Retirement: An Age-Old Game with Brand New Rules

Retirement: An Age-Old Game with Brand-New Rules

Welcome to RetireMentorship. I am not Freeman Linde. My name is Michael Swartz, and I am Freeman Linde’s business partner at La Crosse Financial Planning. He has invited me to contribute to the podcast. I’m excited about our topic today. This is an idea that I have presented to several clients and prospects, and the response is almost always the same: I had no idea that this was so new…

So, let’s explore retirement, an age-old game with brand-new rules.

The Problem

Many of us feel the framework for modern retirement has existed for centuries… but that’s not true. It’s all relatively new.

Anthropologists have found clues suggesting that Currency (using physical objects to represent value) has existed for 40,000 years. Shells, metals, and stones have been found to indicate that currency has been a part of human history for a long time.

More recently, the first coins were minted around 2,700 years ago.

Paper bills were introduced 1,300 years ago, and

The first digital currency, bitcoin, was introduced 14 years ago.

Since the first currency was developed, saving enough to replace an earned income (i.e., retiring) has been an age-old game. But the modern rules of retirement have only developed over the last century…

Approximately one hundred years ago, your grandparents were likely part of the first generation to own land or be born in the United States of America (since your great-grandparents were likely members of the generation that first settled the American Midwest under the Homestead Act). These settlers were burdened with surviving the Great Depression and Dust Bowl drought that eclipsed the entire decade of the 1930s… facing simultaneous economic and agricultural challenges that demanded their immediate attention. It was impossible to save for the future when they couldn’t afford to live in the present.

In the early 1900s, there were virtually no private or public retirement plans, either. There were no Roth IRAs, Social Security, or 401(k). Retirement savings plans could not have been funded, even if they had existed. Creating a winning strategy for the game of generating a wealth-based, self-funded retirement was mathematically impossible just a century ago.

Solutions

In 1940, the first Social Security benefit check was issued. In today’s dollars, the benefit of the check would be worth just over $6,000/year in 2023.

Shortly after the SS started, Japan bombed Pearl Harbor, and America was pulled into WWII. America’s involvement in the war left a lasting impression on the domestic labor force.

Female representation in the workforce grew by 160% in the 1940’s. When the war ended and the men returned home, most women elected to retain their positions, and the dual-income household was born.

Also, following the end of World War II, the popularity of pensions grew exponentially as production and manufacturing facilities incentivized aging workers to leave their positions. Pensions encouraged older workers to retire, opening their spot for faster, younger workers returning from the war. But the average income produced by these pensions was worth $11,000 annually (in today’s dollars). Even combined with an average Social Security benefit in the 1970s, the income generated by the two benefits fell well short of a fully funded retirement.

Many pensions became distressed by increasing life expectancies and dwindling contributions, and pension managers had to reduce the monthly benefits drastically to keep them from going insolvent. Several companies terminated plans entirely, transferring the risk of retirement income funding back to individuals through company-sponsored retirement plans known as the 401(k).

1978: At its core, the legislation in Section 401 [specifically, subsection (a)] was designed for owners and executives of corporations with discretionary income and profits to contribute to their own retirement savings plan while deferring taxes. It just so happened that §401 [specifically, subsection (k)] allowed employees to defer income and profits to a personally owned, qualified retirement savings plan. The popularity of the 401(k) grew as employers offered these qualified plans to attract and retain employees. With some quick math, the 401(k) retirement savings plan is just 45 years old.If you plan to retire this year at 65 and begin your career at age 20, you are a member of the first generation with access to a 401(k) plan for your entire working career. You and your peers are the pioneers of self-funded retirement.

Other wrinkles have been added since the 401(k), too. The Roth Individual Retirement Account (IRA) became law in 1998 (25 Years Ago). Nearly a decade later, in 2006 (just 17 years ago), most 401(k) providers began offering a Roth option within the 401(k) plan. The financial success of your retirement is dependent on accounts that have been around for as little as 17 years and, at most, 45 years.

Conclusion

While we have been using shells and stones for nearly 40,000 years to accumulate wealth, the accounts and corresponding laws that dictate how you manage your self-funded retirement have been around for less than 50 years. It is imperative to your success that you learn how to play the retirement game by the brand-new rules we are all required to follow.

The laws and accounts that dictate your financial success in retirement will continue to change… and hiring a retirement planner with an intimate awareness of your situation and daily awareness of how the financial future is developing will be critical to your retirement success.

This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are those of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.