Money

How to Survive Retirement

February 3, 2021

How to survive retirement

Retirement used to mean that someone got too old to work so their family took care of them. The Industrial Revolution changed everything. People gave up the farm, moved to the city, and didn’t consider how they’d support themselves once they got old…

One of the country’s largest employers, the American Express Railroad Company, offered a solution: the pension. The employee would pay a percentage of his paycheck to American Express while employed. When the employee retired, American Express would pay the employee a monthly stipend using the money the employee contributed. The idea spread like wildfire and within 100 years, the majority of American workers had a pension.

But problems popped up: What if the company goes under? Or got acquired? What if management used the funds on the business? Or made bad investments? 

So the government stepped in to “help.” In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) which regulated pension plans to hold companies accountable. But the regulation backfired. ERISA was too restrictive and companies stopped offering pensions.

Related Reading: The Case for Small Government

Wall Street “Saves” Retirement

A few years later, a group of corporate executives asked Congress if they could defer paying income taxes on income invested in the stock market. For example, if an executive made $400k, but invested $200k of that into the stock market, he wants to pay income tax on $200k, not $400k. Congress said sure and added a provision to ERISA that said employees can defer taxes on eligible income (Section 401k).

Fast forward to September 1979. A bank CEO was due a cash bonus but he didn’t want to pay taxes on the bonus so he hired a consultant to advise him. The consultant, Ted Benna, discovered Section 401k and used that to legally defer taxes on the CEO’s bonus. The consultant realized what this meant and the 401k retirement account was born.

Corporations across the country were thrilled. Finally there was a way to avoid the responsibility of their employees’ retirement. The only problem was that investing isn’t taught in school and the average American knows nothing about the stock market. No worries, Wall Street swooped in to “help” and that is why the word retirement means investing in the stock market.

Related Reading: Is a 401k Worth It?

Retirement For The Rich

It should disturb you that a businessman can approach Congress with a personal request and get it granted. That said, the 1970’s was when America went from capitalism to corporatism and these situations were common. Congress knew that financial literacy is a foreign language in America and that few Americans knew how the markets worked or what affects its performance. This is who benefits from retirement accounts:

Wall Street

For the first time in history, average citizens were instructed by their employers and the government to send a percentage of their paychecks to Wall Street portfolio managers. The banks would “oversee” their nest eggs in exchange for egregious fees. Whether the nest egg grew or evaporated, the bank would profit.

The Government

The stock market is a gauge for how the economy is doing. In order for the plan to work, however, Americans must consistently invest in the stock market. If young people stopped investing, retired Americans would suffer because the flow of money is what keeps the markets afloat. If it weren’t for the stock market, the government has no other safety net large enough to support the elderly.

Pension Plan Operators

The government still offers pensions but they are screwed and know it. They mismanaged money and made promises they couldn’t keep. They need Americans, even today, to keep contributing to retirement accounts because it keeps markets high which alleviates their insolvency.

Bankrupt Public Companies

The rise in index investing, which is a common investment strategy, has helped lousy companies stay alive. When the investor buys every public company, instead of analyzing individual stocks, bankrupt and over-leveraged companies benefit.

Related Reading: The Income Tax is Unconstitutional

How Safe Are Stocks?

It is common to rely on experts when we don’t understand something. In the case of retirement accounts, the experts are Wall Street executives. They say investing in the stock market will make us rich. On average, they say, the S&P 500 has returned 10% since 1926!

True. Yet so is this:

From 1999 to 2009, the average return was a -24%

From 1999 through 2017, the average return on the S&P 500 was 3.4%

So which is it? Are we going to be rich or poor? It’s a crapshoot. If you wanted to retire between 1999 – 2009… sucks for you! Today, thanks to excessive money printing, the stock market is at all-time highs. Will it go up forever? Maybe. But maybe not.

Related Reading: The Pros and Cons of Index Funds

How to Survive Retirement

The moral of the story is that you don’t have to invest in the stock market. If your employer offers a match, then sure, invest up to the match — but remember that you have options. It’s your life and your money. Consider the following:

Real Estate

Why not pay off your house? It’s an asset you understand and if you wanted to, you can move out and use it to collect passive income.

Business

Are you always going to be an employee? Why not start your own business, instead of giving it to corporations that don’t need it?

Yourself

Don’t put off going back to school, living abroad, becoming certified in something, etc. until you “retire.” That day may never come.

Alternatives

You can open a self-directed IRA to invest in land, gold, cryptocurrency, real estate, tax liens, and dozens of assets beyond the stock market.

Cash

I’ve taken several risks in life and not one would have been possible if I hadn’t saved a pile of cash. Cash is underrated.

Related Reading: What is Dumb Money?

Conclusion

You can invest your money and prepare for retirement any way you want. The government and financial services industry want you to think the stock market is the only option but that is not true. How is investing in an asset class you don’t understand the safest way to prepare for the future?

Saving for retirement is obvious. But investing your retirement savings in the stock market? No. The biggest misconception with tax-sheltered retirement accounts is that the employee benefits because they won’t have to pay taxes on the withdrawals until they are 65. The experts say that when you turn 65, you will be in a lower tax bracket.

Huh?

The government has no clue where tax brackets will be 30 years from now. Why would you trust a politician? Considering how much debt our government is raking up, do you really think taxes will be lower in the future? Only the present moment is guaranteed. Wake up.