The Trading Academy

March 24, 2005

 

The New Retirement Model

By John Mauldin

It seems like every week I get a letter from a reader asking questions along the following line: "How can I make a lot of money so I can retire early and/or live the lifestyle I want to live when I do retire?" Most of them are phrased far more eloquently and with accompanying questions and comments, but the bottom line is, "How can I get rich?"

I'm especially touched by the very sincere letters from young people who ask this most basic of questions about accumulating wealth. They are not looking for get-rich-quick schemes but for some guidance as to how to organize their lives. I've never really been able to answer these letters with anything close to an adequate response. In today's letter I'm going to draft a response that we can use for all such future letters. I trust you will find it interesting as we wax a little philosophical about how to build wealth.

Today's letter is in part a reflection of two very different items which reached my desk this week. The first is a rather interesting survey on retirement from Merrill Lynch. The second is a remarkable new book by my longtime friend Michael Masterson simply entitled "Automatic Wealth." Both of them got me to thinking about retirement (not mine, of course!), and how the coming wave of baby boomers entering their retirement years will have a massive effect on all aspects of American society.

The New Retirement Model

Merrill Lynch released a new survey a few weeks ago called the New Retirement Survey, wherein they polled 3,448 baby boomers, both from the general population and the more affluent segment about their views on retirement. I'm going to spend a few pages summarizing the survey, and highlighting some of the more interesting points. I should note that the survey was done for Merrill Lynch by gerontologist Dr. Ken Dychtwald, who is the president of Age Wave with the help of Harris Interactive. I must say that I thought it was a very thoughtful and well put together survey.

The survey reveals that baby boomers plan an unexpected approach to retirement in anticipation of increased life spans, labor demographics and (what I perceive as a lack of) financial preparedness. Interestingly less than 1/5 of baby boomers plan to stop working for pay. 40% expect to cycle between work and leisure; another 16% plan to work part-time and an energetic 13% plan to start their own business. 6% plan to continue to work full-time.

That is a long way from the model of our parents and grandparents, who more or less expected to retire from work. Interestingly, of those who expected to continue working, 56% of them said that they intended to pursue a different line of work.

Not having enough money was only fourth on a list of fears about the future. Number one on the list was being unable to afford health insurance, with over half of those responding worried about health insurance. Right after that was a major illness and going to a nursing home.

Money Can Buy Happiness

The survey broke the respondents into two groups. Those who were very or fairly well prepared for retirement and those who are somewhat or not prepared. Those who are more financially well-off were twice as likely to be looking forward to retirement, 70% more likely to be optimistic about the future and three times as likely to describe themselves as successful. Coincidentally, they expected to live longer, and were happier.

Those with less money were twice as likely to be stressed out; 50% more likely to worry about health care; much more worried about losing their sex drive and three times more worried about whether or not they would have enough money. Evidently, money can buy some relative amount of happiness, at least among the broad population.

The United States is currently in a great debate about Social Security. We are basically ignoring the far larger and more contentious issue of Medicare, and this survey tells us why. When asked the question, "Do you believe that you and every member of your generation are entitled to the full benefits of each of these programs?" 89% of boomers believe that they are entitled to Medicare. Social Security was only slightly less at 88% and senior discounts scored 85%. 78% believe that we are entitled to prescription drug coverage.

The Republicans have offered a plan whereby nothing changes for the baby boomer generation, recognizing that trying to change the benefits for those over 55 is a nonstarter politically. Given the serious anxiety about health care among the boomer generation, when we do get around to having to deal with Medicare the choices are going to be few and difficult. But there is some consensus about what those choices would and would not be.

72% of respondents favored reducing entitlement levels of those who are financially well-off. 63% opposed having everyone receive a little less in the way of entitlements and 65% opposed raising the age of eligibility to reflect higher life expectancies.

As an aside, I think this means we do relatively nothing about Medicare until there is indeed a crisis, forcing a solution. Given the above and some of the statistics below, I think it is highly likely that the "rich" are going to have to cough up (pardon the pun) more of their income for health care for everyone else.

Unrealistic Retirement Expectations

Those were pretty much the general conclusions. I've found some of the actual survey questions and responses to be very interesting. 42% of baby boomers do not know how much money they will need to be able to live comfortably in retirement. 60% had less then $100,000 of total savings other than their home, and 46% had less than 50,000. Of course 7% were not sure how much they had saved and 12% decline to answer, so it would be a reasonable assumption to think that 70% had less than $100,000.

26% felt they would need between $25,000 and $50,000 annual income to be comfortable in retirement, and another 27% would need as much as 75,000. (23% were not sure what they would need -- so much for financial planning.).

Let's look at that last group. To generate $75,000 of income, with a reasonable degree of safety and adding enough to principal to be able to take care of the effects of inflation, you need a portfolio worth about $1.5 million, give or take $100,000. Only 2% of the respondents said they had as much as one million. Only 3% had more than $500,000 with another 5% having more than $250,000. Less than 10% of the boomer generation had more than $250,000, yet 70% said they would need more than $25,000 annual income to live comfortably.

Even subtracting for Social Security and other pensions, there are going to be a lot of baby boomers who are going to be disappointed about their retirement if they have to live off their savings. To our credit, we seem to recognize that. Thus, less than 20% of us expect to be able to enter retirement without working for pay again.

Nevertheless, we are an optimistic lot.

We as boomers like to think of ourselves as a generation that defies categories, yet we sometimes fit into them so well. Dr. Ken Dychtwald broke the boomer generation into five clear "profiles of boomers and their likely retirement scenarios emerged. These profiles provided further insight as to what the "next stage" looks like for these boomer groupings; the personal, societal, workforce and economic implications of their perspective. The five distinct and different boomer segments are: the "Empowered Trailblazers," the "Wealth-Builders," the "Leisure Lifers," the "Anxious Idealists," and the "Stretched & Stressed."

The next few paragraphs are direct quotes and descriptions for these five groups from the survey. It might be interesting to see into which groups you fit.

"For the Empowered Trailblazers (18% of boomers), retirement will be a well- rounded, empowered and liberated period of their lives. Rather than spending their retirement in passive rest and relaxation, they will be traveling, exercising, taking educational classes, spending time with family and friends and embarking in new directions. Open to new ideas, retirement will provide an opportunity to widen, not narrow, their horizons. Generous with their resources, they plan on contributing time and money to social causes and charities. 68% are looking forward to next phase. More than half say 'self-confidence' and "open- mindedness" completely describes them. 90% aspire to work, 67% plan to volunteer, and 79% plan to travel.

"The Wealth Builders (31% of boomers) are fueled by their desire for material success and security. For them, retirement will center around continued work and the achievement (and enjoyment) of financial success and security. They are the most likely of all groups to define themselves as workaholics and are less likely to say they want to stop working for pay in the next phase. About half of this group would say they are primarily driven by their own personal financial gain, while the other half is working to achieve financial security and stability for their immediate family. In fact, they are the most likely of all boomers to describe themselves as family oriented, and in the next phase they plan to reap the benefits of their hard work by spending more with their spouse or partner, children, and grandchildren. 79% plan to work, but only 28% say a sense of self-worth or identity is a very important reason to keep working - it's the money that matters.

"Anxious Idealists (20% of Boomers) see their retirement years both as a time for new directions and better work/life balance and as an opportunity to give even more of their time, skills and money to worthwhile causes. They may not have a lot of assets, but they are the most likely to say it's important to them to leave a significant amount of money to their family and to charitable organizations. However, because throughout their lives, they have not tended to focus on practical matters, they realize that they haven't put away as much money as they should, and their lack of money is a serious and growing source of worry and fear. 85% believe that it costs too much to retire.

"When asked what they are looking forward to, the Leisure Lifers (13% of Boomers) are the most likely to list simplifying their lives and having years of full time relaxation and play among their top goals. Work is definitely not a priority for them - and a large percentage never enjoyed their careers or jobs. They are the most likely to look forward to stopping work for pay completely and permanently, and the sooner the better. They are more likely to say they will retire by their early 50s. In fact, half of them are retired already. With low levels of income and low levels of savings, if they were to anticipate serious financial difficulties in the next phase, they are the least likely to say they would go back to work to try to make up for the shortfall. Instead, they are counting on government entitlements and their savings to ensure a life of leisure in the next phase. 78% are looking forward to having more time for rest and relaxation, and 71% are looking forward to reducing stress. 94% feel that they and every member of their generation are entitled to full benefits from social security.

"The Stretched and Stressed (18% of Boomers) are the least likely to describe themselves as successful, self-empowered or optimistic about the future. They are on a bad path and they know it. During the next stage, they will continue to work, not because they want to, but because they will have to. Of all boomers, they have the highest unemployment levels, have earned the lowest levels of income throughout their lives and have taken least advantage of available guidance or pension opportunities. There isn't much they are looking forward to - they are least likely to look forward to spending time with their spouse, most likely to think financial issues and where to live will be major sources of disagreement, and most likely to think they and their spouses will be very unhappy in the next phase. Only 9% are looking forward to next phase, and they expect lowest levels of happiness (5.8 out of 10). They expect to live the shortest - only until age 77."