[Homestead] Saving for a Rainy Quarter Century - G. North
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Fri Dec 17 12:43:40 EST 2004
Gary North's REALITY CHECK
Issue 405 December 17, 2004
SAVING FOR A RAINY QUARTER CENTURY
"People can expect to live one-fourth or
one-third of their life in retirement," says
Jeffrey Brown, an economist and author of a
recent study released by Americans for Secure
Retirement. "That requires a lot of planning."
The challenge, he explains, is to make a nest egg
last a lifetime in the face of uncertainty about
how long one will live and what future
expenditures will be.
Christian Science Monitor
(December 13, 2004)
Ben Stein is known for his comedy skills, as seen on
Comedy Central's "Win Ben Stein's Money." His performance
as the deadly dull high school economics teacher in "Ferris
Buehler's Day Off" is a classic. But as a commentator on
"Sunday Morning," he gets serious.
On the November 29 show, his commentary was titled
Try this on for size. You're seventy-five years
old. You live in the comfy home you've always
lived in. You play golf in good weather. In bad
weather, you travel to where it's warm and sunny.
When your grandchildren call, you take them out
on the lake in your new boat. Your wife takes
classes in the local college and paints. This is
your life in retirement and it's everything you
always hoped and dreamed it would be.
Or, try this scenario: you are seventy-five years
old. You live in a tiny apartment with the smell
of boiled cabbage and noisy neighbors all around.
You live in a scary neighborhood and you dare not
go out after dark. Eating at restaurants is just
a dream. Your apartment is too small to have your
kids or grand kids visit. If you get sick and you
have to spend time in nursing care, you don't
know how you'll afford it. Your life is pure
To emphasize his points, the tape editor spliced in
appropriate images. For scenario #1, there was a lake with
boats on it. For scenario #2, there was a photo of a
Somewhere in between Lake Capital and Slumburgh is
where most Americans will live out their golden years. The
capital base necessary to sustain life on the lake is huge:
millions of dollars. For most middle-class Americans, life
is more likely to be lived in an apartment connected to a
son's house, or maybe in their own home, which the son's
family lives in, in preparation for the inheritance. I
call this scenario #3. I call it Family Solidarity.
But the two ends of Stein's retirement spectrum are
realistic. You don't want to wind up in scenario #2.
The fact is that if you are a baby boomer, one of
the 77 million racing towards retirement, you
have -- to a large extent--your choice of which
of these retirement outcomes is yours. You get
the good outcome or something like it if you
start early, get a sensible, solid financial
advisor, make a solid sensible plan for
retirement savings, stick to it through thick and
thin, accumulate diversified savings of stocks,
mutual funds, bonds, real estate, variable
annuities and foreign investments. You should
accumulate an amount equal to roughly fifteen to
twenty times what you need annually to live on --
with allowances for pensions and social security.
It's a tall order, and it's a bit scary to think
about, but if you even come close to it, you get
to have that great retirement life.
Problem: the percentage of people who are actively
saving enough money to achieve this goal is so small as to
be statistically irrelevant. The savings rate in the
United States is close to zero. It has been falling for
two years. (http://snipurl.com/bbnz)
The average American family's income is about $40,000
a year. The average family therefore needs to have as a
goal a retirement fund of $600,000 to $800,000. But the
only asset they own that may possibly enable them to
achieve this is their home. This is why I see scenario #3
as the most likely. Stein warns:
The point is, making sure you have a swell
retirement is up to you. Not to Uncle Sam,
usually not to your employer, not to your kids.
You have to max out your IRA's, your Keoghs, your
401K's and do it sensibly, and then some. And you
have to start with that all important plan.
Stein's point is well-taken. Anyone who thinks that
the government is going to be able to give him anything
more than scenario #2 is naive. But most Americans are not
doing this. Most Americans are like these people:
Or, you can just be the happy go lucky
grasshopper in your working years, not think
about retirement, and then later, you get to live
At that point, the editor spliced in the back side of an
old woman in a wheelchair.
Which sounds better to you? I thought so. No
matter how old you are, get started now and do
the best you can.
Today, the personal savings rate in the United States
is 0.2%. The typical American family, which earns $40,000
a year, is putting away a whopping $80 a year. Some
How much should this family be saving? At least
$4,000 a year. Like clockwork.
THE CLOCK IS TICKING
It takes high income, good investment knowledge, and
self-discipline to save enough money to provide for a
comfortable retirement. It also takes the ability to stay
ahead of price inflation. This is not easy. In a recent
article in "The Christian Science Monitor, we read:
"In the world economy, we've seen whole
industries slide into bankruptcy -- steel,
airlines," says C. William Jones, president of
the Association of BellTel Retirees. "This has
really transferred responsibility for people's
financial future to themselves."
He speaks from experience. In the 14 years since
he retired, Mr. Jones has lost about 35 percent
of the buying power of his pension. To offset
those losses, he returned to work as head of the
retirees' association. "Had it not been for that,
I certainly would be making a significant change
in my standard of living," he says.
To make retirement saving easier, wise workers set up
an automatic payroll-deduction program with their employer.
The money is deducted and put into a savings program before
the worker receives his pay check. Like the U.S.
government's withholding plan, this lowers the pain.
If the company matches part of the deduction, so much
the better. But the SEC-approved investments may not pan
out as planned. The fund may not compound as fast as you
hope. But the discipline of living within your means is as
important as the rate of return on your investment
portfolio. Whatever the rate of return, it will produce a
nest egg larger than the one produced by the non-saver.
The key to success is a person's willingness to act in
terms of the ticking clock. It means facing reality young,
and then acting in terms of this reality, month buy month,
no matter what.
The problem is, it takes only one disaster to eat up
the program, such as sickness or lawsuit judgment.
Insurance can offset some of this risk, but not all of it.
This is why most people in history have died poor.
They did not leave much of a legacy to their heirs. They
had little capital. Yet the West has known about this
truth for over three millennia:
A good man leaveth an inheritance to his
children's children: and the wealth of the sinner
is laid up for the just (Proverbs 13:22).
The West's 250-year miracle of compound economic
growth has made possible a reversal of this empty-purse
legacy. The doubling period is 73 years divided by the
annual growth rate. Compound economic growth of 3% per
annum doubles the wealth of a society every 24.3 years (73
divided by 3).
The problem that most people face is that their
appetites grow alongside the rate of growth. Their tastes
change. Usually, these tastes become more costly.
Then, with plenty of warning but without preparation,
couples find themselves retired. They much cut
expenditures by 50% to 75% overnight. This kind of
reduction in lifestyle comes at a high emotional price.
Most people start spending their savings in order to delay
the required transformation in their consumption habits.
The less habitual their discipline of thrift, the less
prepared they are for the day of reckoning. They fail to
adjust fast enough. This is going to happen to tens of
millions of retirees. They don't see it coming.
Among baby boomers, both men and women expect to
play catch-up with their savings later in life
instead of making regular deposits now, according
to a study by The Guardian Life Insurance Company
of America. Yet that strategy can be costly.
"They don't understand some basic financial
principles such as compound interest and adequate
returns, so they are doing nothing," says Frank
Murtha, a business professor at New York
PAY NOW OR PAY LATER
Look at a photo of yourself that is over five years
old. You can see what has happened. Maybe you should
paste this photo on the bathroom mirror. Let it remind
you, day by day, that the day of reckoning is approaching
This may seem like strong medicine. But people don't
like to be reminded. A refusal to save, like the refusal
to write a will or set up a trust, is the average man's
response to the ticking clock. It's Scarlett O'Hara's
syndrome: "I'll think about it tomorrow."
It is easy to let the debt system hike the price of a
home, and then call this your retirement program. If you
own rental property, this is a valid outlook. "Borrow a
million dollars and have your renters pay it off," Jack
Miller says. But hardly anyone can do this because most
Americans don't rent. They are paying off mortgages. They
will get these debts paid off about the time they retire,
as long as they refuse to refinance along the way. Your
home is not an ATM machine.
But this asset will provide only rental space -- more
space than most retired people need. It will not provide
income. It will require maintenance. Property taxes must
be paid. This nest egg turns out not to be the capital
asset that retired people expected. If their family
members live close by, in mortgage debt up to their ears,
then the retired couple probably won't move to a lower cost
of living region. Their golden years become one long
struggle to get enough income to finance life in their
People in their twenties are unlikely to read a report
like this. Also, people in their twenties are locked out
of the conventional real estate markets. Their income is
low. They don't buy homes John Schaub's way.
(www.johnschaub.com) They rent. If they save for a down
payment, fine, but they can't hope to do this in Boston,
New York City, Los Angeles, and San Francisco.
American families don't make inter-generational
decisions based on inheritance. The parents don't sit down
with the younger in-laws and make plans as to who will get
what. They do not decide which region is best to keep
family's capital intact.
For instance, a joint family council could decide to
move to the same region. This way, grandparents won't lose
contact with the grandchildren. Next, the grandparents
could then buy an investment home in a lower cost-of-living
region, and rent it out. Later, they can sell their
existing home, not renew the distant rental contract, move
to the rental home, and add a separate wing onto it for
themselves when their income declines. They will be able
to rent out the main home for income, or else invite the
in-laws to move in. The parents then move into the smaller
unit. The family of the son or the daughter then buys out
the old couple, who issue a mortgage. In the nineteenth
century, farmers did this for their sons. But agriculture
ceased to be the chosen occupations of Americans in the
In the competition between grandchildren and rational
family economic planning, the latter usually loses.
Grandparents retain ownership of large homes in expensive
cities. Retirement housing expenses then drain them of
You cannot change this culture. Most Americans make
decisions that have long-term economic effects, yet their
decisions are based mainly on short-term income criteria.
The head of a household acts in terms of how much money he
can earn now, not how much capital he can control, debt-
free, later in life. The result is the dissipation of
Nevertheless, individual families can break away from
the standard approach to inheritance planning. They can
decide to discuss the basics with in-laws.
1. Who will take care of the parents
2. Who will inherit the largest share because of
3. With which families the parents will live
4. What expenses must be made and when in order to
make living space available
5. Who will pay for these expenses
The parents must make mental preparations to surrender
a degree of their independence. This may be the most
crucial adjustment of all. Oldsters who wait to the last
minute to move into assisted living quarters will usually
overpay. The longer you have to make plans, the less
expensive the implementation of the plan will be.
Oldsters who know they will become dependent on their
children are wise to adjust their behavior early. The fact
that they don't factor this lifestyle adjustment into their
retirement plans indicates that they are not taking
seriously the true costs of retirement. The older you
become, the more difficult the adjustment will be . . . for
It boils down to this: Who do want to see on a daily
basis in your old age? Employees in an assisted living
facility or your children and grandchildren? Where do you
want to die? In an assisted living facility in the
presence of employees, or in the presence of your children
Make your plans now.
Am I being realistic in suggesting a family home with
separate living areas? Will parents move in with a child's
family? Will younger families move in with parents? If
they won't, then parents had better consider an economic
One alternative is a duplex. If you can find one in a
good neighborhood, consider buying it. If the neighborhood
has single-family homes, even better. Use the second unit
to make a full-sized home now, if you need one. Or use the
second unit as an office. But be prepared to rent it out
in your retirement. A 2-bedroom unit will probably be
rented by an older couple whose children have gone, but who
have no home of their own, or a young family. You can be a
good neighbor in either case.
With a couple of acres in an unzoned part of the
county, you could do the same with a double-wide mobile
home, purchased used for a steep discount.
I realize that we all think, "It won't happen to me."
We plan to live in our own homes until we move into a nice
assisted living center at $2,000 a month (today's dollar --
pre-inflation). It's great if you have $3,000 a month
coming in passively, month after month. Not many people
do, which is why not many people live in an assisted living
center. I have seen a figure of a million Americans.
That's not many.
We have lived in abnormal times, when the Ponzi scheme
known as Social Security had more money coming in than
going out, and when corporate retirement plans, for those
who have had them, have been solvent. Both of these
conditions are going to change radically in the next two
THE GOVERNMENT WILL NOT BE THERE
Most American assume that the government will pay for
their expenses. They have not checked with Social Security
to see what they can expect as their monthly check. They
don't want to know. If they knew, this would pressure them
to make major adjustments now. They don't want to make
adjustments now. The estimated $44 trillion unfunded
liability of Social Security/Medicare is about four years
of all productivity, including government. This unfunded
liability remains unfunded, and so continues to compound.
We cannot "grow our way out of it." It grows right along
with economic growth. It is expected to be $51 trillion in
2008. See Table I here:
So, the average American trusts in an institution that
can change the law at any time, and has, repeatedly. It's
all a matter of voting blocs.
Younger voters are kept from de-funding the system by
the thought that their parents' expenses can be passed on
to the voters. But they are the voters. They think that
the rich will pick up the tab. But these two welfare
schemes are funded by payroll taxes, not by taxes on
capital or dividends. The workers will have to pay if
anyone does. That's why they won't pay. They have the
votes. They just haven't experienced sufficient pain yet.
I keep coming back to this theme because I look at the
catastrophic figures for personal saving. Businesses are
saving, but businesses are being bought up by foreign
investors, to the tine of $650+ billion this year, minus
whatever they bought of government debt, which American
taxpayers must pay interest on forever.
At some point, all but the short-lived must get this
question answered: Who will pay for my declining years? If
your answer is "I will, with accumulated capital," that's a
good answer. Just don't outlive your accumulated capital.
Most Americans will.
The lack of personal saving by Americans is a
widespread phenomenon. It has not arrived overnight; it
will not depart overnight. It represents a major shift in
the direction of present-orientation. Americans are buying
present goods with the money they could have invested in
order to establish a legal claim on future goods (interest
and dividends). Morgan Stanley's chief economist Stephen
Roach put it this way on December 10.
America's federal government budget deficit is a
very serious problem. . . . Declining personal
saving is an outgrowth of the Asset Economy --
namely, aging and myopic homeowners banking on
unrelenting house-price appreciation to do the
saving for them. The fact that America is now in
the midst of a housing bubble is especially
worrisome in that regard. The problem with
persistent structural budget deficits -- a
long-term prognosis that is centered in the 2.5%
to 3.5% steady-state range -- is that the US has
no cushion of private saving to fund it. That's
the intractable current account problem in a
nutshell. . . . America's saving problem is off
the charts -- possibly the most serious imbalance
in an unbalanced world. . . .
I repeat the point I made earlier -- budget
deficits matter much more when there isn't a
backstop of private saving. I take no consolation
in the fact that the US may be running "average"
deficits -- still a leap for me to accept -- if
it has no private net saving. We cannot afford
average deficits with no private saving. At
least Europe and Asia have that cushion -- much
higher private saving rates giving them every
right, in my opinion, to be critical of the US
for its profligate ways. Europe and Japan have
their own problems, as does the US. But if the
world ducks the shared imperatives of an urgent
rebalancing -- just because the "other guy's"
problems look worse -- we won't get anywhere.
The easy way out of debt for governments is to run
huge deficits and then tell the central bank to finance
them by creating money. The result is the erosion of
purchasing power: price inflation. The government pays its
debts on the cheap.
This is the economic case for income-producing real
estate. Let your renters pay off the mortgage debt. But
this strategy will fail unless your loan is a fixed
interest loan. Otherwise, rising rates will eat up your
profits. Your goal should be to get the debt paid off
fast, and then raise your rents along with the depreciation
of the dollar.
The case for gold is the case for capital preservation
and wealth transfer to heirs in an era of inflation. You
had better own gold in your golden years.
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