Author Topic: Our Ridiculous Approach to Retirement  (Read 8936 times)

atelierk

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Our Ridiculous Approach to Retirement
« on: July 22, 2012, 07:26:43 PM »
From the article:

"Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die."

Not one mention of controlling wasteful spending, living below your means, avoiding debt, getting your act together...
« Last Edit: July 22, 2012, 07:33:26 PM by atelierk »

arebelspy

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Re: Our Ridiculous Approach to Retirement
« Reply #1 on: July 22, 2012, 10:06:49 PM »
Quite a negative negative viewpoint.  The problem with articles like these is they often convince the people reading them that it's hopeless, so they might as well give up (rather than it's a challenge, start tackling it now).

This just stands out to me (from your quote): Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.)

7% savings rate is so tiny.  Heck, even saving 30%, their drastic example of if you're already 55, should be doable for most people.  I mean, if they bought a house at 25, it should be paid off 30 years later.  A typical house payment is 30% of one's income in the U.S., so right there they can keep putting away that payment and they'd be fine.

The bottom line is it really ISN'T that hard.. You just can't spend everything you earn.  Save some, and it suddenly becomes easy.

Thanks for sharing the article.
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Another Reader

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Re: Our Ridiculous Approach to Retirement
« Reply #2 on: July 22, 2012, 10:13:45 PM »
This is the economist that several years ago proposed forcing people to annuitize their IRA's and 401k's upon retirement through a federal program.  The attitude of "I know what's best for you" is something we could use a whole lot less of, especially where government is involved.

Another Reader

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Re: Our Ridiculous Approach to Retirement
« Reply #3 on: July 22, 2012, 10:27:29 PM »
Here's her pitch for forced savings into mandatory government sponsored annuities.

http://www.annuitydigest.com/blog/tom/teresa-ghilarducci-pension-reform

sol

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Re: Our Ridiculous Approach to Retirement
« Reply #4 on: July 22, 2012, 10:54:35 PM »
At first I thought that this, like so many pages on the web, was another example of content-free eyeball fishing, another article from a news source that has no desire to produce news, only page views.  The more controversial it is, the more comments and hits they get, the more money they make.  It's the new paradigm, we'd all better get used to it.

See link for more details:
http://www.fastcompany.com/1843032/media-manipulator-ryan-holiday-proves-his-point-by-getting-this-story-published

But then I noted this article is from the NYTimes, which in my estimation is about two notches above places like CNN when it comes to substantive content, and then I noticed the article is written by an econ prof.  If you read the quote in context, it's not so much about the impossibility of planning for your retirement, it's about how most people (obviously not us) don't plan for retirement and would be better served by a pension system that manages their retirement for them.

And that's a sentiment I can get behind.  The switch from defined-benefit to defined-contribution retirement plans was foisted on the American people with promises of "more choice" and "better control" over their own retirements, but has instead resulted in millions of financially illiterate workers who would have otherwise been taken care of at the end of a long career having to survive solely on social security.  Yes, the new system gave people more control, and hardly any of them were ready for the accompanying responsibility.

The folks on this web site are clearly not the target audience.  We generally understand both the theory and mechanics behind saving for retirement, and can use that system to our advantage.  I think it is important to note, however, that most Americans are not part of this community, do not have this knowledge, are too distracted to manage their own retirements, and will thus exit the workforce woefully underprepared for post-career financial management.

Jamesqf

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Re: Our Ridiculous Approach to Retirement
« Reply #5 on: July 22, 2012, 11:25:37 PM »
Read this earlier, and was struck - as I so often am by conventional retirement planning advice - by what appears to me a massive fallacy, the blanket assumption that I spend every cent I earn.

Quote
To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security.

So in a good year, I earn close to $100K.  Out of that, I actually SPEND somewhere in the neighborhood of $30K.  Now surely, if I want to maintain my current standard of living in retirement, I need a stash that will produce $30K in income (plus taxes), not $100K.  Then figure that by the time I reach a conventional retirement age, I'll have the mortgage paid off, which will reduce outgo by ~$10K/year. 

So $2K/month (in current dollars) should be more than enough maintain my present standard of living, even ignoring what I might possibly collect from Social Security.  At a 4% return after inflation, that takes a stash of $600K, if I've done the math correctly. or only $400K if I use the article's 20X method.  Since I'm over the lower figure already, I'm not worried.

arebelspy

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Re: Our Ridiculous Approach to Retirement
« Reply #6 on: July 22, 2012, 11:30:18 PM »
Read this earlier, and was struck - as I so often am by conventional retirement planning advice - by what appears to me a massive fallacy, the blanket assumption that I spend every cent I earn.


Yes, that is true, retirement planning should be based on expenses.

That said, the above assumption applies to most people.  So when retirement planning, it is true that they need to replace their income.

However, it should be pointed out to them that if they are spending all they earn, they aren't saving any, so they won't be able to replace any.  And that the less they spend, the less they need to replace (and the more they can save towards doing so).
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Jamesqf

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Re: Our Ridiculous Approach to Retirement
« Reply #7 on: July 22, 2012, 11:35:51 PM »
The switch from defined-benefit to defined-contribution retirement plans was foisted on the American people with promises of "more choice" and "better control" over their own retirements...

I have to disagree about that.  The main selling point for 401K/IRA plans is that they would be portable.  This was (and is) extremely important in a time when it was becoming less and less the norm to work for one company all your working life, or even to stay with one long enough to become vested in their pension plan.  They would also be independent of the company's future success, so that a bankruptcy or other failure wouldn't mean the disappearance of your pension.

Another point which the article glosses over is that to provide a retirement income (that's not derived from taxes on current workers), SOMEONE has to save & invest the necessary money.

arebelspy

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Re: Our Ridiculous Approach to Retirement
« Reply #8 on: July 22, 2012, 11:36:31 PM »
But then I noted this article is from the NYTimes, which in my estimation is about two notches above places like CNN when it comes to substantive content, and then I noticed the article is written by an econ prof.  If you read the quote in context, it's not so much about the impossibility of planning for your retirement, it's about how most people (obviously not us) don't plan for retirement and would be better served by a pension system that manages their retirement for them.

I agree, which is why this article was so disappointing to me.  It was straight up fear mongering.

One could easily point out the problems while offering not just a pitch for her ideas (pension/annuities) but solutions within the current framework/system, rather than making it sound hopeless.


The folks on this web site are clearly not the target audience.  We generally understand both the theory and mechanics behind saving for retirement, and can use that system to our advantage.  I think it is important to note, however, that most Americans are not part of this community, do not have this knowledge, are too distracted to manage their own retirements, and will thus exit the workforce woefully underprepared for post-career financial management.

True.  But really, the main change that's needed is that rather than consume so much and spend all their paycheck (and more, going into credit card debt) on stuff, consume a little less and save 20-30%.  If that number became the standard everyone knew, rather than the current "save 10-15%" number that everyone knows (and ends up saving maybe 5-10), that alone would solve many of the issues.  They'd only need 70-80% of their income replaced, and they'd have years of an okay savings rate in which to do so.  Or, to paraphrase a popular saying: "It's the savings rate, stupid."  (Obviously not directed at you, sol.)
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Jamesqf

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Re: Our Ridiculous Approach to Retirement
« Reply #9 on: July 22, 2012, 11:39:17 PM »
That said, the above assumption applies to most people.  So when retirement planning, it is true that they need to replace their income.

Except that I get the same "advice" from the companies that I have my 401K & IRA funds with.  Now it seems obvious, at least to me, that if I'm actively contributing to these plans, I AM saving at least the amount going into their plans.

arebelspy

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Re: Our Ridiculous Approach to Retirement
« Reply #10 on: July 22, 2012, 11:46:59 PM »
That said, the above assumption applies to most people.  So when retirement planning, it is true that they need to replace their income.

Except that I get the same "advice" from the companies that I have my 401K & IRA funds with.  Now it seems obvious, at least to me, that if I'm actively contributing to these plans, I AM saving at least the amount going into their plans.

Fair enough.

The other reason though, besides it being "close enough," since most people spend almost everything, is that it's easy.

Their clients don't know how much they spend.  They do know their income.  So it's a lot easier to base projections off of a number you know, and say "you'll need 80% of your preretirement income" (or whatever).  They may be assuming you're saving 10%, spending all the rest, and your spending will go down 10%.  It's all pretty rough guesses anyways (like on rate of return over the next 1-30 years), so they likely figure it's good enough to use income.

Like I said, they should educate people on how spending less means they have less income they need to replace (and have them track their expenses), but that's the part that should be happening more, IMO, and then they won't have to use those poor rules of thumb.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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sol

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Re: Our Ridiculous Approach to Retirement
« Reply #11 on: July 22, 2012, 11:53:08 PM »
I have to disagree about that.  The main selling point for 401K/IRA plans is that they would be portable.

Wouldn't it just have been easier to make them portable?  Considering that they were basically tossing out the entire national retirement planning system and replacing it with something new, couldn't the something new have required a little less educated involvement from the masses to provide a base level of income?  Wouldn't that have been better for most people?

For example, I'd be all in favor of doubling the amount of money we all pay into Social Security, and then doubling the payout in retirement.  Wouldn't that also solve many of these problem?  And an employer match to the program would be perfectly portable, since it's a national system.

Quote

Another point which the article glosses over is that to provide a retirement income (that's not derived from taxes on current workers), SOMEONE has to save & invest the necessary money.

I don't see any problem with calling it a tax.  In one case, you devote part of your paycheck to your retirement savings vehicle of choice.  In the other, you devote part of your paycheck to taxes which fund an enhanced SS-style retirement income program.  What's the difference?

Our current plan is great for offering people more options and freedom to choose whether they want to eat catfood or caviar in retirement.  My complaint is that catfood is the default.

atelierk

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Re: Our Ridiculous Approach to Retirement
« Reply #12 on: July 23, 2012, 05:36:18 AM »

And that's a sentiment I can get behind.  The switch from defined-benefit to defined-contribution retirement plans was foisted on the American people with promises of "more choice" and "better control" over their own retirements, but has instead resulted in millions of financially illiterate workers who would have otherwise been taken care of at the end of a long career having to survive solely on social security.  Yes, the new system gave people more control, and hardly any of them were ready for the accompanying responsibility.

The folks on this web site are clearly not the target audience.  We generally understand both the theory and mechanics behind saving for retirement, and can use that system to our advantage.  I think it is important to note, however, that most Americans are not part of this community, do not have this knowledge, are too distracted to manage their own retirements, and will thus exit the workforce woefully underprepared for post-career financial management.

I agree. Speaking as a Boomer myself, I think it's useful to remember that we are the first generation to be in control of our own retirements but I also think it's safe to say that most of us just didn't know what to do with that. Our post-WWII parents, for the most part, got married, bought a little house, stayed in it for their entire working lives - working for one employer - and at retirement time, had a paid-off house, a pension and some social security to live on. At the end of 35 or 40 years - voila,  retirement was there. So that was the example we Boomers grew up with. Parents had no need to teach their kids about asset allocations, mutual funds, and all that. We were taught to "save for a rainy day" in a passbook savings account, back when savings accounts actually paid 4 or 5%. We even had "Banking Day" once a week in grade school.

Unfortunately, as the old system was replaced by the DIY 401K version, no real instruction manual came with it. In my case, back in 1981 I opened a 403B (TIAA-CREF) but back then, there was no investment advice as part of the plan, nothing much in the way of choices, nuttin'. I had three options: 75/25, 50/50, 25/75 (stocks/bonds). I chose 50/50 'cause that's what the nice lady in HR said most people choose. I was 24 at the time! Obviously, I should have chosen the 75/25 option but I had no one to advise me..no one with any experience in this investing stuff at all. Investing was for Rockefellers, Vanderbilts, and other robber-baron types, not Joe or Josephine Blow. It does sorta feel as if we boomers were all just dumped in the deep end of the retirement pool, sink or swim.

Having said all that, once Boomers wake up to the fact that their retirement looks kinda iffy if they don't get their act together, there's no excuse for not getting busy to repair at least some of the damage caused by their ignorance. Articles such as this one don't help at all; rather, they discourage Boomers from even trying because they promote the comforting idea that they're all victims of a bad retirement system when instead, they're victims of their own financial illiteracy. For tail-end Boomers at least, there's still hope if they'd just wake up to the fact that they're spending their money on a lot of wasteful crap. Even if you've made mistakes earlier (as I did), a 40% savings rate isn't impossible (or even that hard) once you get real about the situation you're in. Heck Congress even gave us a "catch up" provision to take advantage of.

Speaking from my own experience, the single biggest thing that has to happen is for Boomers to decide that their freedom is more important than buying crap. But these Doomed Boomer articles never mention that.
« Last Edit: July 23, 2012, 10:39:39 AM by atelierk »

kolorado

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Re: Our Ridiculous Approach to Retirement
« Reply #13 on: July 23, 2012, 08:33:26 AM »
How in the world can you guess an age you're likely to be disabled, too old to work or die? Even if you make great decisions about your health for your entire life you aren't guaranteed anything in the future. My grandparents have done everything wrong and have been "dying" since the 60's. Yet they're still alive. Heavily medicated but fast approaching their 90's. There is no way they could have known the types of medical advances available to prolong their lives even if they had been saving for retirement. So even if we say, I'll probably live to 85 when it's likely I'll develop heart disease(family history say)and die. But no wait, by the time you reach 70 they discover a procedure to prevent heart disease. Congrats, you just added 5-10 years to your life but you didn't save money for it so your bonus years will be spend in a state "home".
The only advice that really makes sense to me it to control your spending and save enough to provide an income. You can do that fast and extreme or you can do it the traditional way over a long career. It's best to not touch the actual balance, just live off the interest or dividends. So what if you end up losing a bunch of the nest egg in estate taxes? You'll be dead. And you will have had enough income to live to the end of your days with the kind of choice and dignity you planned for.
 Planning to spend to your last penny on your dying day is just odd advice. I have to assume the author is being sarcastic and negative about the possibility of any successful retirement savings plan.

velocistar237

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Re: Our Ridiculous Approach to Retirement
« Reply #14 on: July 23, 2012, 09:21:18 AM »
I'd like to note that she gave the article a very appropriate title, even though she missed the main point.

Jamesqf

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Re: Our Ridiculous Approach to Retirement
« Reply #15 on: July 23, 2012, 12:09:04 PM »
My complaint is that catfood is the default.

Off topic, but I think anyone pushing the "old folks eat cat food because they can't afford anything else" meme can't have priced cat food lately.  I suspect that if older people really do eat cat food, it's because of the deterioration of the sense of taste with age means that most normal food has become tasteless.

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Re: Our Ridiculous Approach to Retirement
« Reply #16 on: July 23, 2012, 12:27:48 PM »
Speaking as a Boomer myself, I think it's useful to remember that we are the first generation to be in control of our own retirements...

Not true.  In fact, there was only a generation or two (in the US) that even had the concept of a government-funded retirement.  The Social Security system made its first retirement payment in 1940, and 401K & IRA plans have been around since the early '80s.  Before that, retirement was, as Shakespeare put it, a matter of
Quote
...I have five hundred crowns,
The thrifty hire I sav'd under your father,
Which I did store to be my foster-nurse,
When service should in my old limbs lie lame,
And unregarded age in corners thrown.

Quote
but I also think it's safe to say that most of us just didn't know what to do with that.

And so?  Should I be handicapped because the rest of the world is unwilling to take the trouble to educate itself?

Quote
...but I had no one to advise me..no one with any experience in this investing stuff at all. Investing was for Rockefellers, Vanderbilts, and other robber-baron types, not Joe or Josephine Blow.

You couldn't have gone to the library and taken out a book or two?  I was not long out of college back then, but did fairly well investing after the '87 crash.  Didn't have that much to start with, but by the early '90s had the student loans all paid off, and had bought my first house and airplane.  If a computer nerd can do it, why can't the rest of the world?


grantmeaname

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Re: Our Ridiculous Approach to Retirement
« Reply #17 on: July 23, 2012, 12:33:24 PM »
The point isn't that it would have been impossible for any individual Boomer to take responsibility for their retirement in a positive way early in their career. The point they were making is that Boomers on the whole weren't a demographic that was well prepared or well educated in anticipation of the changes to retirement savings plans.

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Re: Our Ridiculous Approach to Retirement
« Reply #18 on: July 23, 2012, 02:57:51 PM »

And that's a sentiment I can get behind.  The switch from defined-benefit to defined-contribution retirement plans was foisted on the American people with promises of "more choice" and "better control" over their own retirements, but has instead resulted in millions of financially illiterate workers who would have otherwise been taken care of at the end of a long career having to survive solely on social security.  Yes, the new system gave people more control, and hardly any of them were ready for the accompanying responsibility.


I agree. Speaking as a Boomer myself, I think it's useful to remember that we are the first generation to be in control of our own retirements but I also think it's safe to say that most of us just didn't know what to do with that. Our post-WWII parents, for the most part, got married, bought a little house, stayed in it for their entire working lives - working for one employer - and at retirement time, had a paid-off house, a pension and some social security to live on. At the end of 35 or 40 years - voila,  retirement was there. So that was the example we Boomers grew up with. Parents had no need to teach their kids about asset allocations, mutual funds, and all that. We were taught to "save for a rainy day" in a passbook savings account, back when savings accounts actually paid 4 or 5%. We even had "Banking Day" once a week in grade school.

Unfortunately, as the old system was replaced by the DIY 401K version, no real instruction manual came with it. In my case, back in 1981 I opened a 403B (TIAA-CREF) but back then, there was no investment advice as part of the plan, nothing much in the way of choices, nuttin'. I had three options: 75/25, 50/50, 25/75 (stocks/bonds). I chose 50/50 'cause that's what the nice lady in HR said most people choose. I was 24 at the time! Obviously, I should have chosen the 75/25 option but I had no one to advise me..no one with any experience in this investing stuff at all. Investing was for Rockefellers, Vanderbilts, and other robber-baron types, not Joe or Josephine Blow. It does sorta feel as if we boomers were all just dumped in the deep end of the retirement pool, sink or swim.

(a little snipping)

Speaking from my own experience, the single biggest thing that has to happen is for Boomers to decide that their freedom is more important than buying crap. But these Doomed Boomer articles never mention that.

Another boomer here.  I too had the same TIIA-Cref options in 1987.  Choosing the 50/50, I seriously wondered if I had should have gone with the 25/75 after Black Monday.  It was a learning curve for me.  My parents kept their money in passbook savings and CDs.  Period.

Following advice from a popular financial book of the day and Money magazine, I signed up for automatic withdrawals.  A bit here, a bit there, and we soon had a down payment for a house and a growing retirement nest egg.

But back to Atelierk's point:  in the 1980's and early 1990's, my husband's 401-K choices were limited and lousy for the most part.  Get the company stock, an ultra-conservative fund, or a fixed income fund.  The company stock was the best option.  I do think that employees have become more savvy and hence there are expanded choices.


MacGyverIt

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"Our Ridiculous Approach to Retirement"
« Reply #19 on: July 23, 2012, 05:19:07 PM »
[MOD EDIT: Merged into existing topic.]

The author's income requirements aren't quite Mustachian but some of the statistics cited in this article are mind-boggling. And at no point in the article does this professor of Economics suggest reducing consumption/cutting cable/driving a used car/not (or barely) eating out. *sigh*

http://www.nytimes.com/2012/07/22/opinion/sunday/our-ridiculous-approach-to-retirement.html

- Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.
- Almost half of middle-class workers, 49 percent, will be poor or near poor in retirement, living on a food budget of about $5 a day. (Newsflash Mustachians, $5 a day for daily food intake is POOR!)
- To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security.

Good points by the author....
- At dinner one night, a friend told me how much he has in retirement assets and said he didn’t think he had saved enough. I mentally calculated his mortality, figured he would die sooner than he predicted, and told him cheerfully that he shouldn’t worry. (“Congratulations!”) But dying early is not the basis of a retirement plan.
- After all, people hear that 70 is the new 50, and a recent report from Boston College says that if people work until age 70, they will most likely have enough to retire on. Unfortunately, this ignores the reality that unemployment rates for those over 50 are increasing faster than for any other group and that displaced older workers face a higher risk of long-term unemployment than their younger counterparts.
- Basing a system on people’s voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs. (She's sounding downright MMM-ish here :-> )
« Last Edit: July 23, 2012, 05:21:07 PM by arebelspy »

Jamesqf

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Re: "Our Ridiculous Approach to Retirement"
« Reply #20 on: July 24, 2012, 12:15:08 AM »
But dying early is not the basis of a retirement plan.

Wrong!  The Social Security system was based on the premise that most people would die before collecting much of their benefits.
 
Quote
Basing a system on people’s voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs.

I can't see anything unreasonable in that.  I've been saving for about 25 years.  (Would have been longer, if I'd had any money back then.)  So I must either maintain that I am inherently superior to the ruck of common humanity, or believe that most anyone can do the same.

velocistar237

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Re: "Our Ridiculous Approach to Retirement"
« Reply #21 on: July 24, 2012, 06:41:21 AM »
Wrong!  The Social Security system was based on the premise that most people would die before collecting much of their benefits.

Right, it is basically a form of annuity/insurance. It's kind of crazy to think that our health care culture, where we prevent death at any expense, both costs an outrageous amount and increases Social Security withdrawals. It's a double whammy.