiding this nightmare in your old age.

This is the reality of old age.  We need to be aware of it.  We need to prepare for it.

The Daily Grind

On weekdays, my schedule consists of:

  • Wake 6AM
  • cereal
  • shower
  • coffee
  • work
  • walk at lunch (listen to books)
  • work
  • walk after work (listen to books)
  • ~7:30PM dinner, TV, reading
  • 10PM bed

There’s nothing terribly expensive about this lifestyle.  Weekends are more or less the same, but the work time is replaced by reading, blogging, video games, and TV.  There’s nothing particularly expensive about the lifestyle.  Now that I have it written down, it’s clear that I need to cut back on some of the TV so I can focus on other goals (comedy, investment learning, product development and sales).  Those shouldn’t be too expensive.

It’s hard to be funny when you’re tired.  I have an obsessive personality, and it’s hard for me to deliberately change gears from the flavor of the month to anything else.  Right now the flavor is financial planning and increasing income.  I’m on a 1-2 year cycle.  Usually about a year after I start something, I begin to sum up its limitations.  At 2 years, I getting really nervous that I’m stuck in a rut (“a rut is a grave with the ends punched out”), so other opportunities start looking better.  I was contacted by Apple yesterday for a position there.  I’ve been contacted by recruiters from nearly every major tech company in the last few years (and many minor ones also).  It’s a position I take for granted.  The privilege of being young.  But I know in the long run it goes nowhere.  I’ve seen older engineers, employees for life.  It’s not a bad existence.  But there’s no soul in it.  All the passion and joy is gone.

I am reminded that going into business just means I’ll have different risks than I have now, not that they will necessarily be better or worse.  I am pulled in two directions, one telling me to quit and work full time on my own stuff just to quiet the fear, and the other saying that I need to start my own thing while working so that I get used to the effort level and so that I can be more flexible in strategy.  Dave Ramsey talks about people “blowing up the log jam” when they choose not to sell a car and then find themselves not paying off the debt.  Sell the damn car!

Quit the damn job!  Not really an option right now.

Among the Future Peasants

We walk among people who are sacrificing their future for their present.  Most do not understand what they have done.  They will have a BMW now and retire in poverty.

People have little natural awareness of their money on a 30 year timespan.

Humans are notoriously bad at long-term planning.  This is why we’ve polluted the environment and why we refuse to decrease CO2 emissions even in the face of great evidence of disastrous climate change.  Do you know how much money you need for retirement?  Do you know the factors to include in the calculation?  (hint: rate of return, inflation, lifespan, burn rate, grandkid college seed money requirements, etc.)

Most people don’t know how much they need to retire.  $1M may sound like a lot now, but in 30 years it may not be enough to retire comfortably.

People also don’t know the time value of their money.  In other words, if you invest $100 today instead of spending it, how much spending power will you have in 10, 20, or 30 years?

How much have you paid in the last year in credit card interest?  Late fees?  Overdraft fees?  How much have you paid to your financial advisor?  How much will you pay in interest if you take out a 30 year mortgage but only stay for 10 years?

These are big numbers.  They will control the quality of your life and the quality of your retirement.  If you control them, you can live the good life.  But if you don’t know them, they will control you.  Most people are controlled by them.

People are ashamed of being broke and in debt.

A friend once described a man she dated from the Internet.  She said he had an American Express Black Card.  I think that means he had a net worth of at least $15M.  The TV offers silver, gold, and platinum cards.  They show people on great vacations.  But they don’t show people with $20k in credit card debt staring at their bedroom ceiling.  Nor do they show all the vacations absorbed by credit card interest payments.

Credit is celebrated, but debt is not.

Debt is shameful.  Most people have it, but nobody wants to brag about their debt.  Salaries and debts are taboo to discuss, that’s why we have anonymous salary websites.  Often, people are uncomfortable talking about their money because they don’t want people to know about their debt.  They don’t want people to know that their apparent affluence is an illusion.  If you talk about money, they’ll steer the conversation elsewhere.

People fear changing their lifestyle and losing financial freedom.

When you have $20k of debt hanging over your head, it’s easier to make the minimum payments and focus on other things in your life.  I have been really good at that!  Every day the thought would come up, and I’d just smile and think about something else.  After all, I had a great income.  I didn’t want to lose the freedom I’d worked so hard for.  The freedom to buy almost anything I wanted within the next month.  Not right now, of course, because I’d have to wait until the next pay check.  But that’s not too long.

I feared paying off the debt and losing my financial freedom before I’d ever really tried it.  Now that I’ve been “on the wagon” for a few months, I realize that I didn’t have much to fear.  Truth is, there are a lot of satisfying things a person can do without money, especially if they’ve been spending their money on toys, toys they’ve haven’t had time to play with because they’ve been too busy trying to… earn more money for toys.

I’ve mentioned the books I’ve been reading to several close friends.  People hate being told what to do about money, so the best you can really do is say, “Hey, there’s this great book, it’s helped me a lot financially, maybe you should look at it.”

Some friends respond positively but don’t really take action.  Others say, “Oh, I’m too busy right now, I’ll read it next month.”  (It’s an audio book, and I know you have a 2 hour commute every day :-P).

At work, I’ve had several colleagues look at changing their living arrangements recently.  It’s been interesting to see how much money they’re willing to spend on rent.  Housing is most people’s #1 cost, so I believe how a person spends on it will often reflect on their overall spending.

When I was 12, I read the “Dragonlance” series of books, which featured a maged with cursed vision.  Whenever he looked at a thing, he saw it aging, withering, and dying.  That’s how I feel right now.  When I see a person paying high rent and failing to save, I see their retirement fading out of existence.

Beyond anecdotes, the statistics for retirement in America look pretty grim.

Early baby boomers – born between 1946 and 1955 and now 58 to 67 years old; median net worth in 2010 of $173,480, down about $67,850 or 28 percent from 2007.

Late baby boomers – born between 1956 and 1965 and now 48 to 57 years old; median net worth in 2010 of $110,870, down $36,800 or 25 percent from 2007.

(http://www.forbes.com/sites/robertlaura/2013/09/30/the-real-reason-why-baby-boomers-are-so-far-behind-in-retirement-savings/):

Why so much agreement? Well, for starters, there are 14 million people under the age of 30 with outstanding student loans. The average debt load for someone who graduated in 2012 was a staggering $29,400 – but the unemployment rate in that age bracket was 11.6 percent in November and, for those who are employed, the average annual earnings for those in the 16-24 age bracket ranges from just over $21,000 for women to just over $24,000 for men (regardless of educational attainment, though it improves significantly for those over 25 with college educations). So many recent graduates are saddled with a debt burden close to or larger than the average annual salary for someone their age, and they’d be lucky to find a job at all.

from (http://abcnews.go.com/Business/politicians-ignore-millennial-student-loan-crisis/story?id=21195661)

The average college graduate obtained a degree in 2012 with $29,400 in student debt, up from $18,750 less than a decade before in 2004, according to a new reportreleased Wednesday

“The amount of student debt has tripled since 2004 and stands today at nearly $1 trillion.”

(from http://www.huffingtonpost.com/jane-white/college-debt-millennials_b_3941604.html)

More than three-quarters of renters between the ages of 18 and 24 spend more than they earn every month, according to a survey of 1,000 renters (of all ages) by Rent.com. This is the case even though 17% of respondents in that age bracket say they’re willing to live with roommates to save money.

(from http://business.time.com/2013/01/17/todays-young-adults-will-never-pay-off-their-credit-card-debts/)

I’d like to pretend that there is good evidence we should have hope for the future of American retirement, but I haven’t found it yet.  But there is hope for anybody reading this blog.  Everyone can have a good retirement, but it takes planning and delaying gratification.

Dollar Wars

I watched a YouTube video about building a gaming PC.  Out of curiosity, I looked up one of the components in the video on Amazon.  Amazon has subsequently suggested that I purchase many of the *other* components from the YouTube video, components that I didn’t intentionally look up.

It’s possible that YouTube and Amazon have an agreement, and that the YouTube video is tagged with Amazon items, that Amazon and YT share this information with each other to target me.  But it’s also possible (and I think more likely) that other people who saw the video looked up more components than I did, and Amazon is simply offering me components that it believes are related to my search based on the behavior of other customers.

None of this is evil.  In fact, it’s actually kind of cool.  Now I know that the computer case used in the video has poor reviews, and I’m unlikely to buy it.

But it is a reminder that the Internet is extremely good at trying to get my money (come on, you’d rather buy a dual GPU gaming machine than save this month, right?), and that I’m in a very real competition with Amazon.  We’re both trying to grow wealth based on my income.  In fact, it might be a good idea to create a chart showing all the different companies I’m competing with.  A score card so I can figure out how much I’m winning.

Entitlement

From an early age, I’ve wanted a big house and a private school education.  Big is relative, of course.  I’ve always wanted massively huge.  I’ve never known how I’d pay for it.

I went to a public high school but a private college.  It was made clear to me that paying for that college was a big burden, and I felt stressed about paying it back while I was in school.

Legally, I own the ~$400k of stuff.  The condo, the investments, the stuff.  But morally I know that I’m so greatly indebted to my mom that none of it is really mine.  This is unpleasant to believe, but I know it pushes me to work and achieve more, to build momentum until I can achieve escape velocity from what I’ve been given.

Occasionally, I go to real estate websites to look at houses back in the neighborhood where I grew up.  I know the area, and the houses there are about 20% of the cost of houses in the area where I live now.

How much house can I afford?  Morally?  How much of my money can be credited to my work?  Not much.  College was $160k.  I was given around $40k for the down payment on the condo.  Another $20k for a car.  $5k for 401k encouragement.  That’s $225k not including airline flights and all sorts of other things.  Even the couch I’m sitting on now.

So while I look at these houses, I know that I should only buy something small.  I will need to pay for my kids and their kids education.  Simply said, it’s more important that I grow wealth to continue the prosperity that has supported my current success than to spend the money I make on cool stuff.