We review books that deal with everything from financial independence topics to politics, and anything in between. We may sometimes stray into films and music if there is a “Findependence” angle.
As recounted in his own book, and columns in MoneySense and elsewhere, Hallam used to buy individual stocks until he realized the error of his ways and switched to indexing: and not just “core and explore” but 100% indexing. If you feel like following suit but don’t want to pick your own ETFs at a discount brokerage, check out Sandi Martin’s excellent piece on how to choose a robo-adviser, right here at the Hub. Continue Reading…
The System Worked was published earlier this year, bearing the tantalizing subtitle: How the World Stopped another Great Depression. I ordered it from the library after reading a New York Times review on it and several related books.
I have to admit it took some time to wade through it, in part because I returned my copy to avoid lugging physical books through Turkey, where I spent three weeks in October. But on my return, I borrowed it again and finished the book.
The author, Daniel Drezner, is a senior fellow at the Brookings Institution and a professor of International Politics at Tufts University. I found his prose somewhat dull but the ideas underlying them are worth mining.
U.S., Europe and China pulled together
In book publishing it’s probably harder to sell an upbeat title than a pessimistic one. (When was the last time a newspaper led off an issue with “No planes fell from the sky yesterday?”) And The System Worked is decidedly upbeat about how governments around the world coordinated their response to what could have been a global economic and stock-market disaster in 2008 and its aftermath. It credits this coordination primarily to the United States first and foremost, ably assisted by the Eurozone and China. Japan, it seems, slipped into a second tier throughout this struggle to avert what otherwise was shaping up to be another Great Depression.
Daniel Drezner (Oxford Press)
The early chapters recap the common perception (a false one in the author’s view) that the system did NOT in fact work: this after Drezner lays out his case for why it did indeed work out splendidly. Those who claim otherwise cite specific trouble spots like the escalation of Europe’s sovereign debt crisis or the failure of climate-change negotiations. Here is a typical upbeat Drezner quotation:
“Even though the initial drop in output and trade levels was more acute in 2008 than in 1929, by any measure the global economy has rebounded more robustly over the past five years than it did during the Depression … The liberal economic order proved to be more robust than expected.”
Certainly, Drezner’s optimism has been justified through late November of 2014. Friday’s twin events of China cutting its interest rates and the ECB’s stimulus talks suggests that the world’s central banks continue to fight the good fight against deflation, depression and other horrors.
But can the system work for more than these first five years?
All of which makes the book’s final chapter all the more tantalizing. Entitled “Where do we go from here?” Drezner repeats his main theme when he says that on policy grounds, both TARP (Troubled Asset Relief Program) and the related Federal Reserve programs were “huge successes” in how they “greatly eased the credit crunch faced by the banks.” This despite the fact TARP “has remained political poison.”
Well, the skeptical reader may say at this point, we may have survived the first five years but can we keep it up? Drezner concedes “there are valid reasons to be concerned about the future.” There is still much fragility in the global economy and the Eurozone “has still not found a viable way to fix the internal imbalances between Germany and southern Europe.” A global recession is quite possible, he admits, and “there are a lot of ways in which things could go wrong” but “given what has happened since 2008, it is safer to conclude that they won’t.”
A big part of his faith is based on what he terms “the enduring strengths of the United States.” These include healthy demographics, geographical security, a dynamic pop culture and excellence in higher education and innovation. Add to that lower oil costs and the fact he believes America will be “the world’s leading oil producer some time before 2020.”
Meanwhile its chief rival, China, is reforming its development model so that “its domestic economy more closely resembles that of the United States.”
Drezner closes with the admission that in the world of international affairs punditry, pessimism sells. Nevertheless, he closes with this:
“Pessimism has spread just as widely as financial contagion did in 2008. It is wrong and needs to be corrected … Going forward, a healthy dollop of optimism is in order.”
A big aspect of planning for retirement is health and longevity. Back in the summer, I devoted a blog at the Hub’s sister site to Mark Venning of ChangeRangers.com. Venning helps clients prepare for two things: making the shift from employment to entrepreneurship, and also to help prepare for a future of extended longevity and life expectancy. That’s “why the word ‘Retirement’ doesn’t work for me. It’s about longevity planning,” he told me, “My core message is plan for your longevity, not for retirement.”
That’s one reason the Financial Independence Hub includes sections both on Entrepreneurship and Aging & Longevity. But we’re not just a site for the Boomers: we take an “Ages & Stages” approach to financial independence, starting with material for Millennials and their focus on debt reduction, family formation and home ownership. Then by the time we reach those in mid-life (call them Gen X if you will), the focus is on Wealth Accumulation.
One of several book recommendations from Venning to his students — many of them terminated from full-time employment — is a book by Lynda Gratton called The Shift: The future of work is already here. It’s not brand new: my copy was published by Harper Collins in 2011. But it’s still relevant, especially to the generation of baby boomers, myself and Venning included, who are grappling with the issues of retirement planning.
Gratton, who is a business school professor, identifies five forces that are shaping the world of work, plus three “shifts.” They’re all worth summarizing here.
The 5 forces shaping our future
1.) Technology
2.) Globalization
3.) Demography and Longevity
4.) Society
5.) Energy Resources
The 3 shifts
1.) From shallow generalist to serial master
2.) From isolated competitor to innovative connector
3.) From voracious consumer to impassioned producer
For baby boomers and others who are nearing retirement, or moving into semi-retirement or self-employment, almost all of these forces and shifts need to be taken into consideration. In earlier blogs like this one — Never Work Again — we looked at the revolution in Internet marketing, which is based on both the Technology force and Globalization. When you can run a web-based business from anywhere in the world merely with a laptop computer and a smartphone, you know you’re embracing these forces.
Gratton’s points on demography and longevity seem particularly apt: this was the topic that most fascinated the team of researchers she tapped into for the book. “We quickly understood that technology is changing everything and will continue to do so, and that natural resources are depleted and carbon footprints must be reduced,” she writes. But demography and longevity “is intimately about us, our friends and our children … It’s about how many people are working, and for how long.”
The dark side: some boomers will grow old poor
In 2010, when Gratton was writing the book, there were four distinct generations in the workforce: the Boomers’ parents, the Boomers, Gen X (born between 1969 and 1979) and Gen Y (1980 to 1995). And coming up is Gen Z, born after 1995. Gen Y will be ascendent in the workplace by 2025 but increasing longevity means the Boomers and Gen X will still be hanging around, wanting to work and contribute in some capacity well into their 60s, if not beyond. Gratton also warns that “some baby boomers will grow old poor,” particularly if they don’t respond to the gift of extended longevity by embracing the forces and shifts that are confronting them.
Because of globalization and technology, the privilege of being born in North America may no longer be sufficient advantage for those who don’t embrace The Shift. Books like The Laptop Millionaire describe how those with wealth can take advantage of outsourcing: for example, hiring English-speaking Filipinos as full-time virtual assistants for something like $250 or $300/month.
There is a dark side to these shifts: those not equipped to embrace change increasingly will have to compete for jobs or contracts with people half a world away who are technologically sophisticated and willing and able to work for much less than North Americans.
Gratton devotes big chunks of the book to fictional scenarios of the near future of work, some of them pessimistic, some of them optimistic. All in all, it’s well worth reading. It reinforced my own belief that “If you’re not sure whether you should retire or can afford to do so, then just keep working, preferably in a congenial line of work you can continue to practice well into your 70s.”
Today’s blog title comes from Chapter 14 of The Upside of Aging, a book we mentioned several weeks ago at sister site FindependenceDay.com. This is recommended reading for anyone nearing the traditional retirement age. It consists of 16 essays from various experts, all of whom look at the topic of longevity through various lenses: urban planning, global demographics, healthcare and pharmaceutical research and so on. For example, Ken Dychtwald of Age Wave pens an interesting essay titled “A Longevity Market Emerges.”
Pictured below is Dan Houston, president of Retirement, Insurance and Financial Services for the US-based Principal Financial Group, who wrote the chapter I flagged in the title.
Retirees can expect one spouse to reach 90
Dan Houston
Houston begins by observing that because of longer expected life spans, the mind-set around retirement is evolving, and for the better. “Couples age 65 now have a 45 per cent chance that at least one will live to age 90,” Houston says, citing the Society of Actuaries, “This may be the first time in history where someone spends more years in retirement than in a traditional working career.”
The downside is of course financial: living another 20 to 40 years after leaving the workplace comes with a “substantial cost,” Houston says, “one that has to be funded. It’s an increasingly challenging prospect given inflation, the high cost of health care, and the risk of outliving savings.”
Try living on $400/month
The statistics, at least in the U.S., are not encoring. Fewer than four in ten pre-retiree households (aged 55 to 70, not yet retired) have financial assets of US$100,000. And even if they did have that amount on the nose, it would generate guaranteed lifetime income of just $400 a month.
Many think they’ll need less income in later life than recommended and many plan to draw down on assets at such high rates (9% a year on average) that assets will be depleted within 13 years. The recommended “safe” annual withdrawal rate is closer to 4%. They underestimate the cost of unreimbursed health care costs: in the U.S. Houston estimates a moderately health retired couple will need US$250,000 just to cover health care expenses and premiums throughout retirement. This is one area that Canadians may be ahead because of our universal health care system.
Don’t count on working in retirement
I’ve said before that the solution to this is to “just keep working,” but of course this may not always be an option. It’s a sad fact that agism still prevails in the workplace and costly older workers may be asked to leave before they’re ready to do so; and eventually body or mind may not permit full-time work even if one can find a willing employer. Houston says pre-retirees tend to overestimate their ability to work for income in retirement: more than two thirds expect to be able to supplement retirement income with some work but in reality, only one in five retirees actually works. That statistic, Houston observers, “reflects availability of work, as well as ability to work.”
Just as disturbing is the fact that 55% of American workers, and 39% of retirees, report having a problem with their level of debt. And those who do manage to save are not saving enough: 43% of workers report that neither they nor their spouse is currently saving for the future, while 57% report the total value of savings and investments is under US$25,000.
Four key investment risks
Even where there is ample savings to invest, Houston lists for key risks: inflation, market volatility, income and longevity. These are all linked: the longer you live, the more inflation can cut into your income. Consider this alarming stat on inflation’s power to erode savings: a dollar invested int he S&P500 in 1971 grew to $2.27 by 1982 but on an inflation-adjusted basis, that dollar depreciated to 96 cents. Houston notes that even annual inflation of 3% will cut a retiree’s purchasing power in half.
This calls for investments that have a fighting chance against inflation: Houston mentions Treasury Inflation-Protected Securities (TIPS, known in Canada as Real Return Bonds or RRBs); commodities, global REITs, natural resource stocks and Master Limited Partnerships.
As if that’s not all enough to keep a retiree awake at night, Houston reminds readers that the “insolvency” date for America’s Social Security system keeps moving closer: 2033, according to Washington’s May 2013 estimate. Meanwhile the over-65 population will double between 2010 and 2050.
As has been noted elsewhere, every day 10,000 baby boomers turn 65. While Canada’s combo of CPP and OAS seems on relatively solid ground, I continue to believe the best way to prepare for a long-lived retirement is to spread your income sources around: employer pensions, savings in RRSPs, TFSAs and non-registered plans, the government plans mentioned above, some part-time work or business income and perhaps rental income from investment real estate.
As we say in the ad at the top of Findependence.TV, it costs only US$2.99/C$3.37, takes a minute to download and maybe an hour to read … but it could literally change your life.
If anyone pre-ordered the e-book, it should now be on your Kindle or Kindle app on other devices. If you like it, or even if you didn’t, please share your feedback with a short review at Amazon.ca or Amazon.com.
One last thing, the five discussion forums should be up and running. We’ve seeded each with a starter thread to stimulate dialogue.
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