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Retirement, Delusion and an Indebted, Aging Population

Older couple reviewing money
Stephen Ellzey will be turning 59 next month, but his working career is far from over and any hope for retirement has since vanished.

Ellzey, a development director for Access Monterey Peninsula, told loans.org that he “will have to work until they spread my ashes on the Pacific.”

It all started at his last job in the television industry. A new business model was enacted at the company and his tenured status disappeared. His sales depleted, he lost most of his clients and his $160,000 income shrank to a meager $34,000.

Ellzey and his wife filed for bankruptcy and somehow managed to save their condo. Due to the work change, he was forced to begin anew in the work force, making less than half his original salary. The massive hit to his 401k plan removed any chance for a retirement.

A recent bank statement check showed, after removing all monthly bills, a remaining $40. Ellzey said his family’s life is now paycheck to paycheck, and living hand-in-mouth.

“I’ve given up on the American Dream,” he said.

Ill-Prepared For Retirement

Retirement years are flooded with stereotypes of relaxation, golf trips and afternoon naps. But for more and more Americans, that luxurious life is far from attainable.

According to a new survey by Northwestern Mutual, more than four in 10 Americans believe they will have to work into their 70s and 80s because they will be unable to afford retirement. Over 30 percent of survey respondents expect to retire in their 70s and 10 percent expect to retire in their 80s. 

The survey also found that 62 percent of single Americans are less financially secure than they thought they would be at this point in their life. Fifty-nine percent of Generation Y and 63 percent of Generation X feel less secure now than they thought they would be.

Robert Baltzell, a financial advisor and founder of RLB Financial, said the Northwestern Mutual report is not surprising. A 2012 Gallup Poll and a report by the Conference Board earlier this year both illuminate the grim reality of American retirement plans.

Baltzell said he sees a trend of delayed retirement in his practice.

Jamie Hopkins, Assistant Professor of Taxation at The American College, agrees that the report is unsurprising. Hopkins said that one-third of the United States will rely solely on Social Security in retirement and about two-thirds will rely significantly on the program.

Furthermore, half of American citizens have only $10,000 in their savings; hardly enough to even begin considering retirement at age 65.

But where did this consensus retirement age of 65 come from? Some experts say it was from the U.S. Social Security program, but in reality it dates back to 1880.

A Right or A Luxury

A retirement age of 65 has roots in Germany, according to portfolio manager, Michael Needleman. The “Iron Chancellor” Otto von Bismarck introduced a social security system to combat the Socialist Party. Bismarck knew that most citizens would not live past the age of retirement.

When the United States adopted a similar plan in 1935, the average life expectancy was 61.7 years. In less than a century, the average life expectancy has spiked significantly. According to recent data by the World Bank, the average life expectancy is 78.2 years.

In the past, employees would be able to rely on their company’s pension and social security benefits to take them through retirement. This is no longer the case. Due to the 16.5 year extension on life expectancy, the Social Security program was depleted faster than expected.

Although the Baby Boomer generation relies significantly on Social Security benefits, the younger generations do not count on the program being as supportive in the near future, according to Brad Arends, CEO of Alliance Benefit Group Financial Services.

The younger generations could be on to something. Despite being deeply ingrained in our culture, the concept of retirement is not a long-standing ideal. And it could be resurging once again.

Andrew Aran, partner at Regency Wealth Management, said retirement is a fairly modern concept. Three or four generations ago, people did not retire, especially not in agrarian societies.

“Madison Avenue, the government, travel industries and Wall Street have all contributed to this new dream and that is now perceived by many to be a right,” Aran said.

Curtis Chambers, founder of Chambers Financial Group, agrees with Aran that retirement is a perceived right. Americans have been trained to think they need to retire at 65. Chambers said he has seen many people retire at the prime of their career.

The need to retire at this pre-defined age is a “myth” he said.

“A better approach is to retire when you are ready, and not allow an arbitrary number established back in 1935 to determine your retirement date,” Chambers said.

Although experts scoff at the idea of a retirement privilege, it is a driving stimulus for many workers.

Ellzey said he worked his entire life, beginning early in his youth with a job mowing the lawn and working for the remainder of his life.

Before his job changed, he believed he was set for a comfortable retirement.

“I had clawed my way to the spot in the world that I wanted to live in and retire in,” he said. “I think after all these years of working, it would be nice to kick back and start enjoying life.”

The Weight of Debt

For many consumers, including Ellzey, large debts and low retirement funds keep them in the workforce well past their retirement dates.

The type of debt impacts a retiree’s funds more than anything. Some positive forms of debt are manageable throughout retirement, but others put a harder strain on the ever depleting funds.

Debts such as mortgages are not as detrimental to the older generation, as long as payments are covered each month. Aran said that debt itself is not bad, as long as it is “low cost and a proportionately manageable amount.”

Other debts such as personal loans and payday loans are more problematic. Personal loan debts, payday loans and multiple auto loan payments stretch beyond a consumer’s true needs.

“Any non-mortgage debt, if incurred for a long period of time, is usually a bad financial trade off for wants versus real needs,” Aran said. “The higher the balance outstanding and the interest rate, especially in a low interest rate environment, the greater the financial hole one is digging for themselves.”

Baltzell agrees.

“Personal loans and credit cards only act as a drain on your retirement savings,” he said. “The high interest rates typically outpace the growth of your investments.”

Finding a Way to Plan

Statistics illuminate the harsh reality of retirement and planning, but fewer consumers actually believe they are part of the statistics.

Hopkins said that most consumers lack a realistic idea of the overall cost of retirement. They believe that their current lifestyle will continue throughout retirement, but for significantly less. Another delusion is the idea that their parents survived retirement, so by default they will as well.

“Markets have changed, defined benefit plans have changed, and the cost of living has changed, creating a new type of retirement that is very different from that of past generations,” Hopkins said.

In the past, people retired with the security of Social Security and their employer’s defined benefit plan. Now, Social Security supports retirees less, and other sources such as 401(k)s  are used to fund the years of retirement.

Arends said that funding retirement is a shared responsibility and the employee has to be more engaged than ever before.

Employees are expected to manage their 401(k)s even though most have zero experience and training. Due to this, a move toward retirement education has increased. The emphasis, moving forward in the retirement planning community, is 100 percent about retirement readiness, Arends said.

“It hasn’t always been focused there. It’s been on the stove but it’s been a backburner thing,” he said. “Now it’s going to be on the front burner.”

Arends continued stating that American workers have an idea of when they want to retire, but they have not mapped anything out, such as costs, what they will need and how their life will be.

Even for those with solid plans, surprises can always sidetrack the retirement timeline. One is the loss of a stable job, as experienced by Ellzey.

Other surprises include medical expenses. Arends said that a 65-year-old couple, who enters retirement at the same time, will need $220,000 to pay for healthcare costs not covered by Medicare or a supplement plan.

This large cost can quickly deplete what a couple once thought of as a well-stocked savings or retirement fund.

Needleman puts the blame on the American consumer culture. He said workers need to treat their retirement similarly to their health.

“Just like an annual doctor’s visit, it is important for consumers to speak with someone that they trust to review their financial health,” he said. “There are so many unexpected costs that can arise during retirement and it is imperative that consumers full understand the cost of retirement.”