About 10,000 people retire each day in America.
That means you and I probably know someone who had planned to retire just as the Coronavirus-caused financial disaster struck.
Based on my experience, most of those 10,000 had already made peace with the fact they would have to do without a few things in order to make their retirement budget work. And that was before COVID-19.
Perhaps they’d seen their parents retire in a world offering government-backed bonds and FDIC bank CDs paying 6% to 8% on every retirement dollar. Today’s Coronavirus-affected CDs and government bonds struggle to pay 1%.
Without trying to debate the pros and cons of the various state and national “stay-at-home” orders and the huge portion of our economy that has been shut down, I can say I empathize with the protestors gathering at state capitals across the country, urging governors to re—open the economy.
No one is arguing that shutting down the economy is hurting people. The argument the government is making is that the harm done is for the greater good.
That “greater good” argument is the same one the Federal Reserve made in its last two attempts to stimulate the economy after major economic shocks – there was the dot com bubble in 2000, followed by the financial crisis of 2007. In both cases, the Fed stepped in and lowered the interest rates borrowers had to pay, thus stimulating the economy.
It was as if every saver in America was told, “We’re going to reduce the amount of money everyone else is going to pay you so we can help the rest of the economy.”
I’ve always been amazed that retired people have not lined up in front of the Federal Reserve with “Don’t mess with my CDs!” signs and loud chants of “Yo Ho, You’re not great, you reduced my interest rate!”
But the Fed has gotten away with this strategy with little or no push-back from the saving class. And now, yet again, savers will pay a dear price for the Coronavirus.
What is a retiree to do?
Well, you can lower you living standard. If you have $300,000 and want to live off the interest (assuming you’ll get 1%), you’ll need to learn to live off the $3000 per year that will yield you. That’s about $250 each month.
But what if you didn’t need $250 per month, but $1500? You could do that, but you’d be assured of running out of money in less than 20 years. That’s because your $300,000 only earns $3000 each year in interest. So, the additional $15,000 per year you would be spending in this scenario would have to come from principal…which would eventually run out.
That is, unless you had a group of cooperative and compassionate friends that said, “Don’t worry about it. If you happen to out-live your money, we promise to just keep sending you the $1500 per month as long as you live.”
That would be amazing!
You and I probably don’t have enough friends with enough financial heft to make that a meaningful promise, but I can suggest the next best thing.
You could make that same deal with a large group of total strangers. All of you could put $300,000 each in the pot together. In this example, we’ll assume you are all the same retirement age. Assuming you hire a very nerdy math genius (known as an actuary) to calculate your life expectancies, you could be sure that for every one of you that outlived your $300,000, there would be someone else who didn’t because they died early.
Each person died before the average life expectancy would leave a pool of money. Actuaries call this “mortality credits.” The mortality credits are used to pay the income to the people in the group who happen to live longer than average.
I’m describing the broad outlines of a guaranteed income annuity issued by an insurance company. The insurance company does the pooling of the risk (that’s the large group of people), the actuarial calculations and provides the guarantee that the income will last for a lifetime (no matter how long).
The Beatles used to sing a song with the lyric, “I’ll get by with a little help from my friends.” Ringo Starr is 79 today.
If you don’t have as much money as Ringo, you may have to retire with a little help from your friends – or at least a group of people who have all agreed to promise one another that their incomes will be enough, and that they will last as long as each of them do.
That’s a pretty amazing trick, but one you can’t do alone.
You need a few “friends.”
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