“Expectation is the root of all heartache.” – William Shakespeare
The above quote from Shakespeare is one of my wife’s favorites. It serves as a constant reminder to our family that much of the time feelings of disappointment or frustration are simply a matter of misplaced perspective and expectation. I’ve realized over the years that this truth permeates all areas of life, and one of the secrets to happiness and contentment is to protect yourself against allowing unrealistic expectations to run away with your emotions.
It’s National Retirement Week in America, and I think the planning and execution of individual retirements is an area where setting appropriate expectations is incredibly important - not only for emotional reasons but also because math doesn’t tend to care about our feelings. Unfortunately, the retirement outlook in our country is not looking great. Some might even call it a crisis. The research suggests that there is a massive disconnect between expectations and reality when it comes to what the average person in our country can expect their retired life to look like.
According to an article by Robert Laura in Financial Advisor magazine, 70% of pre-retirees think that life will be better in retirement while only 40% of retirees find it to be so. Think about that. More than half of those in retirement end up believing their life was better before they made the transition. There are a number of potential reasons for this, not the least of which is the misplaced perception that the absence of work will somehow make life qualitatively “better”. There are those pesky expectations again.
But philosophical, spiritual and emotional reasons aside, there are also plenty of financial reasons why many are setting themselves up for disappointment. One foundational issue for future generations is the long-term viability of social security. As we stated in our post Social (In)security, this government program will eventually become insolvent if left unchanged in its current form. While retirees operate on the expectation that their benefits will be there when needed, current political leaders would rather bury their head in the sand than come anywhere close to touching this hot button issue. That said, as we’ll explain in our next post we do think the problems with social security are fixable, and it’s almost certain that the needed reforms will eventually be implemented.
Another looming issue is the woefully underfunded status of public and private defined-benefit pensions across the country. The proverbial can has been kicked down the road for years on this issue, and eventually benefits will need to be adjusted lower or contributions will need to be increased, or both. Again, at the root of the issue are long-term return expectations that are foolishly high and almost guaranteed to not be met. Like social security, this is a politically toxic issue that current leadership is hesitant to dig in on, but eventually crisis will breed the necessity for structural changes to our country’s existing pension systems. We’ll peel back the layers on this topic in an upcoming post as well.
Finally, and perhaps the most troubling aspect of our country’s retirement woes, personal savings rates and abysmally low compared to what it would take to fund most peoples’ idea of what their retirement should look like. We’ve written extensively about the importance of saving early and often, and how cultural pressures inherent to American’s highly materialistic society act as a constant headwind to sound financial planning. Unfortunately not enough people are listening. In fact, a recent study from the Insured Retirement Institute shows that roughly 45% of baby boomers have no retirement savings at all, and the majority of would-be retirees drastically underestimate the amount of money they will need each month to cover expenses. Again, we see that expectations are out of whack and doomed to go unmet. A deeper dive into the personal savings crisis will serve as our final post in this series.
As we’ll show you in the next several Insights, the issues referenced above are both serious and complex, and they will necessitate a lot of hard decisions being made. Nobody likes hard decisions…that’s why we call them hard. But what’s worse, making a hard decision today that sets you up for future success, or living with a false hope that eventually ends in disappointment and regret? We view these types of questions as integral to the planning work we do with our clients.
Our ultimate goal is to deliver freedom to our clients that empowers them to pursue what makes their lives truly rich. A big part of this, and something we’re learning to do better every day, is properly setting expectations so that our clients avoid the heartache so many of their peers are setting themselves up for. So we invite you to join us over the next several posts as we unveil reality and reset expectations for our country’s social security system, public and private pensions and personal savings trends.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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