Why is Retirement so Expensive?

Here is an interesting article by Pamela Villarreal concerning Boomers and retirement.  Having retired early, I can concur with many of her statements.  This is only the Executive Summary of the article.  You can read the complete article at: http://www.ncpa.org/pub/st341

 

How Are Baby Boomers Spending Their Money?

For a number of years now, retirement and financial experts have bemoaned the fact that baby boomers and others who should be thinking about retirement saving are nowhere near ready to retire. Some blame the failure of 401(k) and Individual Retirement Account (IRA) retirement plans to fill in the gaps left by elimination of corporate pensions. Others argue that American adults of all ages are simply not saving enough.

Using data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, it is possible to compare the preretirement spending habits of today’s middle-aged workers (45 to 54 years old) and today’s older workers (55 to 64 years old) with the spending habits of those age groups 20 years ago. What, if anything, changed over the past 20 years?  Real incomes for these age groups have not changed much. But the portion of disposable income households spent on certain categories of goods and services has increased.

Baby Boomers Are Spending More on Education. From 1990 to 2010, education expenditures increased the most — by 80 percentfor 45 to 54 year olds and 22 percent for 55 to 64 year olds. As with health care, the cost of a college education has grown faster than income for decades. Thus it is not surprising that a recent analysis by the New York Federal Reserve Bank found that one-third of the nation’s student loan debt is held by individuals over the age of 40.

Though some individuals choose to further their own education during midlife, it is likely that many baby boomers are helping their college-age children with college expenses and loan payments.

Baby Boomers Are Spending More on Adult Children. A recent survey from the National Endowment for Financial Education found that more than half of parents are helping to support their adult children. Among parents of 18-to-39 year-old children:1

Fifty-nine percent of parents are providing financial support to adult children who are no longer in school.

This support takes the form of living expenses (48 percent), transportation costs (41 percent), spending money (29 percent), medicals bills (28 percent) and paying back loans (16 percent).

Another survey found that two out of five parents have paid off debt for their adult children, including 29 percent who had paid off student loans for their children.2

Baby Boomers Are Spending More on Mortgage Debt. Housing, however, is typically the largest monthly consumer expenditure. Home mortgages comprise almost three-quarters of all consumer debt, and three-fourths of middle-aged and older workers’ households have mortgages. From 1990 to 2010 the share of expenditures on housing — including principal, mortgage interest, taxes, maintenance and insurance — for these age groups increased about 25 percent. For 55 to 64 year olds, nearly half of this increase was due to an increase in the interest portion of housing expenditures — even though mortgage interest rates have fallen over time. The portion of income they spend on mortgage interest increased 47 percent, from 4.3 percent to 6.3 percent.

Are baby boomers buying more home than they can afford or are prices for a basic home simply outpacing income growth?  The median house size has increased from 2,080 square feet in 1990 to 2,392 square feet in 2010. Since the mid-1990s, the Federal Housing Authority allowed more borrowers to qualify for loans with lower down payments. This action began a proliferation of loans that required little or no down payment. Furthermore, after 2000, home price growth outpaced income growth, peaking in 2004 and 2005. Home prices began falling dramatically by the end of 2008, but many households were underwater, owing more on their mortgages than their homes were worth.

Moreover, the average age of the first-time homebuyer increased from age 28 in 1985 to age 35 in 2011. As the age of the first time homebuyer increases, the probability that a household will carry a mortgage into its preretirement years also increases. In addition, due to the availability of home equity loans, many boomers who were previously close to paying off their homes could be refinancing or tapping into home equity. In fact, it is estimated that 15 percent of all baby boomers will not get out of debt in their lifetimes.

Baby Boomers Are Not Spending More on Entertainment. Contrary to some perceptions, baby boomers have not increased their spending on frills, such as entertainment or dining out. Indeed, their spending on some consumption categories fell from 1990 to 2010:

• Food purchases (including restaurant spending) fell 18 percent for 45 to 54 year olds and 20 percent for 55 to 64 year olds.
• Household furnishings fell nearly one-third for 45 to 54 year olds and one-fourth for 55 to 64 year olds.
• Clothing expenses showed the steepest decline, falling 42 percent for 45 to 54 year olds and 70 percent for 55 to 64 year olds.

 The decision to forgo present consumption for future retirement savings is a matter of individual choice. Contrary to the belief that the savings rate has been stagnant, or even declined, retirement accounts appear to be playing a larger role for baby boomers. However, retirement savings is nowhere near the 10 percent that is often recommended as the share of income that should be dedicated to savings.

Policy Recommendations

Saving for retirement is more than a public policy problem: it is a cultural issue. Public policies could be amended so that all forms of saving are tax-neutral (no preference for one investment over another), and consumption subsidies are eliminated. For instance:

• Reform the income tax system by applying lower, broad-based rates, coupled with the elimination of consumption subsidies, such as the home mortgage interest deduction, sales tax deduction, energy efficiency credits and so forth.
• Treat tax-deferred 401(k) and IRA plans equally; allow the same annual contribution limit to IRA plans as is allowed for 401(k) plans — the 2012 annual limit is $17,000.
• Treat investments equally by either taxing proceeds and interest at one low rate, or eliminate the tax altogether. This includes dividends, capital gains on housing purchases, stocks and mutual fund purchases, and earned interest on savings accounts.

Public policy changes alone cannot incentivize people to become better prepared for retirement, but government has a compelling interest in promoting saving behavior with tax reforms.

My "suggestion" is to do away with income tax altogether.  Tax consumption instead of income or savings.  Right now the government encourages consumption and discourages savings.  The less you consume, the more you save.   This would help the poor and the middle class (if there still is one).   A value-added tax or sales tax on non-essential purchases (exempting food, gas, medical, etc.) could be collected by the states and we could shutdown the IRS. :)

All Americans would pay this tax.  We would no longer have 50% of the population paying no taxes and voting for bigger government programs.  "When you rob Peter to pay Paul, you can always count on Paul's vote."  

Everyone would know how much of each dollar we spend goes to fund the government.  We would also see how limiting the size of government reduces that amount.  Thus, a return to our original Constitution and self-sufficiency.   Before income tax, Americans were able to accumulate real wealth and hand it over to the next generation.  We could do that again.

What does it mean to retire?

I have four days until I retire from working for 40 years.  Truthfully, I have been working all my life.  But this retirement is from a professional career after college.   For a man, work or a career usually means more than just a job or security.  It means a sense of identity, a picture of who you are and what you chose to do with your life.  Although it shouldn’t be – for most men, you are your job.

So, what do you do when you are no longer the professional doctor, lawyer, or engineer?   Does it all end and you just fade away?   Not really.  But a lot of thoughts and emotions go through your head.  Some of the emotions are relief from the stress and the problems that work brings.  Other emotions are the memories of good times and friendships along the way.  But, make no mistake, all men and women go through a process of letting go when they retire.

Fortunately for me, I experienced a “trial” retirement from 2005 to 2006.   It was not planned and we were not prepared for it, but it did teach us what we needed to do to adjust to this new chapter in our lives.  I worked part-time for the same company and got to do a lot of enjoyable things, but after a while I was bored and missed the interaction with people.  My career involved so many hours and consumed so much of my life, that I had no hobbies, social life or interests outside of the work place.   So, before you retire, take some time to think of what retiring really means. 

Let’s start with the dictionary.               

re·tire:  verb \ri-ˈtī(-ə)r\ re·tired, re·tir·ing

1: to withdraw from action or danger : retreat 

Does retire really mean to withdraw from action?  Why can’t retire mean advance instead of retreat?  For the first time in most of our lives we can finally do or pursue what we always wanted to do.   The job or career we chose may not have been the only thing that interested us in life.  In my case, I followed the advice of my parents and other adults who in the wisdom of the 1960’s told me to get a good college education, go to work for a large corporation, and when I reached middle age I would be in a nice middle management position and the company would take care of me.  I did that and began my engineering career in 1973.   However, I found that working for a large corporation did not guarantee a long career and most certainly did not ensure good treatment when I reached middle age.  

By the time I was in my 50’s many corporations had come and gone.  Downsizing was in vogue and there were no middle management positions left in the organizational chart.  Just an elite group at the corporate level and the rest at the plant level.  I survived many downsizings, mainly by agreeing to take on the work left over.  I was doing the work of five employees by the time I reached age 55.  The demands of the job and the stress level were high.  The corporation was anything, but paternal and usually acted more as a slave driver.  As my last boss said, “What were you thinking?”

So, I would agree retiring is a retreat from “danger” in the form of a stress-induced heart attack, but it shouldn’t be a retreat from “action.”  In fact, when I reached 55, I decided to take action.  My wife and I realized we had no choice but to stay in our jobs because we had too much debt.  Debt limits your options.  We decided to get out of debt any way we could.  It wasn’t an easy road, but we put a plan in action and within four years we were out of debt.  If working as a Greeter at Walmart makes me happy, now I have that option.

2: to withdraw especially for privacy 

Does retire mean to withdraw from others and to isolate yourself?   Privacy is good, but the isolation of retirement isn’t.  We need interaction with people to remain healthy emotionally, just like we need exercise to remain healthy physically.   Sometimes that interaction is family, sometimes it is friends.   Many times it is neither.   One of the hard truths about getting old is you start losing your family and friends.   Having the means to meet new people is a necessary skill as you grow older.  That means you must develop the type of smile and winning personality that attracts others.   My wife is blessed with a beautiful smile.   She can sit on a bench and in 15 minutes, some one will be sitting next to her and having a conversation.  Once she went to the huge Macy’s in New York City.  She was so tired from shopping that while waiting in the lobby for me to pick her up, she just sat down on the floor.  After a short while, several women were sitting on the floor next to her.  They began chatting and laughing.  The crowd began to grow and Macy’s security became concerned.  I guess they thought it was a protest or something.  Fortunately, I showed up just in time to keep her from getting arrested.  Melissa found New Yorkers to be just as nice and friendly as Texans.   Of course, she has never met a stranger.  

3: to move back : recede 

Does retirement mean moving back?   Well, usually it does, but not in the sense of receding.  Many retirees decide to move into a smaller house or a warmer climate.   It is often their last move.  This may mean they find a convenient place to live, but often they are more removed from people they know.  The less familiar surroundings and the loss of things to which they were accustomed cause problems.  I have learned that people are more important than places.  We may think we don’t need people in our lives, but we do.  We often need people who need us.  I know we have spent a lot of our time and money helping others and now we are on a fixed income, but there are more needs than just money.  Our family needs a connection to the past even if they don’t think so.  Respect for elders isn’t just a commandment in the Bible.   It has a purpose.  Taking time to hear “living” history reminds us of what others suffered and how blessed we are today.  In America, each generation has had a better life than the last.  This should give younger people hope for the future even during bad times.  Our stories and remembrances although boring to some, provide a living testimony for others.   Stay close to people and plant the seed of hope for another generation.

4: to withdraw from one's position or occupation  

Retirement does not mean the “conclusion” of your life.  Your life is far from over.  How do you know you won’t achieve a higher “position” than the one you just left?  In many cases, it is time for the second or third act in a long drama that is your life.   Find what you enjoy and are passionate about and begin doing something that makes you happy.  What an opportunity.  For the first time in your life, you have the luxury of “time.”   ‘What if you have all the time in the world?”  What would you do?   For one thing, you would no longer worry about time.  You would have time for several “careers.”   Time to learn and master new things even though you make mistakes. Time to develop relationships.   A wise man once told me “Don’t live by the calendar.”   Which means: Don’t assume you are supposed to graduate from school at a certain date, or marry on a certain date, or achieve some success at a certain date, and if you don’t you are a failure.   History has many examples of people who achieved their dreams much later in life.  I have been told with the cracking of the DNA code, modern medical science will find ways for us to live 120 years.   That is half of your life if you retire at 60.   Quit thinking you are running out of time.

5: to go to bed 

Well, this is one definition of “retire” that appeals to me.   When I was trying my “experimental” retirement, I found I took a lot of naps.  I told Melissa I was going to make a sign that read “Chores are optional, but naps are mandatory.”   I tend to enjoy sleep.   But, now that I am about to retire, I find I am too excited to sleep.  There is so much freedom to do anything you want that you don’t want to waste time sleeping.  I have found Melissa is more active and productive since she retired.  She started writing a book and will be finished by the end of her first year of retirement.  She has reconnected with family and friends and is a constant source of encouragement to them.  She has such a zest for life that she is constantly asked to join groups of others.   Melissa and I joined the YMCA to get our health back.  With this new exercise habit, we will have more muscle, more energy and much better health to keep us going.   We spent our health making money in our younger years.  We don’t want to have to spend all our money to buy back our health in our retirement years.  

So  WHAT IS THE MEANING OF RETIRE?   Well, I have decided to replace the word “retire” with the word “renew.”  I am not beginning retirement, I am beginning renewal.   I plan for the next decades of my life to be the best I have ever lived.   Every morning I wake up, I will say, “Good Morning, Lord” instead of “Good Lord, its morning.”   I will look for ways to encourage others and give them hope.  I will get in the best shape of my life, so I won’t creak and pop when I walk.   I will stay active and learn new things, pursue what I love and enjoy every bit of my life.  I will live as if I have all the time in the world and money is no object.   And when I die, I will have no regrets, no grudges, no unforgiveness and no worries.

So join me for the best is yet to come.