Real Retirement Planning

Having as much pride as any other writer and not wishing to be thought a copy cat I almost never comment at length on what anyone else has written.  I am supposing that most of you at W&G also read Reality Check and Taipan Daily, and read Gary North’s exhortation to check your retirement plan Memorial Day weekend.  In this rare instance I’m going to add my innocent, childlike wisdom to what a real expert said.

Retirement plans are…helpless flounder!  I hardly know where to begin, so I’ll start with what I know best.  I, too, was taught a few basic formulae back in ’58, and two superb ones are virtually impossible now and have been for some twenty years, minimum.

The first was that one should allocate no more than 25%, preferably less, to housing.  In our early married years I always tried to make that twenty-five per cent. cover not only rent but utilities (power, water, telephone, etc.) as well.  Usually that involved quite a bit of searching to come up with a house we were willing to live in, but I always managed.  We never lived in less than comfort, but we were never “house poor.”  A good rule is never to be any kind of “poor,” including spending too much on cars, clothing, entertainment, or whatever your personal passion is.

I can imagine the stunned looks and hysterical laughter of today’s young workers when adjured to go and do likewise, because housing and accoutrements eat up half of their after-tax income.  They consider cable TV, Internet service, and cell ‘phones to be absolutely indispensable.  My brilliant son lives in what he describes frankly as “a tiny hovel,” and has a room mate to share expenses, but he lives in Washington state, one of the five most expensive areas in the US.  When I compare relative income by my quick and not all that dirty method (divide by ten; a decade or so ago it was “divide by five!”) Andrew is making $500/month in 1966 dollars, when his father made $325 and got shot at frequently.

In theory, ‘Drew is making half again as much as John did.  He drives a WRX-STI (whatever that may be, other than fast and sporty) four years old that was paid for completely when he entered the world of commerce full time two years ago after finishing his MBA.  He is a fast-rising star (Mothers can be so impartial!) at the corporation which values him very highly, and the kid is pulling down about 60K, which sounds pretty good at twenty-six.  I’m not bragging on my son (I will be glad to, of course), I’m pointing out that the increases in taxation and the costs of over-regulation make it virtually impossible for most people to live decently on what is left after the depredations of the Nanny State, and we haven’t gotten to massive inflation and the depths of Depression, which are coming.  Not only will Cap and Trade add $1500 to $3000 a year to the average family’s expenses, depending upon which figures we use, but  those are going to be “after tax” dollars.  That means we must add a third to the estimates in the actual impact C&T will have on expenses.  And remember that such estimates always turn out to be far less than projected.

My first summer jobs paid a dollar an hour, practically tax free, and I saved enough to pay half of the cost of my first car.  (Daddy was teaching me good habits, including saving half of what I made.  It helped that my beloved three-year-old Plymouth Cranbrook cost $225!  The summer before I started college he smiled at me lovingly and told me to go clean out the rest of the account and spend it on more new clothes than he had already given me money to buy.  THAT was a real lesson in the value of saving!)

I was employed as a secretary for a little while and made $225/month.  A department head at the local college made an unthinkable $800/month!  The difference was…I took home almost two hundred and twenty of that.  Social Security, these days, eats up over 15% of income, between deductions and what the boss isn’t paying you because he is giving it to the government on your behalf.

The formula I want to get into now is far worse.  I was taught that a husband should endeavor to leave his widow 80% of his highest income.  Let me repeat that:  in order to provide security and continuity of the lifestyle they had achieved, eighty per cent. of his highest income will be required.  That is really pretty modest, because expenses go down only in the gasoline not used for him to go to work, food, and occasional wardrobes updates men need less frequently than ladies.

I realized in 1992 that every widow and those who wanted to retire eventually was in serious trouble, because the interest rate fell to 5%!  Oh, my, how young and naive we were back then.  Here’s a little mathematical exercise:  if you make $100,000, and the interest rate is five per cent., how much do you need in insurance and/or reliable investments to ensure that your beloved spouse is not going to end up in a cockroach-infested, cold water, walk-up flat eating Fancy Feast?  Don’t even bother to figure it out, because these days you have to multiply the figure by at least five, your stock market portfolio is down at least 50% (if you didn’t get out in time, and if you did…there wasn’t any place much safe to put the money), and worse times are ahead.  Do you have an insurance policy for ten million dollars?  I didn’t think so.  Neither did John.

As nearly as I can tell my mathematical genius, OR/SA husband had one of two plans for my old age.  (The private research corporation he worked for wanted him to work until he was at least seventy-two!)  The first was that he was going to out-live me, and the second (I’m guessing!) is that I am so utterly fabulous that I would surely find another husband before the insurance money ran out.   Passing lightly over his opinion of my manifold charms and perfections (not shared, oddly enough, by a great many), he failed to take into consideration that I would not be able to remarry!  If I do, I will forfeit my entire income!  Worse, my new spouse would have to live fifteen years, unless the rules have been changed recently, before he could “leave” me a share of his retirement income.  Awk.  Um.

The government is ruining the morals of sweet little old ladies because the pretty universal conclusion widows reach even when they find wonderful men is, “I love you dearly, but I just can’t afford to gamble my old age on the probability that you will live to be eighty-seven.”  Decent men don’t even ask to ladies they love to take a risk of that magnitude.  My darling Charles made the modern equivalent of a proposal amongst the older set, e-mailing me, “Hey, pretty lady, how’d you like to live in sin?!”  I burst into delighted laughter–never having been the sort of lady who gets propositioned by sexy sailors–picked up the telephone, and accepted.

He explained anxiously later why he had not shown up with a gorgeous ring and a bouquet of roses, gone down on one knee, and delivered a classical proposal imploring me to make him the happiest of men by bestowing my hand upon him in marriage.  He knew it would endanger me.  He was pretty sure I would have accepted, but darn it…it would cost a bare minimum of half a million dollars to change my name to his–as proud as I would be to bear it–and I have a perfectly good name I answer to every time I hear it…and it just isn’t safe.  I dislike being a scarlet woman, but there isn’t any other rational choice.

The sole feeble beam of hope I can see is that most women no more than sixty have probably qualified for Social “Security” in their own right.  I’ve done a lot of interesting things, but I haven’t “worked,” in the government’s eyes, forty quarters, not by a long shot.  Perhaps Donna Reed, if widowed a second time, could qualify for a sop of a few hundred in SS, but she sure couldn’t live on it.  Rueful chuckle…I always thought that failure in life was needing SS.  What’s the official “poverty” level, again?  Nah, I own my own home outright, and that will surely disqualify me from food stamps.

Please take Gary’s advice and check your hole card.  Even if things stabilized right where they are and get no worse, can you afford to retire?  What will your wife have to live on?  Will she be able to remarry if her experiences with you have caused her to think that she doesn’t want to end her days without the companionship and love you have provided?  Will she end up saying, “Welcome to Wal-Mart?”

I’ll leave you with a final superb rule:  “Never confuse what you can pay for with what you can afford.  If you do so frequently enough, eventually you will not be able to do either.”  That is the sin of those who lived on credit cards and pulling equity out of their houses every time they built up a little.

Paying for dead horses is very painful.  Three generations living under the same roof sounds very unpleasant, as much as I adore my children and they would love to have me live with them.  One of my favorite sayings is, “The worst that could happen is…” although I use that in the analytical sense of risk management, and the answer has to be “Nothing really serious!”  What is the worst that could happen to you if you do not do your best to secure your future now?  You’ve already started by reading what Agora has to say.

What is the worst that could happen to your wife?  What could you do to prevent it?

My apologies if I have ruined your weekend, but it is never too early to plan ahead, and even now we can all take steps to alleviate the grim future we envision.

Linda Brady Traynham

May 29, 2009

The Daily Reckoning