The financial services industry has quite a sales job ahead. Is lifelong austerity the only solutions to the radically extended retirement income needs of future generations?
Want to “change the world” or “save the world?” Set aside the tropical locations and clean water, micro-lending, mosquito nets or the next “mating and dating” super app – get every employee at your local tool and die shop to embrace austerity and save more for retirement – truly.
To meet growing retirement income funding needs, we are looking at an abrupt “about-face” in lifestyles and spending, especially for younger employees.
There appear to be three certainties in the new future of retirement:
- Lifespans have already extended to historically unprecedented lengths. These lengths will likely continue to extend out into more decades beyond normal worklife. Especially for women.
- Funding of these extended lifespans must come from savings accumulated during everyone’s worklife.
- The default financial behavior is to spend now and never save for the future. There are multiple sources of evidence that this is “normal” human behavior.
There are facts to support this phenomena — Vanguard, the mutual fund giant reports the median 401(k) balance in it’s client’s retirement plans is slightly above $26,000. No one is going to retire on that kind of retirement savings.
The conclusion is both unsettling and seems inevitable – everyone must immediately adopt personal and family austerity. Try “selling” that!?
Of course, the opposite is what is and will continue to occur. For a variety of biological, evolutionary, socio-cultural and brain-based reasons we are designed to consume, right now, and not save or defer current consumption.
Most of our institutions, social norms, ideologies and societies are based on meeting greater and greater consumption demands. World-wide, 7B+ people want and are demanding upper-middle class lifestyles and consumption. They will not be denied.
We make no moral, ecological or ideological judgments. We cite global factors just to underscore the universality and biological basis for consumption – and let’s not forget the global “epidemic” of extended lifespans.
Spend It All Today!
Focusing on employees of US companies facing vastly extended retirement periods, the challenge is a very practical and unhypotheotretical one – how can employees fund their (now greatly extended and more expensive) retirement?
Now let’s assume that these employees have pretty good support for their savings – once they put the money into their 401(k) account. Of course, all savings and investment systems are imperfect but the 401(k) defined contribution system is the one we have to work with.
It is and will continue to be improved. But no radical changes should be expected. Certainly none that will dramatically increase returns or retirement income – independent of having a (much) larger pool of savings.
Let’s also un-stuff a straw-man: “evil” financial services firms. Yes, employees saving more will result in more money for retirement investment funds. Yes, they will make a lot more money. Yes, appeals to save more are immediately beneficial to all retirement investment firms. That is a given. Everyone knows that.
No Magic Bullets
Nevertheless, the extra money must be saved. That is also a given — regardless of fees. No, there are no extraordinary investments, special strategies or “bull” markets where anyone will make a killing and avoid “saving until it hurts.” The best one can hope for is not experiencing big losses. Those can be “fatal.”
Let’s not allow ourselves to be distracted from the necessity of lifelong austerity.
There are no “bogeymen” keeping employees from retirement riches. Reforming retirement investing products and services and what is charged for investments is a separate matter and will be dealt with as such. It already is and will continue to be, by a combination of increased transparency, better regulations, competition and oversight by retirement professionals.
Lifelong Austerity as the Only Answer
Let’s get back to the real issue. Right now, each employee has to:
- Sign-up to take more money out of every paycheck
- Put it in their retirement plan
- ”Do with less” in their personal checkbook and savings accounts.
Every employee must “do with less.” It called austerity. Living a life of austerity for themselves and their families.
Denial and hope are not strategies for retirement. There simply is no other way.
We are not making a moral argument but a simple cash-flow one.
- The most reliable source of savings is during one’s work life
- The power of compounding demands money be put away in the 20’s and 30’s.
- One cannot get access to these savings, and accumulated interest, until after ones work life.
This is simple bookkeeping.
Critical and especially painful, the critical times to reduce one’s paycheck and embrace an austere lifestyle are in the 20’s and 30’ exactly when people are finding mates, starting families, making a down payment on a car and home, saving for children’s education. Can all of these financial goals be met — likely not. What then, are the priorities?
Imagine trying to impress one’s future spouse by living at home, not having a car, and eating only at cheap restaurants! Having one good suit, etc.
Imagine starting a new family and still living with parents, no car, maybe a movie once a month, no restaurant – at all. Not many babysitters even.
Here we are only talking about those who have a job and 401(k) plans.
What now, is the “American Dream?”
Extended Periods of Dependency
Note: Let’s remember that extended lifespans means all of us will be taking care of our parents – probably for extended periods – so managing intergenerational resources now becomes a necessary skill. You live with your parents during critical early saving decades and they stay with you at the end of their lives.
An austerity life does not include big-screen TVs, many vacations, many new clothes, gadgets or eating out. Not many MP3s or DVDs either. Cellphone contracts? Probably out.
Each individual employee and family must go step-by-step through their spending and cut out pretty much everything not a necessity.
Who wants that sales job? Who will even “buy” it?