I know that a lot of people that are considering retiring right now, are very apprehensive because of the scary economic conditions. I experienced many of the same apprehensions, but being that I'm already retired, it's too late for me to reverse course. And the truth is, my fears were far worse than reality proved to be.
I am not alone. Yesterday the
New York Times reported that a poll done by The Pew Research Center shows that retirees are actually faring
better in this recession than their 30 to 40-something-year-old cohorts that are still in the workplace:
"The most vivid finding to emerge from this survey is that older Americans -- most of whom have already retired and downsized their lifestyles -- have been far better insulated from the current storm than those who need to worry about keeping their jobs and building up diminished retirement accounts . . ."
At first glance, this finding was curious to me. The one group that has no more income coming in from gainful employment is faring the best? Kind of the exact opposite of what you'd expect if you are one of those people on the diving board thinking about jumping in, huh?
Why would this group be doing better than those 30 to 40 year-olds that have their whole lives in front of them to earn money?
I think it's partially because retirees are forced to be more financially agile. When you are working and retirement feels like it's such a long way off, it's much easier to get in financial trouble. You have the illusion that there is going to be a constant stream of income coming in for years to come; and some feel so secure of this future income stream that they borrow to finance current spending, thinking that a salary will always be there.
Retirees have already given up on that illusion since they have a fixed amount of money that must last them for the rest of their lives. Perhaps this makes the impact of bad times seem more
real to us, forcing instant action to
adjust our spending during a bad market. Retirees don't have the option of thinking "My job is secure," or "I'm sure I'll find a new job next month," or "Retirement is so far off, I still have time for my income to supplement my portfolio, or for my investments to come back." We have to react instantly. The negative impact of a major hit to the retiree's portfolio is immediate, and it's implications are clear.
The
durability of your retirement nest egg is a function of four things: spending, inflation, portfolio growth, and your longevity. The only of these factors that retirees have any significant control over is spending, although I suppose you can influence the longevity factor as well, perhaps by taking up smoking, eliminating your exercise regimen, or by not wearing your seatbelt, that type of thing.
Fortunately, I am finding retirement to be a lot less expensive than I thought it would be. While our nest egg has been hammered along with everyone else's, our spending has decreased even more than I imagined it would, meaning, that the nest egg should carry us through at these spending levels (adjusted for inflation), even though it has been beaten down by the market. It looks like other retirees are finding the same thing, or perhaps they are more willing to make immediate and drastic cuts in their budgets than their working brethren.
In addition to downsizing lifestyles, it appears that retirees are following conventional investment wisdom. Such wisdom dictates, that as you get closer and closer to retirement age, you should shift your portfolio allocation more and more toward bonds and cash, and away from stocks. When you are actually retired, this shift should continue, creating an even more conservative portfolio as the years go by. This may also explain why retirees are faring better:
"The collapse in stock prices last year also caused less damage to those over 65. The poll found that 23 percent of elderly Americans reported losing at least 20 percent of their investments last year, well below those further from retirement."
"Those over 65 presumably had more conservative investments, which fared better."
Unfortunately, what the Times calls the "threshold generation," has not fared as well, and it wasn't because they were losing their jobs at a higher rate. In fact, "the younger the worker, the more likely he or she was to lose a job."
"The Pew poll found that the recession was having its deepest immediate impact on those in the "threshold generation," ages 50 to 64. They were most likely to have suffered significant investment losses, and three-quarters of them said the recession would make it harder for them to afford retirement, a greater percentage than of either older or younger Americans."
It's a good reminder that if you are considering retirement in the near future you should already be shifting assets toward a more conservative portfolio that will preserve its value even in rocky equity markets. At the very least, it should be comforting to hear that it may be easier to downsize your spending in retirement than you might think.
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I read a book once that pointed out all the things you won't have to spend money on once you are retired: work clothes, lunches, daycare, transportation, meals out and entertainment that you won't have to eat/do to make yourself feel better because you hate your job so much, etc., etc.
Posted by: Rhea | May 19, 2009 at 12:52 PM
@Rhea--so true!
Posted by: Retired Syd | May 19, 2009 at 01:49 PM