So You Think You Can Retire, Punk?
One of the big taboo subjects in the New Economy is long-term financial planning. We like to pretend we're all part of this brave new world where all who choose to have the right attitudes and take the right kinds of risks will have comparable outcomes. We like to pretend that just because people with very diverse financial profiles live similar lifestyles in similar gentrifying metro neighborhoods, doing similar "new economy" work, that our financial trajectories won't diverge too much as we -- and by we, I mean assorted bloggers, podcasters, freelance coders, designers, non-unicorn startuppers, Etsy merchants etc. -- grow older and less healthy. This is of course, insanity. The world emerging today has a tiny fraction of big-exit winners, a slightly larger fraction of people who win options lotteries and make big gains in secondary markets, and a vast majority -- including most with "new economy skills" that on paper prepare them for surviving and thriving -- who are basically in complete denial about the financial realities of their lives. If you aren't one of the lucky ones, working for a big tech company (ironically among the last few places where you expect an industrial-age style retirement), you have to wake up to a lot of very grim realities. But there's light at the end of the tunnel.
Retirement Pyramids, 2000 vs. 2040
1/ Like the infamous "Food Pyramid" of the 90s, our financial lives today are governed by an implicit "Retirement Pyramid."
2/ The retirement pyramid is a stack of assumptions and expectations that reflect what politics would like the populace to believe rather than what individuals should actually expect.
3/ The retirement pyramid in every country is different, but all reflect roughly the same set of politically convenient industrial age assumptions about long-term societal stability.
4/ In the US, the base is early education debt, viewed as an investment. Historically, every year of postsecondary education added a few percentage points to lifetime income.
5/ Above that is home ownership, again historically a solid-returns investment vehicle in the US, which cost around a median year's income around 1980, but costs around 4x the median now.
6/ Above that was a mix of investment (hopefully wisely invested in index funds) and fixed-benefit pensions.
7/ Finally, the whole thing was topped off by government benefits: social security and healthcare: the backup-plan.
8/ If the theory worked, you'd come out on top: your net financial life floating high above the volatility of the everyday economy by the time you were too old and possibly infirm to work.
9/ Every assumption in single layer of the stack is now under threat. Some, like pensions, have crumbled almost entirely.
10/ Unless you're really smart about your choices, your education "investment" is likely to be a deadweight loss. In the US, even STEM degrees with moderate "in-state" price-tags are no longer sure-fire bets.
11/ Though not financially the biggest piece, educational investments/student debt is the most critical piece of the puzzle. I tweetstormed about it earlier this week.
12/ Home ownership is not just more expensive: outside of major metros with very high demand and limited supply, it is no longer a guaranteed positive investment. Entire small towns can vanish over just a few years.
13/ Defined-benefit pensions of course, are history for all but a few secure categories of workers.
14/ You might think stock and bond investments are relatively safe. After all, the stock market has historically provided solid returns for those who resisted the temptation to speculate and stayed in index funds.
15/ Think again. Much of the wealth-building opportunity has shifted to secondary markets (startup stocks), and the number of publicly traded firms has halved in the last 20 years.
16/ And of course, with people projected to live much longer, and social security and healthcare under threat in all major economies, the government is a lousy backstop.
17/ Bottomline: the financial and macroeconomic theories underlying the retirement pyramid are under threat at all levels.
18/ The pyramid (show on the left above) is still true for many older Americans. The ones for whom it is already false are voting for Donald Trump, and committing suicide at alarming rates. That is one not-very-good New Economy retirement plan.
19/ As many of you know, 42 is a number of deep religious significance for My People. I will turn 42 later this year. For the under-42 set, even the theoretical retirement pyramid looks lousy.
20/ If you're graduating college today, and things continue evolving as they are today, you can expect the following retirement planning environment.
21/ Your education is likely to be a deadweight loss. You are likely to rent all your life, not own a house (not a bad thing in itself, but undermines the traditional retirement model).
22/ Unless you get privileged access to secondary markets (read: stock options), your retirement money will be in an increasingly volatile public market.
23/ You can expect fewer government benefits, which kick in later, and run out earlier, both for short-term safety net needs and retirement.
24/ Worst of all: your investments will probably live in a much more volatile market environment (represented by the more turbulent water line for the picture on the right)
25/ This isn't the end of the grim realities. We mostly model cost-side elements in retirement models, making deluded assumptions about the revenue-side.
26/ In particular, most retirement calculators assume you will not just have a predictable paycheck-like income through your life, but that it will increase predictably.
27/ This of course is based on the idea of industrial age careers, with predictable roles for people at all life stages and risk appetites. Layoffs, downward mobility, divorce, and free agency do not even guest-star in these calculators.
28/ The assumption for information workers was: you'd be a single, childless individual contributor in your 20s, a senior pro, part of a married dual-income couple with kids in your 30s, and climb a senior management ladder in your 40s.
29/ Of course, this best-case scenario was not particularly accurate even at its best, in the 1950s. Today it is becoming wildly inaccurate, as "best" and "median" diverge rapidly.
30/ "Middle management" is fast vanishing as something for people to do in their late 30s and 40s, replaced by software, and in the future, by blockchain technologies.
31/ "Individual contribution" is harder to continue into middle age as technological change and the increasing challenge of staying relevant conspire to make life harder past 35 or so.
32/ The net of this is that some element of entrepreneurial risk-taking is now necessary, not an option, to make the financial equations of life balance out for most information workers entering the workforce today.
33/ And that's just to theoretically, barely, come out on top. There is far less room for error than there used to be under the old theory.
35/ This model bets on extremely aggressive savings, radical lifestyle change, and careful investment (with no expectation of big IPO wins) to balance the equations.
36/ To many, however, this approach will be socially unrealistic (since it requires a certain degree of social withdrawal from communities with more conventional financial lifestyles).
37/ It is also, to some extent, a case of what Bruce Sterling calls acting dead. Not very much better than the worst case Trump retirement plan of a protest vote followed by suicide.
38/ I have painted a really grim picture of future prospects for the young, and the picture is one that many find to be viscerally true, especially young supporters of Bernie Sanders and older Donald Trump in the US today.
39/ It is not surprising that many think the equations cannot be balanced at all at the individual level and that societal support systems need radical upgrades. Such as through a universal basic income.
40/ That said, there are a few bright spots on the economic horizon that hold out enough promise to potentially wipe out all this grimness, and in ways that depend on your agency rather than capricious government actions in the future.
41/ One big one is technology-driven deflation: things getting cheaper is good for smaller retirement bills. A few seconds thought shows that unless you take on a lot of debt, deflation is a good thing. And it is looming today, as interest rates veer towards the negative.
42/ Another big one is a very special secondary market that we all have access to, whether or not we are accredited investors legally able to invest in startups: ourselves.
43/ A half-century ago, there was no meaningful way to invest in yourself. Investments in education and real estate were really investments in the broader society.
44/ Dollars invested in your health are dollars you don't have to save for retirement. Dollars spent learning Spanish or Thai are dollars that open up cheaper global retirement options for you. Self-directed learning in general, unlike formal education, is an investment in yourself.
45/ And of course, more traditionally (yes this is "traditional wisdom" by now), money you invest in growing a blog, an Etsy store, or a podcast, or going carless, is retirement savings.
46/ Another huge one is defining your own community of belonging creatively and carefully. This is particularly true in the West, and even more true of the New Economy. Why?
47/ Western society in the last century has acquired an egalitarian social gloss even as it has gotten more unequal behind the scenes. People with drastically different net worth conditions "look" the same based on exterior lifestyle.
48/ Startup culture is even more extreme: billionaires and rent-and-ramen strugglers alike might wear hoodies that are indistinguishable to those without a trained fashion eye.
49/ As the suicide-prone Trump communities (and communities like Greenland Inuits profiled in this gut-wrenching profile) show, when communities are dying, they can take you down with them, faster than you would go down alone.
50/ So being careful and conscious about what community you invest in, by "belonging" to it, is a big smart retirement move. Slowly but surely, what used to be a constraint is becoming a free opt-out/opt-in variable here.
51/ The wrong choice is not just psychologically risky. It poses direct financial risks: you will end up following spending, child-bearing and saving norms that make no sense for your actual income prospects, based on an illusion of egalitarianism.
52/ The right community/belonging choices -- the right kinds of streams -- otoh, open up new worlds of opportunity. They are primarily online now, but expect them to reshape geography in the future, and keep an eye open for good places to move.
53/ The problem of course, is actually modeling the risk/return profile of this messy cash-and-kind personalized retirement portfolio clearly. Like many of you, I've improvised my own models that are lousy, but better than the cookie-cutter ones.
54/ It is easy to delude yourself that your transient-fad blog, a one-week-wonder ebook, and a weight-training routine are reliable retirement assets comparable to nice, fat, and highly liquid stock portfolios.
55/ But until someone invents retirement calculators (perhaps one of you will) that allow us to model these new realities, you're on your own like me, armed with Google Sheets (free, thanks to tech-deflation).
56/ Is it going to be tough? Yes. But if like me, you prefer the truths of a more powerful reality to the delusions of a less powerful reality, then you wouldn't trade your lifestyle for your parents' lifestyle.
57/ Figuring all this out is a challenge, an unquestion with no definitive answers. But asking it honestly, and swapping intelligence candidly with those of your friends in the same financial boat as you: that's a start.
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Check out the 20 Breaking Smart Season 1 essays for the deeper context behind this newsletter. If you're interested in bringing the Season 1 workshop to your organization, get in touch. You can follow me on Twitter @vgr
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