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Are You Ready to Work Until You Die?

• By Mark Nestmann Nestmann.com

In the last 150 years, a previously unknown social concept has taken hold in the US and other wealthy countries: retirement. And just as we're getting used to it, it's being wrenched away from us.

A century and a half ago, only those who had accumulated great wealth could stop working in their fifties or sixties to enjoy a leisurely retirement. People worked as long as they were physically able to. Once they became too feeble to work, family members cared for them.

Those with no family were generally sent to the poorhouse, a residence where disabled and elderly people were supported by taxpayers. They were expected to work if they were physically able. As you might expect, living conditions were Spartan.

Retirement is possible only because industrialization has helped to facilitate capital accumulation.  This capital can be used to support a person's needs after a certain age.

Capital accumulation occurs through savings, investment, and economic growth. Unless all three factors exist in sufficient quantities, a society's ability to provide retirement benefits to older citizens declines.

Unfortunately, in the US, all three factors are moving in the wrong direction:

Savings. In the 1970s, Americans saved 9% to 15% of their income. Today, we save only about 4%.

Investment. In an era of near-zero interest rates, it's a lot tougher to generate safe investment returns. When my father retired in 1981, he could buy a certificate of deposit (CD) that paid 14% interest. Sure, inflation was higher in 1981 than it is now. But his after-inflation return on investment was nearly 6% higher than it is today.

1981 inflation rate: 10.3%

1981 three-month CD interest rate: 14%

Net return on investment: 3.7%

2018 estimated inflation rate: 2.38%

2018 three-month CD interest rate: 0.75%

Net return on investment: -1.63%

Economic growth. In the 1970s and 1980s, there were six years in which the economy grew at a rate of 9% or higher. Since then, the growth rate has exceeded 5% in only a handful of years. In 2017, the economy expanded at only a 2.3% rate.

The confluence of these factors forces retirees – and anyone thinking of retirement – to save a great deal more money to supplement Social Security and pension income they receive or expect to receive.

Let's say you start receiving Social Security benefits of $2,500/month in 2017. To live comfortably, you've calculated that you need to receive additional monthly income of $1,500. If you earned the 14% interest that you could in 1981, you'd need savings of a just under $130,000 to generate that income. But to generate the same income with a 0.75% interest rate, you need to save $2.4 million – more than 18 times as much! What's more, after inflation, you'd still be losing almost 2% annually.

And what if you don't have $2.4 million? You might be tempted to invest in bonds, which have a significantly higher yield than CDs. Let's say you purchase a 30-year Treasury bond backed by the full faith and guarantee of the US government at 3%. To generate $1,500/month income from an investment yielding 3%, you'd need $600,000. But after inflation, you'd still only be getting a net return of 0.62% – less than one-sixth of what you could have had in 1981.

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