A History Lesson on Retirement

The Not-Too-Distant Future State of Retirement

We recently read “The Greatest Retirement Crisis in American History” in Forbes by Edward “Ted” Siedle. In it, Sidle argues, as the title eludes, that we are about to experience the greatest retirement calamity in our nation’s history. He suggests we are in wave one of up to four waves caused by retirement planning shortcomings. The first wave, which recently started, forces retirees back to work. “Welcome to Wal-Mart.” The second wave delays retirement for most. The third wave cancels retirement for most and the fourth wave financially ruins most senior citizens.

While we tend to be “glass half full” kind of guys, we cannot deny that we are not concerned about the future of retirement in America. People are not saving enough for any financial goal, let alone retirement. Social Security is underfunded and our politicians have their heads in the sand because it is too politically risky to face the problem head-on. Unemployment is lousy and business cares more about hoarding cash than hiring and investing these days.

This made us wonder why Americans are about as good at saving for retirement as we are with dieting between February 1st and December 31st. According to Siedle, and many other sources, the current average 401(k) balance of those 65 years or older is about $25,000.

According to ABC News, the average retired individual will receive a monthly Social Security check of $1,294 and the average retired couple $2,111. That’s $15,528 per individual and $25,332 per couple annually. Combined with the commonly recommended withdrawal of 4 percent from the average $25,000 retirement savings of $1,000 annually (KISS), that gives an individual $16,528 annually and a couple $26,332 annually.

Spreading even $26,332 across twelve months is not our idea of an enjoyable retirement. $2,194 a month may sound like a lot because many living expenses will decrease. Consider, though, that Fidelity estimates retirees should expect to spend about 35 percent of their annual benefit on healthcare costs. 35 percent of $26,332 is $9,216. That leaves $17,115 left for all other expenses for the rest of the year. That leaves $1,426 a month on which to live.

That may be possible, but is it enjoyable? How did America get here?

Ancient History of Retirement

Retirement as we know it is a new phenomenon, but retirement is not altogether new. It is true that throughout most of history we pretty much worked until we died. Why? We worked until we died because people died young. Life expectancy at birth stayed below age 30 until the Medieval Islamic Caliphate period. Even then, life expectancy if one reached the age of 20 included another 40 years. We did not retire at age 65 and live a life of leisure for 30 years. We were already six feet under by then.

As the Seattle Times shared in December 2013, pensions go as far back as the 13th century when Emperor Augustus provided them to Roman Legionnaires who served a minimum of 20 years. By the 16th century, Britain and several European countries offered pensions to military members. By the Civil War, the U.S. offered pensions to disabled and impoverished veterans or their widows.

A shift took place in 19th century-Germany. At that time, Chancellor Otto Von Bismark offered government pensions, along with accident, medical and unemployment insurance to all non-working Germans over the age of 65. He had two objectives. The first was to stymie the spread of Marxism across Europe and the second was to stop losing citizens to the U.S., which offered higher wages but no form of welfare. Choosing the age of 65 was smart because even by the early 20th century life expectancy at birth was still only 31 years old.

4: The Four Principles of a Debt Free Life

4: The Four Principles of a Debt Free Life

4: The Four Principles of a Debt Free Life

But by 1875, however, U.S. companies had already beat the Chancellor when American Express, when it was still an express mail business, was the first company to offer pensions and U.S. railroad companies soon followed, but not for reasons you might think.

Agrarian and Industrial Age Retirement

As the Industrial Revolution in the U.S. took over the Agrarian Age, work evolved. When most of the country was farming, older people worked as long as they could, then transitioned to less physically laborious jobs on the farm and let younger family members or hired hands take over the physical labor. This was fine because, as of 1840, over half the U.S. population was under 20 years old, 85 percent was under 30 years old and only 4 percent was over 60 years old.

Americans had a strong work ethic, though, and it was not common for someone at 65 years old to take a gold watch and run to Florida. Many worked until they physically no longer could, many until the day they died. Work provided a sense of purpose and was heavily valued in American culture.

As the Industrial Age reduced the number of family farms and workers headed towards factories, technology was introduced that required workers to adapt to new skills and increased efficiency. Companies became concerned that older workers could not adapt and found many slowed assembly lines and production. Therefore companies offered pensions to workers who accepted them begrudgingly in order to allow younger, more efficient workers to take over. Older workers were put out to a metaphorical pasture.

Modern History of Retirement

Then WWII happened and anyone that was able to help with the war effort did what they could. The government and companies who previously disregarded women and older men now needed them because strapping young lads were shipped overseas to fight. By 1940, 56.6 percent of men over 65 were no longer working, but with no young men around, old men were needed.

An interesting thing happened at this time. In an effort to stave off inflation pressures from the war, the U.S. government implemented a wartime wage freeze. The principle of supply and demand took effect. The increased number of jobs and decreased number of employees caused companies to offer other incentives to attract workers. Company perks such as health insurance and pensions, more specifically defined benefit plans, became more popular as such benefits were not considered in the wage freeze.

When the war was over, however, and younger men returned home, companies put them in positions held by older workers. Older workers were asked to step aside, again, much to their dismay, for the good of the country.

With a lot of marketing and corporate and government incentives through defined benefit plans and Social Security respectively, the golden years of retirement eventually became a thing. Workers looked forward to a few years of relaxation and freedom. No longer was it a stage of life one tried to avoid. To work past the age of 65 became an anomaly, something only done by business owners and government leaders.

By the mid-1970s, two things had taken place. The first was that Americans lived even longer. Life expectancy at birth was about 70 years old. If one reached 60 years old, they were then expected to live another 18 years. Companies that committed to funding a period of life that previously maxed out at five years, now funded a period of life up to 13 years, almost three times as long. This was expensive and becoming more so.

The second thing was that Congress passed the Employee Retirement Income Security Act of 1974 (ERISA), which is a pivotal law even today. Initially ERISA required increased funding for pensions that put an even greater strain on company’s commitment to retirees. As most laws do, ERISA expanded and made pensions even more expensive.

Companies retired (no pun intended) defined benefit plans and adopted defined contribution plans, most popularly with a 401(k) plan, in response. With defined contribution plans, retirees did not receive a specified benefit upon retirement, but a specified annual contribution from their employer until the employee left the job or retired. While this was better for employers, it put more responsibility on employees. Employees needed to invest their employer and personal retirement account contributions in the stock market. For many employees, this was hard to learn on top of their regular work and personal responsibilities.

Current State of Retirement

The current strain on Social Security is the large number of Baby Boomers who, in 2011, officially started to qualify for Social Security benefits. The housing market collapse in 2008 and subsequent Great Recession that started shortly thereafter did not help. Stagnant wages, high unemployment and the ever-increasing cost of everything makes this new thing called “saving for retirement” a challenge for many.

In addition, most Americans simply are not equipped to manage their own investments. In 2009, 11,200 out of 28,000 U.S. respondents (40 percent) to a question posed in an Investor Education Foundation and Financial Industry Regulation Authority (FINRA) study said “I don’t know” when asked if it was safer to buy a single company stock than to buy a stock market mutual fund. American’s are not comfortable with how to invest and, with the stock market losses after the dot.com burst and housing collapse, Americans are afraid to do so. As recently as 2013, only 52 percent of respondents in Gallup’s annual Economic and Personal Finance survey said they are directly, or indirectly through a spouse, invested in the stock market.

As scary as the stock market may be to some, Americans will never be sufficiently prepared for retirement by simply saving or relying on Social Security and other government programs. Retirement as we know it today is relatively new and the retirement of our fathers and grandfathers will not be our retirement. If retirement continues to be a goal, more must be done to prepare Americans. The alternative is to go back to work until we die, as was the retirement of our great and great-great-grandfathers.

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