Financial Planning for Immortality and/or the Apocalypse
Caught between the unimaginable and the unthinkable, it’s time to update your pension plan.
My parents raised me to be financially prudent. It didn’t take, but they tried. They are still trying. For his birthday, my father asked me to tell him I’d read a particular book on financial planning. It doesn’t matter which one, because in broad strokes the lessons are always the same.
Here’s how to be financially secure: Step 1: Spend less than you earn. Step 2: Spend even less than that. Put a bunch aside so when you stop earning an income you’ll still be able to afford to live. Step 3: Put that extra money in the author’s pet financial instrument (mutual funds! real estate! ETFs! GICs! gold!) and grow rich.*
Past Results
In 1889, Otto Bismarck’s Germany set the retirement age to 70 (later, they lowered it to 65, which has become the near-universal standard). Legend is that the age was picked because that’s how old Bismarck was. It’s not true. He was 74. The truth of the matter is that not that many German people made it to 70 in 1889. It is much easier to fund a pension scheme if you don’t intend your pensioners to collect for all that long, if at all.
In 1930, US life expectancy was around 60. Today, life expectancy in rich western countries hovers around 80 (it’s worse if you’re a poor person and better if you’re rich). That’s already a significant jump in expected retirement years. It’s not the only reason that defined benefit pensions have fallen out of favour, but it can’t have helped. Imagine the look of dawning fear on actuarial faces as a company’s accountants came to grips with the realization that they’d be paying out pensions for extended periods. Now imagine the terror if one of these longevity miracle drugs ever comes to market. Remember when the cigarette companies argued that their products saved healthcare costs in the long run by killing off customers? This is the opposite.
These aren’t theoretical concerns. Pensions represent huge liabilities to the companies administering them. More and more are trying to get rid of them, as depressed interest rates result in companies running pension deficits — spending more than their investments make, dipping into profits as a result. In this context, our longer lives are their bigger risks. When GM started offering buyouts, it did so on the assumption that retirees would die at 75.
“They calculated the figure based on my monthly income from GM lasting me another 10 1/2 years,” Reuters reports retiree Richard Fusinski as saying. “There’s no possible way that that’s going to be good for me. I take no prescription drugs. I’m just extremely healthy. What if I lived to 100? That’s 35 years from now.”
And so employers have washed their hands of predicting the future and outsourced Step 3 to each of us. If we are lucky enough to have a job with a retirement plan, it’ll be a defined contribution deal. The company promises to put stuff in, but good luck to us for working out where to put it and what we’ll be able to take out. We’re left playing that particular game alone. Our fellow travellers are a horde of snake oil salesmen, hucksters, gurus, day traders, and algorithms, all ready to take our money, gamble with it, and give some of it back.
On billboards and in certain magazines, serious men from brokerages pose in black and white advertisements assuring us of their knowledge of the markets and ability to understand the trends of industry. They want us to know that they, unlike their competitors, can time the rises and falls. They don’t even have the decency to apologize for last time and assure us that this time will be different.They don’t mention the last crash at all.
Best not to dredge up past results which do not predict future returns, anyway.
These people are in competition with a monstrous ecosystem of algorithmic traders which slide between the ticks of the clock, barely understood by the people who create them, let alone who trade against them. I do not use ‘ecosystem’ lightly. A cottage industry of observers try to catalog the digital fauna, giving them names like Boston Shuffle, Depth Ping, and The Knife. It is truly feral capitalism.
Do Not Predict
The narrative of financial planning is a cheery assurance that, so long as we are fiscally virtuous and eat our vegetables, the markets and compound interest will care for us and Things Will Work Out. Did you know that Einstein allegedly called compound interest the most powerful force in the universe? Of course you do, because every fucking financial planning book mentions it.
Already, we have a problem. Step 1 and Step 2 rely on economic conditions that are basically OK. It is one thing to propose a bunch of life hacks and clever tricks around curbing your latte intake or whatever, but when times are tough, people rapidly run out of margins to shave. At a time of high un- and under-employment, waggling your finger and telling people to be more frugal smacks of unfeeling cruelty and a wilful ignorance of the role that the overall health of the economy plays in each of our fortunes. It is expensive to be poor.
My particular financial planning book was written in 2011, three years after the financial instruments and people who run them — the institutions that everyone recommends as good stewards for our wealth — drove the world economy off a cliff. I was reading it in 2013, year five of the jobless recovery, which is a nice way of saying, “rich institutions are recovering while the middle class and poor wallow in growing poverty.” I read the last chapter in the midst of a debt ceiling showdown in Washington which risked driving the world economy off a cliff again. It was a ride run by dangerous psychotics who seem to sincerely believe that ensuring poor people can have healthcare is evil. It’s a grassroots movement funded by billionaires.
The game feels rigged.
The showdown was averted by last minute capitulation. Commentators assure us that the spirit of the belligerents is broken and the next time the debt ceiling is reached, things will be different. Commentators have been wrong before. After all, the underlying forces haven’t particularly gone away. The future, we all know, is volatile.
These are the conditions under which I am asked to make long bets about the world economy so that I will have something socked away for my twilight years. How many twilight years? We can’t say. On average, we can expect more and more of them every year.
Future Returns
Meanwhile, the IPCC is telling us that we’ve already made a multi-century ‘climate change commitment’, with the attendant rise in sea levels, extreme weather, and refugees. Concerns about peak oil mix in with peak water, peak food, and peak helium. In my cohort of friends and colleagues, especially in the US, there is a substantial portion who consider it to be at least conceivable that there will not be a United States, as we currently know it, by the time we reach retirement age — with the corresponding implication of major upheaval in the market. Why not? No country is eternal and it’s only in retrospect that you can tell the difference between a peak of unrest and the beginnings of a disintegration. The rise of prepper culture along with their sales of packaged food and survivalist gear indicates that there’s a group who are certain the end is coming.
Anyone who’s paid attention to history knows it takes far less than the ending of a nation to collapse the markets, leaving people to fend for themselves and their neighbours. On the more positive side, the tech and medical industries continue to promise and build devices and treatments to help us live better for longer. This isn’t the last crisis and we haven’t seen the last bubble, either. How do you invest prudently in the face of all that?
It is difficult to take the financial planning industry seriously as they natter on about compound interest and filling out questionnaires to evaluate your tolerance of risk. There is serious-mindedness and then there is flagrant myopia. It is nearly impossible to have a good conversation with a financial planner when you have fundamentally differing worldviews on what the future could conceivably entail. How does a singularitarian invest? Which are the right blue chip companies for someone anticipating abundance economics? What about a steady state economy?
Perhaps we need more holistic retirement planners who can intelligently help us work through the relative benefits and disadvantages of investing in stocks or a distant compound with easily-repaired farming equipment. Less dramatically, how can we find retirement planners able to think holistically about the relative merits of accumulating material wealth vs market wealth vs community resilience vs personal survival skills?
Prediction is hard. Impossible, really. Certainly, our forebears don’t have a great track record. The corridors of history are littered with texts of smart and well-informed people getting it truly, laughably wrong. The people in charge of administering the systems that were meant to provide for their clients’ future have given up. This is practical futurism, the stuff upon which the well-being of billions hangs, and its been handed back to those billions to sort it out for themselves.
We’re all professional futurists now.
The longer we live, the more of the unknowable future we must be prepared to face. I wish I knew how to prepare.
cc image by gideon_wright
