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A Comfortable Retirement

Oct. 22, 2010
Derrick Handwerk discusses six factors that will determine whether you have enough money to enjoy a comfortable retirement.

by Derrick Handwerk MBA, CWPP, CAPP

In a previous article, I focused on how most people are not saving enough for retirement. In this article, I will discuss six factors that are common among the middle and upper middle working classes. These six factors are why many of these people will not have enough money to retire on.

1. A longer life span
According to the U.S. Social Security Administration 2006 actuarial publication, life spans have increased over the past few decades. Currently, if you are 65 .you can expect to live until you are almost 85. In 2001, a study reported that a person who was 70 years old lived 5.2 years longer than if he or she had been born a bit over three decades earlier. Thus, over a period of 30 years, the average life span increased by over five years. Additionally, some studies have shown that education, income, and exercise have increased the survival rate even further. With continuing technology advances in medicine, I believe this trend may accelerate.

What this means is that if you are in your 50s or 60s, you may have a good chance to live until you are 90. Nothing could be worse than being 90 years old and running out of money!

2. Global competition for labor and goods
Currently, the U.S. is in a slow growth environment. However, emerging markets like China are growing at rates of 6 to 8% per year or more. India has a billion people and many are well-educated and speak English.

My point is the world is getting smaller and somebody competing for your job or competing against your business doesn’t have to be down the block or even in the next state. Competitors can now be in another country. I bring this up because the income stream of future earnings from your chosen profession may not be as rock solid as it once was.

3. Consumerism
From the time we started watching TV, we have been programmed by advertisers on how we are supposed to behave and spend money. According to the advertisers and many TV shows, fancy cars and the “millionaire lifestyle” seem to be the norm and our right to pursue as Americans. Our homes are much larger than our parents' homes were. A “regular” color TV won’t due anymore. Now we need a 40-inch HD flat screen plasma. I just bought one a few months ago, and I was probably the last one on the block to do so. Now the advertisers inform me I need to be buying a 3D TV!

People who earn a good income generally spend more as their incomes increase. This behavior flies in the face of many economic theories such as Engel’s law. Engel’s law states that people will consume less on a percentage basis as income rises.

4. Taxes
The top marginal federal tax rates during the Kennedy administration were 90%. Those rates have been dropping to the current levels of 15% on long-term capital gains and th 35% as the top marginal rate on wages.

Due to structural deficits at the local, state, and federal levels, I believe tax rates will go up over time. In addition, many less overt “stealth” tax hikes are coming — for example, not indexing the federal tax on wages or capital gains to take inflationin to account. In my opinion, taxes will be increasing, making it even harder to save money.

I see TV commercials for a financial services company asking what your “number” is. This commercial is simplistically implying that there is a singular amount you need to save in order to afford a great retirement, and that this company can magically help you get there.

First, there is no one number. If you tell me:
a. What the future tax rates will be at the federal, state, county, and local level, in addition to any consumption taxes or increased fees for services the government provides, on a yearly basis;
b. What inflation will be on a yearly basis;
c. What the cost of one-time expenses such as weddings and colleges will be
d. You will not divorce;
e. What your yearly rates of return will be in retirement;
f. When you expect to no longer need your money — i.e., the year both you and your spouse will pass

If you can tell me these things, then I can model what your "number" is. However, if just one of those variables change in one just one year, “the number” you will need to comfortably retire will change.

5. Inflation
I believe that inflation is underestimated by the government as illustrated by the consumer price index. This assertion could be a PhD thesis in and of itself. Let’s just keep it short and say that changes to the calculation of CPI were made under Greenspan, and it is in the U.S. government’s best interest to underestimate inflation. As inflation rises, the government would have to pay more interest on its (our) debt and would have to increase cost of living adjustments for all those people who receive checks from the federal government.

6. Investment returns
Many of us who are 45 or older remember the incredible stock market returns during the '80s and '90s. From 1980 -2000, according to, there were only four years of losses on the Dow Jones Industrial Average, the largest being 9.23% in 1981. Many people continue to believe the stock market will dramatically increase their retirement investments.

Dow Jones Industrial Average on the first day of:
1980: 964
2000 : 11,497


A survey done by ING Direct in March of 2010 found that more than 25% of Americans expect annual returns in the stock market to average 10% to 20%. The long-run average according to many investment professionals is about 8% per year above inflation. However, recently, Allison Schrager, who writes for The Economist’s Web site, said that the equity premium “is often assumed to be between 5% and 8%. In my experience, risk managers go silent when asked exactly where this number comes from.”

What if future stock market returns turn out to be lower as Megan McArdle suggests in the September edition of The Atlantic magazine? Then the hope for a bail out of American’s retirement savings would not occur. Not a pleasant thought.

Derrick Handwerk received his MBA from Lehigh University and is a Rauch Business Scholar. He received his certification in wealth preservation and asset protection from the Wealth Preservation Institute. After college, he spent three years in the pharmaceutical industry, and then went on to run and own several businesses, including Handwerk Wealth Advisory. Handwerk Wealth Advisory works with accredited investors and small business owners. He also specializes in working with medical and dental practitioners. Visit his Web site at