The Grinch Who Stole Retirement

October 3, 2014 – I know it seems like I’m beating up on the Fed lately and I am. But I’m doing so with a purpose. A lot of us have heard the calls to end the Fed and to audit the Fed and I fully support those ideals.

However, I want to provide an understanding of how damaging the Fed is to YOUR life. It would be enough to end the Fed simply on the basis that it is illogical and illegal to have a private thirdretirement1 party controlling our nation’s money, especially given they are not accountable to anyone. That is far too much power to leave to a small group of men and women with obvious conflicting interests to those of the American people. But I want to show very clearly how the Fed policies do, in fact, conflict with your daily and long term interests.

In my latest article “Quantitative Proof the Fed is Destroying the Middle Class” I showed how the Fed is disincentivising job creation. In this article I want to look further out and breakdown how the Fed policies are not only destroying or degrading your work life but are despoiling you of your retirement[i].

Even those of us who don’t have finance degrees kind of know that we are supposed to put 15% aside from the day we start working and let compound interest do the rest. For compounding interest over long periods of time will turn pennies into fortunes. Now times get tough and we don’t always stick to the plan but let’s have a looksee at what would be left for us in retirement even if we did everything right. In order to really compare and contrast I am going to lay out two scenarios. I’m going to show three generations of retirement savings for two income buckets; moderate middle class and upper-upper middle class.

Now no two households are exactly the same but there are a few major variables that guide the effectiveness of our retirement strategy. I’ve held these variables fixed within each income bucket across the generations. I hold the savings rate and income growth the same over the three generations changing the interest rates as the Fed has guided them over time. Retirement income is 80% of your last working year’s income with $20K of that coming from Social Security. I also carve $268K off the top of your nest egg at retirement for medical costs, which is deemed to be the minimum cost to have just a 50% chance of covering all your medical expenses in the golden years. Note the annual raise rate is the parameter that gets us to our expected income bucket. Let’s have a look at the moderate middle class retirement across the three generations.

So the old fashioned mix of responsible saving, a moderately progressing income and historical average real interest rates around 3.5% (prior to 2000) over the course of a career allowed you to retire at age 65 and live until you were 80, which was well beyond life expectancy until recently.[ii]  Today, 12% of folks who make it to retirement (65 years old) make it beyond their 85th birthday and 35% of those who make it to retirement reach up to age 84.[iii] And so there is a decent chance if you make it to retirement 15 years of financial coverage may not be enough.

The moderate middle class retiring soon and those just entering the workforce then face a real problem. Those retiring in 2020 will only have enough money for 9 years of retirement and those just entering the workforce, well they can enjoy 5 years of retirement given the same savings strategy that their grandparents employed. That’s a difference of more than half a million dollars of your retirement nest egg plundered by the Fed from those just entering the workforce. The absolute reality of this situation is that those yet to retire will have to work longer and put a higher rate of savings away to achieve the same standard of retirement their grandparents enjoyed.

Now I know some of you are saying well, between my spouse and I, we make very good money and won’t have to worry about running out in retirement. Ok, let’s take a look at you go-getters and see if you fare any better.

Grandparents Upper

Parents Upper

Entering Workforce Upper

Here you can see the higher expected standard of living in retirement requires a higher savings rate in the empty nest years but that is viable and typical given the much higher disposable income levels of this income group. Unfortunately, though, today’s young adults are only going to have 8 years of comparable retirement to that of their grandparents, with a total plundered value of more than three quarters of a million dollars from their retirement. Again, those in this income bucket will have to save more, work longer or reduce their standard of retirement to something less than their grandparents enjoyed.

The dire reality of retirement is likely the most under-appreciated issue facing the nation. There is simply no discussion being had about the decaying scenarios for those yet to retire despite having the baby boomers moving into the retirement phase of life.  The ZIRP (zero-interest rate strategy) strategy employed by the Fed has obliterated the entire fundamental basis of the nation’s retirement strategy. This will result in two ways as it pertains to retirees.

First, those that are responsible and have the ability to do so will increase their savings rate over the course of their working years to make up for the stolen interest income. The problem with this is it will significantly impact consumption which makes up 67% of GDP. And so we have a serious structural demand problem even from those lucky enough to be well employed.

The second result will be irresponsible behavior or constrained circumstances leading to retirees with no money and thus being cared for by the state. This leads to higher taxes which is another drag on consumption.

Ultimately in a world with higher than ever debt levels thus requiring higher than ever economic growth we are going to struggle to find any growth at all, in fact we are at this point already. Add this to the structural employment problems that have taken shape since 2000 and this nation faces very likely more than it can muster.

I hate to sound so pessimistic but the Fed has paved the path for a record number of billionaires in America this year.[iv] That could be cause to celebrate if the Fed hadn’t also paved the path for a record number of people living in poverty in America this year.[v]  The schism between rich and poor is getting wider and the middle class is slowly being pushed to the bottom, leaving more and more wealth to those fortunate few at the top.

This widening schism between the haves and have-nots is a direct result of the Fed and its policies. We the people seem to be fairly complacent about allowing this private third party to plunder our wealth and redistribute it to the few at the top of the economic food chain. It’s kind of like a mutated Robin Hood effect, where they plunder the assets of the working class and deliver them to the rich.

It is somewhat mind boggling to me that I still hear educated men and women defend the Fed as though they are being patriots defending an American institution. This is an entity that by Constitution is illegal, an entity that answers to no one, an entity that has transferred more wealth to fewer beneficiaries than ever before.

Given the clear evidence that the Fed is not only debasing your day to day standard of living but has already plundered much of your retirement, isn’t it time to demand an end to this financial brutality?

Sources:
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[i] http://business.time.com/2013/02/11/sizing-up-the-big-question-how-much-money-do-you-need-to-retire/
[ii] http://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1953-01-01&coed=2014-01-01&width=670&height=445&stacking=&range=Custom&mode=fred&id=GS10_CPALTT01USA661S&transformation=lin_pch&nd=_&ost=-99999_-99999&oet=99999_99999&scale=left&line_color=%234572a7&line_style=solid&lw=2&mark_type=none&mw=1&mma=0&fml=a-b&fgst=lin&fq=Annual&fam=avg&vintage_date=&revision_date=
[iii] http://www.nationalatlas.gov/articles/people/a_age65pop.html
[iv] http://www.nbcnews.com/business/economy/number-billionaires-hits-record-high-2014-thanks-u-s-n205131
[v] http://www.newsmax.com/Newsfront/poverty-line-grows-under/2014/01/08/id/545892/

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