We all hope to live long enough to receive a pension. But few of us have any real idea of how much money is needed to fund our retirement.
Many happily assume that savings of $250k, for example, will easily fund round-the-world travel and major home improvements, whilst also providing plenty of spending money each month. Equally, of course, most companies continue to assume that pensioners, and those near retirement, will continue to spend as if they were still employed.
Both sets of assumptions, unfortunately, are completely wrong. As the chart above shows (updating that used in chapter 5 of Boom, Gloom and the New Normal with 2012 data), even someone who has saved hard and successfully for 30 years will suffer a major reduction in income on retirement. Using the US as an example, it shows:
• Someone who saved 10% of median earnings from 1979-2012, and achieved S&P 500 market performance (red line), today has a pension fund of just $284k (green column)
• This means they would transition from median earnings of $40k in 2012, to a pension of <$10k if they retired this year
Even more worrying is that these are the lucky few. The median household headed by someone aged between 55 - 64 had savings of just $87.2k in 2011. Whilst a new HSBC survey of 15k people across 15 countries shows that "on average, people expect their savings to run out just over half-way through retirement".
This, of course, is not the end of the story. Governments have displayed the same carefree attitude as individuals and companies. They have convinced themselves that adding a year or two to pension age will remove the problem. Only now, when nearly a third of the Western world is already over 55 years old, have some brave souls ventured to present a reality check.
As ICIS's Joe Kamalick reported, the non-partisan US Congressional Budget Office warned last week that the ageing US population is creating major headwinds for public finances as a result of cost increases and lower economic growth:
• Costs are increasing due to "The pressures of an aging population, rising health care costs, and expansion of federal subsidies for health insurance"
• "Much slower economic growth than the average growth rate of potential GDP since 1950. The main reason is that the growth of the labor force will slow down because of the retirement of the baby boomers", as well as fewer women joining the labor force
This situation is clearly unsustainable. The CBO conclude that a continued failure to tackle the issue will soon"have serious negative consequences". Or, as Joe warns, there is a growing risk that:
"The US government would be unable to pay its bills, the economy would collapse, and, like many Greeks of today, a lot of American households would be burning furniture and books to stay warm".