Retirement a Catch-22 Situation

Is it possible to work for 45 years and then retire for 35 years?

This is the debate society is going to have (in earnest) in the not-too-distant future.

Self-interest — political and personal — means the exchange of opinions will (at times) be heated.

The prospect of delaying retirement until age 70, or even 75, is not going to be met meekly by boomers who are counting down the days until they’re 65.

And, even if boomers collectively agree it’s in everyone’s best interest to prolong their working life, AI (artificial intelligence) and robotics may not allow them that luxury.

It really is a catch-22…we need to work longer, but the workforce disruptions at play within the economy may not make this possible.

But I’m getting ahead of myself.

Why do we need to work longer?

Why is it necessary to raise the retirement age well above 70?

According to The Australian

‘Despite 25 years of compulsory superannuation, about 80 per cent of people still retire on to at least a part Age Pension or benefits and half of all singles are retiring with total assets of less than $100,000.’

Four out of every five retirees are reliant on taxpayers to either fully or partially fund their retirements…for a far longer timeframe than it was ever envisaged.

Even in good times — with budget surpluses and no Government debt — this is not a sustainable model.

But we are not in good times. And this problem is not unique to Australia.

The publication of the ‘2017 Mercer Global Pension Index’ report was a sobering reminder of how the global pension system is incapable of delivering on its promises (emphasis is mine)…

‘Not a single country across the world has a pension system that could be judged as “first class” and every nation needs to take action to improve retirement provision. This is the damning verdict of the latest Melbourne Mercer Global Pension Index, which is urging governments in 30 countries to face up to the challenges of inadequate retirement savings and unfavourable demographic trends. Tens of millions of workers face impoverishment in old age unless policymakers take steps to strengthen pension systems to ensure they can deliver good retirement benefits.’

Financial Times, 23 October 2017

According to David Knox, senior partner at Mercer (emphasis is mine):

Increasing life expectancies and low investment returns are having significant long-term effects on the ability of many pension systems around the world to deliver adequate retirement benefits now and in the future.’

There are three variables that determine the quality of life in retirement…

  1. Personal financial situation
  2. Taxpayer funded contribution to fund pension and healthcare payments
  3. Number of years’ retirement funding is required for.

The only variable that has more certainty than any other is the retirement timeframe.

With every year that passes, medical science is increasing our life expectancy…making less last for longer is an almost impossible task.

If something cannot continue, then it won’t.

Take the emotion out of the debate and logic tells us that exiting the workforce at 65 or 67, and living to 100, is a luxury no nation can afford…and one that very few individuals will have the personal means to fund.

And that’s only going to become more evident in the coming years.

The future is not the past

Retirement plans are based on the past continuing into the future.

Financial plans with their forecast outcomes are a case of projecting ‘the known into the unknown.’

These plans are an exercise in ‘hope triumphing over reality’.

The software models assume (more or less) the following…

Government to continue paying age pensions.

Markets to return around 7% per annum.

But what if the future springs a nasty surprise and doesn’t behave like we’ve come to expect?

We’ve become accustomed to living in an inflationary world.

Costs continually rising.

Wages going higher (giving Government additional tax revenues from bracket creep).

Asset prices rising.

Rental income adjusted to CPI.

We’ve been conditioned to make financial decisions based on inflation.

What if inflation is replaced by deflation? 

A few years ago this was a virtually unthinkable possibility.

It was widely believed that central banks could produce inflation with a flick of the printing press switch.

But, as we’ve seen in recent times, it’s not that easy.

The warning signs of an impending deflationary world are starting to come into focus.

Low wage growth. Below par GDP growth. Rising interest rates diverting more disposable income to debt servicing.

While inflation has been difficult to manufacture in the economy, it’s been a very different story in financial markets.

Asset prices — property, shares, cryptos, art works — have all inflated well beyond historical norms. Crazy…that’s the only word you can use to describe the prices being paid for assets.

In due course sanity will prevail…and when it does, it’ll destroy the retirement plans of millions of people.

Prepare for deflation

You need to seriously consider a complete about-face in how the economy functions.

This warning comes from Stanley Druckenmiller.

The name may not be familiar to you. Here’s a bit of background.

Ken Langone is the 82-year-old co-founder of Home Depot (according to Forbes his personal wealth is US$2.7 billion) said this recently…

‘Stanley and I go back 40 years. He is a devoted husband, father and friend. He is as fine a human being as I know, and he is one of the most successful investors in America. I have been investing with him for 40 years, we have never had a down year.’

According to long-time investors, Stanley Druckenmiller has returned — on average — around 30% per annum…and has never had a down year. That’s pretty impressive.

Today, Druckenmiller mostly manages his own wealth…estimated to be close to US$5 billion.

Stanley Druckenmiller is a seriously smart guy…when he talks we need to listen.

And this is what he’s saying …

‘If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years.

The excessive (and cheap) liquidity provided by central banks bought us a decade of false prosperity. Nothing has been fixed.

Deficits are growing larger. Debt levels continue to increase. Speculation is rampant.

We’ve been set up for a massive fail…it’ll be Great Depression-like in its impact.

As asset prices deflate — resulting in losses that no financial planning software ever factored into its forecasts — spending is going to contract…severely.

Retirement capital, housed in superannuation, account-based pensions and/or rental properties, will shrink in value…and it’ll be decades before an investor’s dollar will be made whole again.

People will spend with caution. This is a deflationary spiral.

Government deficits — due to higher unemployment, lower tax revenues and rising welfare payments — will go much further into the red.

To stem the losses, asset and income tests will be tightened up considerably.

The age for pension eligibility will be extended well beyond 67.

Superannuation and account-based pension funds will be taxed at higher rates.

Funding a multi-decade long retirement with less capital and reduced Government funding is going to be an almost impossible undertaking.

But, the catch-22 is will people (with insufficient means to retire) be able to stay in the workforce with AI and robotics making people redundant?

The best advice I can give to anyone approaching retirement age is to be defensive with your capital — cash up before the deflationary bust hits and try to improve your skill set…to remain relevant in the fast-changing employment environment.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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