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As we begin the year, it is traditional to think about the future. Today my good friend, Dr. Gary North, helps us to think far into the future, about our plans for retirement. This is one you should forward to friends and family who have yet to begun thinking about how they will live out the last part of their lives.

This note from the December issue of Retirement Plan Advisor literally crossed my desk as I was getting this issue of Outside the Box ready.

"Data from a new study of the recently retired prepared for Putnam Investment underscores the need for employees to invest more aggressively before retirement, as Social Security, traditional defined benefit and cash balance plans remain the largest source of income for households. This is true despite the fact Social Security is in jeopardy, DB plans are on the wane, and cash balance plans face uncertainty because of litigation.

"The biggest surprise for recent retirees, the study states, is having insufficient income and high expenses. Fifty-nine percent of the nearly 2,000 respondents wished they had started saving earlier, while 70% regretted not saving more through their employee-sponsored retirement plan or via an independent plan."

Gary sees most people unprepared for retirement, but if they take a look at what the future might hold there is time to adjust. Let's take a look at some of the scary statistics and possible solutions. - John Mauldin



Gary North's REALITY CHECK Issue 405
December 17, 2004

"People can expect to live one-fourth or one-third of their life in retirement," says Jeffrey Brown, an economist and author of a recent study released by Americans for Secure Retirement. "That requires a lot of planning." The challenge, he explains, is to make a nest egg last a lifetime in the face of uncertainty about how long one will live and what future expenditures will be.

Christian Science Monitor
(December 13, 2004)
Ben Stein is known for his comedy skills, as seen on Comedy Central's "Win Ben Stein's Money." His performance as the deadly dull high school economics teacher in "Ferris Bueller's Day Off" is a classic. But as a commentator on "Sunday Morning," he gets serious.

On the November 29 show, his commentary was titled "Retirement Planning."
Try this on for size. You're seventy-five years old. You live in the comfy home you've always lived in. You play golf in good weather. In bad weather, you travel to where it's warm and sunny. When your grandchildren call, you take them out on the lake in your new boat. Your wife takes classes in the local college and paints. This is your life in retirement and it's everything you always hoped and dreamed it would be.

Or, try this scenario: you are seventy-five years old. You live in a tiny apartment with the smell of boiled cabbage and noisy neighbors all around. You live in a scary neighborhood and you dare not go out after dark. Eating at restaurants is just a dream. Your apartment is too small to have your kids or grand kids visit. If you get sick and you have to spend time in nursing care, you don't know how you'll afford it. Your life is pure fear.
To emphasize his points, the tape editor spliced in appropriate images. For scenario #1, there was a lake with boats on it. For scenario #2, there was a photo of a dilapidated building.

Somewhere in between Lake Capital and Slumburgh is where most Americans will live out their golden years. The capital base necessary to sustain life on the lake is huge: millions of dollars. For most middle-class Americans, life is more likely to be lived in an apartment connected to a son's house, or maybe in their own home, which the son's family lives in, in preparation for the inheritance. I call this scenario #3. I call it Family Solidarity.

But the two ends of Stein's retirement spectrum are realistic. You don't want to wind up in scenario #2. Stein continued:
The fact is that if you are a baby boomer, one of the 77 million racing towards retirement, you have -- to a large extent--your choice of which of these retirement outcomes is yours. You get the good outcome or something like it if you start early, get a sensible, solid financial advisor, make a solid sensible plan for retirement savings, stick to it through thick and thin, accumulate diversified savings of stocks, mutual funds, bonds, real estate, variable annuities and foreign investments. You should accumulate an amount equal to roughly fifteen to twenty times what you need annually to live on -- with allowances for pensions and social security. It's a tall order, and it's a bit scary to think about, but if you even come close to it, you get to have that great retirement life.
Problem: the percentage of people who are actively saving enough money to achieve this goal is so small as to be statistically irrelevant. The savings rate in the United States is close to zero. It has been falling for two years. (

The average American family's income is about $40,000 a year. The average family therefore needs to have as a goal a retirement fund of $600,000 to $800,000. But the only asset they own that may possibly enable them to achieve this is their home. This is why I see scenario #3 as the most likely. Stein warns:
The point is, making sure you have a swell retirement is up to you. Not to Uncle Sam, usually not to your employer, not to your kids. You have to max out your IRA's, your Keoghs, your 401K's and do it sensibly, and then some. And you have to start with that all important plan.
Stein's point is well-taken. Anyone who thinks that the government is going to be able to give him anything more than scenario #2 is naive. But most Americans are not doing this. Most Americans are like these people:
Or, you can just be the happy go lucky grasshopper in your working years, not think about retirement, and then later, you get to live in terror.
At that point, the editor spliced in the back side of an old woman in a wheelchair.
Which sounds better to you? I thought so. No matter how old you are, get started now and do the best you can.
Today, the personal savings rate in the United States is 0.2%. The typical American family, which earns $40,000 a year, is putting away a whopping $80 a year. Some retirement.

How much should this family be saving? At least $4,000 a year. Like clockwork.


It takes high income, good investment knowledge, and self-discipline to save enough money to provide for a comfortable retirement. It also takes the ability to stay ahead of price inflation. This is not easy. In a recent article in "The Christian Science Monitor, we read:
"In the world economy, we've seen whole industries slide into bankruptcy -- steel, airlines," says C. William Jones, president of the Association of BellTel Retirees. "This has really transferred responsibility for people's financial future to themselves."

He speaks from experience. In the 14 years since he retired, Mr. Jones has lost about 35 percent of the buying power of his pension. To offset those losses, he returned to work as head of the retirees' association. "Had it not been for that, I certainly would be making a significant change in my standard of living," he says.
To make retirement saving easier, wise workers set up an automatic payroll- deduction program with their employer. The money is deducted and put into a savings program before the worker receives his pay check. Like the U.S. government's withholding plan, this lowers the pain.

If the company matches part of the deduction, so much the better. But the SEC- approved investments may not pan out as planned. The fund may not compound as fast as you hope. But the discipline of living within your means is as important as the rate of return on your investment portfolio. Whatever the rate of return, it will produce a nest egg larger than the one produced by the non-saver.

The key to success is a person's willingness to act in terms of the ticking clock. It means facing reality young, and then acting in terms of this reality, month by month, no matter what.

The problem is, it takes only one disaster to eat up the program, such as sickness or lawsuit judgment. Insurance can offset some of this risk, but not all of it.

This is why most people in history have died poor. They did not leave much of a legacy to their heirs. They had little capital. Yet the West has known about this truth for over three millennia:
A good man leaveth an inheritance to his children's children: and the wealth of the sinner is laid up for the just (Proverbs 13:22).
The West's 250-year miracle of compound economic growth has made possible a reversal of this empty-purse legacy. The doubling period is 73 years divided by the annual growth rate. Compound economic growth of 3% per annum doubles the wealth of a society every 24.3 years (73 divided by 3).

The problem that most people face is that their appetites grow alongside the rate of growth. Their tastes change. Usually, these tastes become more costly.

Then, with plenty of warning but without preparation, couples find themselves retired. They must cut expenditures by 50% to 75% overnight. This kind of reduction in lifestyle comes at a high emotional price. Most people start spending their savings in order to delay the required transformation in their consumption habits. The less habitual their discipline of thrift, the less prepared they are for the day of reckoning. They fail to adjust fast enough. This is going to happen to tens of millions of retirees. They don't see it coming.
Among baby boomers, both men and women expect to play catch-up with their savings later in life instead of making regular deposits now, according to a study by The Guardian Life Insurance Company of America. Yet that strategy can be costly.

"They don't understand some basic financial principles such as compound interest and adequate returns, so they are doing nothing," says Frank Murtha, a business professor at New York University.
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Look at a photo of yourself that is over five years old. You can see what has happened. Maybe you should paste this photo on the bathroom mirror. Let it remind you, day by day, that the day of reckoning is approaching relentlessly.

This may seem like strong medicine. But people don't like to be reminded. A refusal to save, like the refusal to write a will or set up a trust, is the average man's response to the ticking clock. It's Scarlett O'Hara's syndrome: "I'll think about it tomorrow."

It is easy to let the debt system hike the price of a home, and then call this your retirement program. If you own rental property, this is a valid outlook. "Borrow a million dollars and have your renters pay it off," Jack Miller says. But hardly anyone can do this because most Americans don't rent. They are paying off mortgages. They will get these debts paid off about the time they retire, as long as they refuse to refinance along the way. Your home is not an ATM machine.

But this asset will provide only rental space -- more space than most retired people need. It will not provide income. It will require maintenance. Property taxes must be paid. This nest egg turns out not to be the capital asset that retired people expected. If their family members live close by, in mortgage debt up to their ears, then the retired couple probably won't move to a lower cost of living region. Their golden years become one long struggle to get enough income to finance life in their paid-off home.

People in their twenties are unlikely to read a report like this. Also, people in their twenties are locked out of the conventional real estate markets. Their income is low. They don't buy homes John Schaub's way. ( They rent. If they save for a down payment, fine, but they can't hope to do this in Boston, New York City, Los Angeles, and San Francisco.

American families don't make inter-generational decisions based on inheritance. The parents don't sit down with the younger in-laws and make plans as to who will get what. They do not decide which region is best to keep family's capital intact.

For instance, a joint family council could decide to move to the same region. This way, grandparents won't lose contact with the grandchildren. Next, the grandparents could then buy an investment home in a lower cost-of-living region, and rent it out. Later, they can sell their existing home, not renew the distant rental contract, move to the rental home, and add a separate wing onto it for themselves when their income declines. They will be able to rent out the main home for income, or else invite the in-laws to move in. The parents then move into the smaller unit. The family of the son or the daughter then buys out the old couple, who issue a mortgage. In the nineteenth century, farmers did this for their sons. But agriculture ceased to be the chosen occupations of Americans in the twentieth century.

In the competition between grandchildren and rational family economic planning, the latter usually loses. Grandparents retain ownership of large homes in expensive cities. Retirement housing expenses then drain them of their capital.

You cannot change this culture. Most Americans make decisions that have long- term economic effects, yet their decisions are based mainly on short-term income criteria. The head of a household acts in terms of how much money he can earn now, not how much capital he can control, debt-free, later in life. The result is the dissipation of family capital.

Nevertheless, individual families can break away from the standard approach to inheritance planning. They can decide to discuss the basics with in-laws.
  1. Who will take care of the parents

  2. Who will inherit the largest share because of this care-provision

  3. With which families the parents will live

  4. What expenses must be made and when in order to make living space available

  5. Who will pay for these expenses
The parents must make mental preparations to surrender a degree of their independence. This may be the most crucial adjustment of all. Oldsters who wait to the last minute to move into assisted living quarters will usually overpay. The longer you have to make plans, the less expensive the implementation of the plan will be.

Oldsters who know they will become dependent on their children are wise to adjust their behavior early. The fact that they don't factor this lifestyle adjustment into their retirement plans indicates that they are not taking seriously the true costs of retirement. The older you become, the more difficult the adjustment will be . . . for your children.

It boils down to this: Who do want to see on a daily basis in your old age? Employees in an assisted living facility or your children and grandchildren? Where do you want to die? In an assisted living facility in the presence of employees, or in the presence of your children and grandchildren?

Make your plans now.

Am I being realistic in suggesting a family home with separate living areas? Will parents move in with a child's family? Will younger families move in with parents? If they won't, then parents had better consider an economic alternative.

One alternative is a duplex. If you can find one in a good neighborhood, consider buying it. If the neighborhood has single-family homes, even better. Use the second unit to make a full-sized home now, if you need one. Or use the second unit as an office. But be prepared to rent it out in your retirement. A 2-bedroom unit will probably be rented by an older couple whose children have gone, but who have no home of their own, or a young family. You can be a good neighbor in either case.

With a couple of acres in an unzoned part of the county, you could do the same with a double-wide mobile home, purchased used for a steep discount.

I realize that we all think, "It won't happen to me." We plan to live in our own homes until we move into a nice assisted living center at $2,000 a month (today's dollar -- pre-inflation). It's great if you have $3,000 a month coming in passively, month after month. Not many people do, which is why not many people live in an assisted living center. I have seen a figure of a million Americans. That's not many.

We have lived in abnormal times, when the Ponzi scheme known as Social Security had more money coming in than going out, and when corporate retirement plans, for those who have had them, have been solvent. Both of these conditions are going to change radically in the next two decades.


Most American assume that the government will pay for their expenses. They have not checked with Social Security to see what they can expect as their monthly check. They don't want to know. If they knew, this would pressure them to make major adjustments now. They don't want to make adjustments now. The estimated $44 trillion unfunded liability of Social Security/Medicare is about four years of all productivity, including government. This unfunded liability remains unfunded, and so continues to compound. We cannot "grow our way out of it." It grows right along with economic growth. It is expected to be $51 trillion in 2008. See Table I here:

So, the average American trusts in an institution that can change the law at any time, and has, repeatedly. It's all a matter of voting blocs.

Younger voters are kept from de-funding the system by the thought that their parents' expenses can be passed on to the voters. But they are the voters. They think that the rich will pick up the tab. But these two welfare schemes are funded by payroll taxes, not by taxes on capital or dividends. The workers will have to pay if anyone does. That's why they won't pay. They have the votes. They just haven't experienced sufficient pain yet.

I keep coming back to this theme because I look at the catastrophic figures for personal saving. Businesses are saving, but businesses are being bought up by foreign investors, to the tine of $650+ billion this year, minus whatever they bought of government debt, which American taxpayers must pay interest on forever.

At some point, all but the short-lived must get this question answered: Who will pay for my declining years? If your answer is "I will, with accumulated capital," that's a good answer. Just don't outlive your accumulated capital.

Most Americans will.

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The lack of personal saving by Americans is a widespread phenomenon. It has not arrived overnight; it will not depart overnight. It represents a major shift in the direction of present-orientation. Americans are buying present goods with the money they could have invested in order to establish a legal claim on future goods (interest and dividends). Morgan Stanley's chief economist Stephen Roach put it this way on December 10.
America's federal government budget deficit is a very serious problem. . . . Declining personal saving is an outgrowth of the Asset Economy -- namely, aging and myopic homeowners banking on unrelenting house-price appreciation to do the saving for them. The fact that America is now in the midst of a housing bubble is especially worrisome in that regard. The problem with persistent structural budget deficits -- a long-term prognosis that is centered in the 2.5% to 3.5% steady-state range -- is that the US has no cushion of private saving to fund it. That's the intractable current account problem in a nutshell. . . . America's saving problem is off the charts -- possibly the most serious imbalance in an unbalanced world. . . .

I repeat the point I made earlier -- budget deficits matter much more when there isn't a backstop of private saving. I take no consolation in the fact that the US may be running "average" deficits -- still a leap for me to accept -- if it has no private net saving. We cannot afford average deficits with no private saving. At least Europe and Asia have that cushion -- much higher private saving rates giving them every right, in my opinion, to be critical of the US for its profligate ways. Europe and Japan have their own problems, as does the US. But if the world ducks the shared imperatives of an urgent rebalancing -- just because the "other guy's" problems look worse -- we won't get anywhere.
The easy way out of debt for governments is to run huge deficits and then tell the central bank to finance them by creating money. The result is the erosion of purchasing power: price inflation. The government pays its debts on the cheap.

This is the economic case for income-producing real estate. Let your renters pay off the mortgage debt. But this strategy will fail unless your loan is a fixed interest loan. Otherwise, rising rates will eat up your profits. Your goal should be to get the debt paid off fast, and then raise your rents along with the depreciation of the dollar.

The case for gold is the case for capital preservation and wealth transfer to heirs in an era of inflation. You had better own gold in your golden years.


I hope you have found this weeks "Outside the Box" enlightening, of course all my readers are probably in scenario #1, but you can pass the letter along to those you know in Scenarios #2 and especially #3.

If you found Gary's perspectives interesting, he writes a free letter that you can subscribe to by emailing

As a side note, Gary started me on my path into the investment world, and I have always been grateful. In the early 80's I was the CEO of (and partner with Gary in) the American Bureau of Economic Research, which published his newsletters and books. Later in that decade, I went into the business of running money, but that's another story.

Your planning for his retirement analyst,

John F. Mauldin


John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC and InvestorsInsight Publishing, Inc. (InvestorsInsight) may or may not have investments in any funds, programs or companies cited above.


Communications from InvestorsInsight are intended solely for informational purposes. Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of InvestorsInsight, and should not be construed as an endorsement by InvestorsInsight, either expressed or implied. InvestorsInsight is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results.

Posted 01-03-2005 3:39 AM by John Mauldin
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