US employees working into retirement after GFC
I have always wanted to witness an American election - and now here I am in San Francisco on November 5. There is enough electioneering going on at the moment to satisfy the most devoted political junkie (and I freely admit to being one of those).
There are a couple of things that always strike me in America - the first is the filthy streets and the second is the number of people who live on them. You would think the richest country in the world would be able to clean up its streets and help the impoverished towards better lives than begging and sleeping in doorways.
However, this time, the thing that has really stuck me is the number of older people doing basic, often quite menial jobs. Almost everywhere, there are people who look to be in their 60s and 70s waiting on tables, cleaning, hotel porters and so on. Twice I have been forced to go to Starbucks and both times there have been older men working right alongside teenagers.
This is a direct effect of the GFC. People have had their life savings obliterated and been driven back to work. Even those who have been able to hold on to most of their money no longer trust that they will get investment returns sufficient to live on. There is no trust of banks, bankers or the markets, and the idea of retiring neatly at age 65 years is now a far off dream for many.
The surveys bear this out: Just under 80 per cent of Americans plan to work past the age of 65. Whether this is through financial necessity or for other reasons is not clear - my guess is the majority will be working because they have to.
On arriving in San Francisco, I was driven from the airport by an older man. Routinely, my first question while here is to ask who is going to win the election (they all say "Obama" - this is a Democratic state). However, after a few words on politics, we got chatting. My driver had been laid off from a middle-management job in 2009 and had never been able to get what he called a "decent" job again. Now, after three years out of his old job, he had lost his work currency and his network.
At the same time, his retirement savings had been hard hit. He had been "reduced" (his word), to driving a taxi with no prospect of a decent retirement in sight. He was bitter and angry - mostly with the banks.
This, and no doubt millions of other stories, confirms the importance of lowering investment risk as you get older. This is especially true as you approach retirement and I would say anyone over the age of 60 who was hoping to retire at 65, should start to lower risk. This means moving from a growth investment strategy to a balanced one, and eventually probably to conservative.
It also means retaining the means to keep working - perhaps, as so many now plan, well into "retirement". This is not easy. Although no one seems to mind young and old working together here in San Francisco, I have often heard a different story in New Zealand.
Working in retirement does have advantages: It keeps you engaged, socially and mentally. However, it also gives a very strong financial advantage. First, is the obvious one - some more income. Not quite so obvious is the extra amount of savings you would otherwise need to accumulate to get that same amount of extra money.
For example, you could earn $10,000 a year from work fairly easily. However, assuming an investment return of 4 per cent after tax, you would need $250,000 of extra savings to generate that $10,000 - it takes a whole lot of capital (and a whole lot of saving) to get just a little bit of extra sustainable income.
Second, carrying on working into retirement keeps you current. If something bad happens to your investments you are still in the game (work-wise) and can carry on. It may not be what you want, but it could be better than the alternative. Mostly, New Zealand dodged the GFC bullet - but remember, we may not always be so lucky.
And the election? This copy goes in before results, but my guess is for Obama to win - although he might have to wait till the specials are counted before celebrating.
Martin Hawes is an authorised financial adviser and his disclosure statement is available at www.martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.
Sunday Star Times