In the last 150 years, we’ve had a number of innovations that radically changed the way we live.
You can tick off the list: electricity, the automobile, refrigeration, TV, the Internet. But one innovation rarely makes those lists. It is just as significant if not more so…
The idea that people can stop working in their fifties or sixties and then enjoy 20+ years of relative leisure is actually quite new.
For most of human history, most people worked as long as they were physically able to and died soon after.
Our inventions often have a dark side that can come to haunt us. They may be applied to wage war… or to create reality TV.
Are we going over to the dark side with retirement? Maybe not, but we’re surely heading in that direction.
When Retirement Was Risk-Free
Saving money for retirement has never been easy for the average worker, but at least it was feasible. Until 2000 or so, anyone could lock in risk-free 5% or higher yields in bank certificates of deposit.
Suppose you saved all through your career and accumulated a million dollars. It was a simple matter to put it all in CDs, Treasury bonds, or tax-free muni bonds and generate $50,000 a year in current income.
Living costs were lower last century, too. Add in Social Security and you could enjoy a comfortable if not extravagant retirement. Your million-dollar principal would remain intact and could go to your children upon your death.
And this was relatively easy to do. It didn’t require any financial sophistication or even a brokerage account.
The hardest part was saving the million dollars in the first place, but you could get by with much less if you drew down the principal over a 20- or 30-year period.
Better yet, you could do this with no risk, just by keeping your money in FDIC-insured banks. You might have to split it between a few different banks to stay within the limits.
Some extra paperwork, but easily done.
Younger readers may think I just described a fantasy world. I assure you, it was very much a reality not so long ago.
Ask your grandparents if you don’t believe me. However, you may find them in a state of shock today because they thought the fantasy would last forever.
Indeed, their financial planner probably told them they could count on drawing down 5% of their portfolio per year to live on.
That’s because the income from the investments in their portfolio would more than make up for the drawdown.
None of This Is Possible Today
Neither you nor a massive pension plan acting on your behalf can generate enough risk-free income to assure you a comfortable retirement.
Because our monetary overlords decreed that it should be so. Retirees and their pensions are being sacrificed for what now passes as “the greater good.”
Because these very compassionate overlords understand that the most important prerequisite for successful future retirements is economic growth. And they think that an easy monetary environment is the necessary fertilizer for that growth.
So, when they dropped rates to zero some years ago, they believed they would soon be able to raise them again – and get people’s retirements back on track – without risking future economic growth.
The engine of growth would fire back up, and everything would return to normal.
So much for the brilliant plan.