Are you ready for retirement? Probably not – and the younger you are, the less ready you are. That’s to be expected, of course – the younger you are, the more time you have to prepare. Unfortunately, there’s an often-overlooked complication that makes retirement much more challenging than you might think…
By Peter Reagan
“Are you ready for retirement?”
That’s a question that too many Americans find uncomfortable to answer. Not because they can’t answer it but because the answer is too often, “No, I’m not ready for retirement.”
And that’s not a position that you want to be in, especially these days.
Today we’re going to go over why you don’t want to be in that situation and what you can do about it to get ready for retirement.
To start, though, we need to take a closer look into…
What is going on in the current economy?
The first thing to pay attention to is that consumer confidence is down as Bryan Mena with CNN notes:
The Conference Board’s Consumer Confidence Index for February… fell to 98.3, falling for the third-straight month and marking the largest monthly decline since August 2021, as expectations for inflation in the year ahead climbed.
Now, if you’re not familiar with the issue, the reason consumer confidence is important is that if people don’t feel like things are moving in the right direction, they’ll tend to hold on to their money instead of spending it.
As Mike Shedlock tells us, though:
Consumers are concerned over inflation. Recession should be the bigger fear.
Why? Because lower consumer confidence for a prolonged period can actually trigger a recession, and recessions cause businesses to close, cause unemployment, cause all kinds of awful life experiences that none of us want our kids to live through (consider this your trigger warning…).
But concerns over consumer confidence don’t mention another statistic that is concerning. Mike Shedlock again:
The share of spending by the top 10 percent keeps rising.
The Wall Street Journal reports The U.S. Economy Depends More Than Ever on Rich People.
I’ve been wondering for a while now just how American consumer spending has been holding up – squeezed between rising prices, expensive credit and a softening labor market. How in the world are the “drunken sailors,” as analyst Wolf Richter likes to say, setting new spending records quarter after quarter?
The insight that, as the WSJ reported (and has been widely discussed), the top 10% wealthiest households make up nearly half of all consumer spending – that makes sense.
Now, it’s no surprise that it’s better to be wealthy than not to be (nice things are nicer than unpleasant things).
Here’s why that matters:
First, the top 10% of earners were responsible for about one-third of spending 30 years ago.
Second, the top 10% wealthiest households are now one-third of the entire GDP.
Third, it means our nation’s economy is highly dependent on a very small group. This presents concentration risk (the opposite of diversification).
Finally, it tells us what most of us already know – that the rest of us just don’t have extra money to spend.
Taken together, these facts offer a warning that recession is around the corner.
Furthermore, all this information reminds us that today’s American economy is focused on consumption, not production.
To such an extreme degree that any slowdown in the top 10%’s splurges on luxury handbags and third vacation homes is a threat.
Wait, now saving is sabotage?
Considering just how dependent our national prosperity is on shopping, any attempt to cut back could have catastrophic effects. That’s one reason that, during recessions, the Federal Reserve lowers interest rates. Low interest rates punish savers with the goal of drawing cash into the economy.
…and it almost always works! The wealthier households, whose net worth is made up of financial assets, they benefit disproportionately from a flood of savings out of safe havens, into assets. If you’ve ever wondered why the rich get richer, well, it’s a feature rather than a bug of the Federal Reserve’s decisions.
See, for example, this somewhat dated (2022) but still extremely relevant chart of how much more the wealthiest households have benefited from the low interest rates of the 21st century:
Why does that matter? Well, right now 90% of Americans have virtually zero savings. That’s what years of steadily rising cost-of-living does to the average family’s budget.
Think about that when you read this from Ivana Saric at Axios:
A grassroots movement is calling on Americans to abstain from shopping with major retailers on Feb. 28 as part of an “economic blackout.”
The People’s Union USA has other targeted economic actions planned for after the blackout.
These include weeklong blackouts against specific retailers, including Amazon, Nestlé and Walmart.
Again, someone may be asking, “So what? Those are big companies. They can handle a boycott.”
And if you think that, then, step back for a moment and ask yourself who shops at retailers like Amazon and Walmart. And why.
Sure, wealthy people shop at those stores, but the majority of those companies’ customers are middle and lower class individuals, just everyday Americans trying to get the most bang for their buck. Choosing the lowest prices.
If you cut the profits of those retailers, which often have lower profit margins than most people think, those retailers have to make up that profit elsewhere with increased prices.
Take groceries, for example. Most grocery stores (and that’s a large part of Wal-Mart’s business) run on low single-digit margins of profit on those groceries. So, if a company is only making two cents on a $.59 can of peas, they really do make all of their money in volume.
And lower volume means that they’ll have to raise prices higher (because they still have expenses to stay open). And if they can’t raise the prices (because people won’t buy at the higher price) or they can’t increase the volume again, then they go out of business..
And who does that hurt? That’s right, the middle and lower classes who were already shopping there to get the lowest price possible because they’re already struggling to stay afloat.
All of these factors together can make the situation in our economy look difficult, and it’s certainly nothing to sneeze at.
People are continuing to struggle, and there are signs that it will continue to get worse with the cumulative effects of inflation, tariffs, and retailers causing retailers to have to increase prices just to stay afloat when sales volumes are down.
How this situation can affect your retirement
Here’s where the rubber really meets the road for what we’re talking about today.
Understand, if you’re relatively young and you’re reading this, consider yourself fortunate. Time is your friend when growing a retirement nest egg.
But don’t allow yourself to get complacent. The better choice is to get started now because the younger you are typically means that you aren’t making as much money as you will later in life. That means the cumulative impact of inflation will affect you much more than someone already more well-off. Simply because you don’t have as much discretionary income to live on (if necessary) and invest with.
So, you should start investing now to set yourself up for retirement so that you aren’t scrambling later to scrape together larger amounts of money to invest (since you would have a shorter amount of time before retirement).
Whether you’re young or not quite as young now, you should be paying attention to the economy because that can affect the amount of funds that you have now to be investing for your retirement.
Because, in the words of a friend of mine (and I can’t emphasize this next statement enough)…
Regardless of your age, ALL future earnings will be devalued by inflation.
ALL future earnings will be devalued by inflation. The larger the portion of your lifetime income that’s not yet realized, that’s yet to be earned, the more you have to lose.
That’s why, in your process of planning and investing for retirement, you need to look into diversifying into inflation-resistant stores of wealth. Not just something that you can turn around and sell when its price increases, but something that actually holds value regardless of what the economy is doing so that you know that you are secure regardless of what happens to other, more “growth oriented” risks.
And that advice applies whether you are near retirement age (because you want to make sure that your retirement is actually secure) or whether you’re just starting out in the workforce (because inflation over time will eat away more of your wealth that you don’t have stored in inflation-resistant investments).
My advice? Look into what I consider to be the best choice for inflation-resistant stores of wealth to diversify into.
The retirement that you save could be your own.