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What If You Can Never Retire?

Jan 30, 2017

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Fair warning: you might not like the conclusion you come to after reading today's letter.

But it's better to address this threat now - and do something decisive about it - than wait ten years when it'll be a thousand times worse.

Because, and sorry to be the one who has to be so blunt about this, but the conditions in the markets today mean that unless you do something about it, you may never be able to retire.

But wait! Don't despair. There is hope yet! I have a novel way of approaching the greatest threat to your retirement to share with you. More on that in a second.

Retirees have been "shafted"

I always find it interesting when a bona-fide member of the establishment is able to sum up "popular" anger so succinctly... then do absolutely nothing about it. Take Bill Clinton. He summed up pretty much every anti-establishment movement in the world in 2015 (his remarks were private, but leaked):

  • When people feel they've been shafted and they don't expect anything to happen anyway, they just want the maddest person in the room to represent them.

He was talking about Jeremy Corbyn's election. He could easily have been talking about Donald Trump, or, to some extent, Brexit. But he could equally have been talking about retirees - or people who want to retire, but can't - since the global financial crisis.

They're the forgotten victims of the financial crisis and its response by the state. The toxic combination of low interest rates and quantitative easing driving bond yields down has made it much, much more difficult to retire with a decent income.

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Interest rates on savings deposits are virtually zero. The search for yield worldwide has made it even harder to generate income from other traditional sources.

Investment income has dried up. And the option of swapping your pension pot for an annuity - the traditional way of approaching retirement - is much less appealing at today's rates. For instance, according to a recent Guardian analysis, a £200,000 pension pot would buy an annuity income of just £9,800. That's way below what you would have got a decade ago.

That's because annuity rates are linked to government bond yields. When the Bank of England prints money and injects it into the bond market, it drives bond yields down. Annuity rates go with them.

That's one of the major reasons we argue against the state intervening in the markets. Never let it be said the state can print and borrow money without risk or consequence. There are always consequences. In this case it's been a generation of people condemned to a poorer retirement, or no retirement at all. These aren't people who'll march and protest and make themselves heard. And they're easily classed as "wealthy". A £200k pension pot sounds a lot. It's easy to dismiss them.

But ask yourself. Could you retire on £9,800 a year? Or does that make retirement a pipe dream?

I'll let you ponder that for a second. It's worth outlining just what an epidemic this is. According to a 2016 Aviva report, there's a huge shortfall between what people have saved and what they expect in retirement. People over 45 expect their pension to pay them, on average, roughly £12k in retirement. But current savings would pay closer to £4k.

Not a good situation. And it comes at a time when traditional welfare programmes like the state pension are coming under huge pressure. This is a major threat that Alan Greenspan highlighted last week: entitlement programmes are unfunded and their liabilities are growing.

This is a three-pronged problem. It's partly demographics. To pay a decent state pension you need a good balance of young people to old - the younger workers subsidies the retirees. The Western world doesn't have the demographics to bear the burden.

It's partly a lifespan thing. Funding someone's retirement when it's likely to last ten years or so is one thing. When they live until they're 90 it's a different problem.

And it's partly a political problem. Once people have been promised something... it's virtually impossible to go back on that. It is certainly impossible to do so and win an election. So governments are caught in a trap of paying an increasing liability with no real way out.

One day, the system will need to reset. You can't keep borrowing (both from the markets and from the next generation) to pay for people's retirement indefinitely.

Which leads us to a fairly grim conclusion: if you're over 50, this is likely the world you're going to retire into.

Interest rates may never get back to the kind of level that supports a decent retirement. Bond yields may stay depressed forever (certainly if the state has anything to say about it). And relying on the government to look after you in retirement could soon be seen as a historical aberration.

You need to recognise this now. Wake up to the fact of what's happening. You can't wait for the markets to "normalise". They might never. You'll be waiting a long time.

Please note: This article was first published in Capital and Conflict on January 27, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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