Money Minded Families. Stephanie W. Mackara
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age 65 and older was 78%. However, through the beginning of this century, the participation rate of men over 65 in the workforce has steadily and dramatically declined. (In 2000 the rate was just 18.4%!)
Retirement became a natural expectation and has come to be viewed, ideally, as an extended period of independence and leisure. So, what has changed? A lot; the shift from agriculture to industry had a significant impact on how people worked. No one truly retired from an agriculture position. That agricultural work was typically not just a way to earn money, but a way to live and have a home. As evidenced in many early wills prior to the twentieth century, a “retirement plan” entailed having as many children as possible so that, in exchange for the house and farm, the children would care for their elder parents in their final years of life.
With the Industrial Revolution, younger generations were able to leave the home to find different types of work and increase their standards of living. This generation entering the workplace created a shift from people having children as a plan for caretaking in retirement to having bank accounts. As children no longer stayed at home, elders could no longer rely on their children to care for them in retirement as they aged, so we also saw a decrease in the number of children being born and coupled with an increase in savings rates.
With the Industrial Revolution also came the five-day workweek, something unheard of in agriculture. To keep workers happy, employers started providing benefits in the form of pensions or other defined benefits that employees would collect only after decades of service. American Express offered its first pension as early as 1875 in order to entice workers to join the company. These defined benefits were “guaranteed” specific dollar amounts to be received each month, funded and paid entirely by the employer if you worked for the company until, say, age 65. Age 65 was seen as “old age”; there were studies that showed a mental and physical decline in workers over the age of 60 and so 65 became known as the target when one should retire. We quickly shifted from working to live to working to retire.
Enter Franklin Delano Roosevelt's first rendition of Social Security on August 14, 1935. The purpose was to provide public pensions to those not covered by private pensions. Social Security was paid into by most employees via a tax from their paychecks and a “pension” payment was made at full retirement age, which (at the time) 65. Taxes to fund Social Security first started being collected in January 1937 and the first benefit payment was paid in 1940. Today, Social Security has morphed and expanded significantly from its original form (more on that later).
Another important, and probably the most critical factor in our view of retirement today, is the marked and continual increase in Americans' standard of living during the Industrial Revolution through today. Today, Americans enjoy a standard of living commensurate with eight times the average American income of a century ago. The rise in opportunity, income, and increased savings rates has provided many the opportunity to spend time and money on things previously only available to the wealthy. Additionally, global industry has decreased the costs of many goods previously considered luxury items.
In 1803, the economist John Baptiste Say explained what is now called “Say's law,” which states, “It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value” (Source: J. B. Say, A Treatise on Political Economy, 1803, pp.138–139). In other words, supply creates its own demand.
At no time in history was this more accurate. Industry was creating more and more goods at affordable prices and, for the first time, private companies or government were funding decades of work-free years. As a result, masses of Americans had extra time and money to spend. This is how today's ideal vision of retirement came to be. This created an environment where savers and spenders both were in a good financial position. The only difference was how much money was left to their children at the time of their passing. Big savers didn't have to spend much, if any, of their own savings on retirement simply because the access to the other financial resources was enough to cover their spending while spenders continued to spend because the government was paying for it!.
The children who may have been left an inheritance from these savers are the current generation of Boomers, and guess what they did? According to Dr. Jay Zagorsky, senior lecturer at Boston University Questrom School of Business, one out of three Baby Boomers who received an inheritance spent it within two years. The good savings habits of their parents somehow did not pass forward to these future generations. Why? I am not certain, but it could have a lot to do with the lack of communication many families have about financial matters. It's time to change that.
Consider families today. Most don't wait until retirement to take a wonderful vacation or to buy the house of their dreams; they buy it when they desire it. We have increased our spending habits but our resources to fund retirement have not been replenished. This has mass implications on many people's retirement savings and more drastically the ability to realize retirement as a destination at all. As you read through this book, it is important to understand how our financial world was formed and how it has changed, quite dramatically, in order to fully appreciate our roles and the need to make a change for our children's future—one that could very likely not include a true period of retirement as we know it today.
2 The Current State of “Retirement”
When people first started “retirement planning,” their focus was often on what was known as a three-legged stool. Each leg of the stool represented a foundation of financial support to count on during retirement, removing the fear of outliving personal resources. The three legs were employer-defined benefit plans or pensions, Social Security, and personal savings. The personal savings leg of the stool was typically used to fund the proverbial “bucket list” while the Social Security and pension supported most people's day-to-day living expenses.
Retirement planning forecasts were then filled with excellent news. We had great “pensions”; many committed to paying private or federal employees the average of their top-three working years for the rest of their lives! They were getting paid the same amount in retirement as in their top-earning years; a lucky few have actually earned more in retirement than in their working years! The government provided Social Security, incomes were growing, access to more luxury items was available, and most people were working fewer years so that they could enjoy all the wonderful bounty! Life was great.
But things have changed for most Americans.
In the previous chapter, we discussed the dramatic decline in the labor force for men age 65 and older at the beginning of this century. What do you think has happened since then? We have seen a marked increase in the labor participation rates of older men, and women, too. In 2009, more than 36% of men ages 65–69 were actively engaged in the workforce. Remember this same participation rate was only 18.4% in 2000. These numbers have similarly increased for men age 70 and older (Source: Older Adults' Labor Force Participation since 1993: A Decade and a Half of Growth, January 2010, Richard W. Johnson and James Kaminski).
Why have Americans started working into what just a few years ago we considered “retirement”? There are many reasons of course. To start, wages have become stagnant, and healthcare and education costs have increased astronomically. Combine this with the disappearance of most private pension systems and a broken Social Security system, and we now have an environment where “retirement” is an elusive concept. Increased personal and national debt also continue to eat away at our ability to both save and invest.
Remember how generous American Express was in 1875, offering the first private pension for their retired employees? In 2009 they decided it was simply unsustainable and stopped offering these generous pensions. American Express is not unlike many other corporations that simply can no longer afford to pay pensions to their employees. Instead, most have replaced traditional pensions and defined benefits with defined-contribution or what most of us know as 401(k) plans. These plans require employees to save their own money for retirement. This ends up morphing two of the three legs of the retirement stool together, creating a great imbalance toward your personal savings.
Consider how much a household needs to spend during their retirement