When I left the Army in 1973, it was to go
to work for the Dupont Walston brokerage
firm. Our training center was in Los Angeles
about three blocks down Wilshire from
the Ambassador Hotel when Sen. Robert
Kennedy had been assassinated five years
There were 189 in my class all but four military
veterans and in addition to all the lies
about heroic achievements, there was a
monthly convoy to the VA Hospital in
Westwood for treatment of wounds and disease.
One of my classmates was a Canadian Scot
who had also been a talented amateur tennis
player so two to three times a week a group
of us would play tennis at some public
After playing, we would go to a local supermarket
and purchase cold drinks. One day as I was standing in line there was an
older woman in front of me.
At first glance, she seemed well dressed although
her tweeds seemed a bit heavy for
the LA weather. On closer inspection, the
hem of the skirt had come undone violating
the symmetry of the garment, and the cuffs
of the jacket were threadbare. The collar of
her blouse showed signs of wear and lack of
cleanliness and her hat was outdated and the
worse for wear.
I got interested and noticed her shopping
basket contained a head of lettuce, a tomato
and can of cat food. In one of those flashes
of intuition that can only be called an epiphany
I realized that she was not going home
to feed her cat and have a salad, this was her
diner! A cat food salad!
Behavioral researchers tell us that there are
four great fears in humans, public speaking,
death, singing before an audience and being
old poor and sick with no solution to the
problem. From personal experience, I will
tell you that public speaking isn't so bad, but
public singing is a true terror. Having faced
it a few times I can say that fear of death is
greatly overrated. I have not experienced the
last one and I hope I never do.
The lady in LA faced one of the great dilemmas
of our age; she had run out of
money before she ran out of life. When you
are in that situation, the options are bleak if
not miserable, in short; it is what I call the
Cat Food Dilemma.
A great deal is being said about the effects
of baby boomer retirement. In the financial
services industry, literally, every article in
our professional publications concerns the
topic and you would think that was the only
challenge we face. There is no doubt that
this mass movement 78 million people from
full time active work to semi or full retirement
is and will continue to reshape the
It is possible that a great number of the
boomers particularly those in the early years
of the generation will face the Cat Food Dilemma
and it is possible that regardless of
the best laid plans of mice and men some of
the late arriving boomers will also have to
decide feed the cat or themselves.
Recently we were doing some planning for a
client and we decided to verify what we had
heard anecdotally about lifespan. We came
across the chart attached to the back of this
letter. It shows the number of years of expected
remaining life for a white male at
various ages and at various times in history.
What is interesting is the dramatic change in
remaining life span for a 40 year olds and 80
year olds. In the last 13 years, life expectancy
for a 40 year old increased two years
or 5.6% and for an 80 year old 12.6%! If
that increase could be projected forward in a
linear manner (always a dangerous exercise)
in the next 13 years, it will add an additional
2.2 years to the average white male's life.
This increase in life expectancy has its roots
in improved medical detection of the silent
killers of men like testicular, prostate and
colon cancer, improved treatment of heart
disease, better diets and improved exercise
routines. Those same reasons are likely to
make the linear progression of life expectancy
a fact rather than conjecture.
Lest you think, I am being chauvinistic by
only using white males, females have always
enjoyed longer lifespan and those
numbers are increasing though at lesser
magnitude. The continuation of longer life
spans for women complicates the Cat Food
Dilemma as in creates a long tail survivor
class that needs to be funded. Some wits say
that women live longer because men do not,
From a humanistic standpoint, these longer
life times should be celebrated as they mean
more contributions from each citizen in the
form of taxes and cultural output. It means
more children will spend more time with
their grandparents but from a financial planning
and social policy point of view, it will
be a headache.
The improved, or extended, lifespan is most
apparent in those 40 and older and the number
of years increases the likelihood of it
being quality life.
Longer life means people will have to
stretch their money over more time, increasing
the risk (if that is the right word) that
they will live past the average mortality
making their retirement plans useless. In
other words running out of money before
they run out of life.
Longer quality life means that people will be
active longer than expected which raises
issues around the labor force, generational
migration, inheritance, estate tax issues,
long-term care and medical costs as these
longer lives will be expensive.
The answer would seem to be simple; everyone
must save more during their working
years. Increased savings may be harder to
do however, since some of the structural
problems with pension plans could necessi tate
large tax increases to pay benefits to
those already retired. Therefore, the apparent
answer is easy again, push back the retirement
age. However, older workers staying
on the job stifles job opportunities for
younger workers. If job opportunities are
not created, the result is generational discord
and social unrest.
The need to increase savings is not a new
concept, having been mooted for years, but
apparently, it has not resonated with the
boomers. A recent study by Cap Gemini-
Merrill Lynch indicated that outside of increases
in home equity boomers are only
saving 37% of what they will need to provide
retirement income at 75% of their current
Okay a smart guy would say they would
have to access their home equity. That is one
possible answer but the issue is if it will be
possible. The influx of homes owned by a
substantial part of 78 million people to the
real estate or reverse mortgage market has to
depress prices, and as we all know when
prices of real estate fall; it is the equity
holder who takes the beating.
Some of this equity liberation may be underway
in the successive waves of refinancing.
What we do not know is if that equity
is going to pay down debt, to purchase other
real estate or if it going into investments or
into consumer consumption.
Even for those who have worked at big
firms all their life, retirement is dicey. There
are two basic forms of retirement plans, defined
benefit (DB) and defined contribution
(dc). Many of the old industrial giants, almost
all state and local governments and
unions maintain db plans.
GM and UAL are the two poster children for
what can happen to db plans. At the current
time medical and pension obligations add
$5,000 to the price of each GM car and
GM's obligations are so large that in truth it
is a pension fund running a car company.
UAL realized that the only hope of curing its
chronic financial problems (other than good
management and not being in a crappy business)
as well as it best chance to cut costs
was to default on its db plans and allow the
government to take over. IBM has frozen
increases in benefits for its db plans. State
and local governments are finding that funding
their plans is difficult and as we go to
press, Delta is discussing terminating its
pension for pilots.
People covered by these plans may not be
able to count on their projected future benefits.
In the case of UAL, by law, the maximum
pension that the Pension Guarantee
Benefit Corporation can pay is $45,000 annually,
not bad maybe but a long way from
the $100,000 plus the pilots were getting
before the default.
The other type of plan is the defined contribution
plan (dc) which includes IRAs, the
401k, 403b and some other variations. The
idea here is that rather than a company guarantee
of future benefit amount, the company
agrees to match employee contributions and
the employee directs his or her investments.
These plans are likely to be the primary
source of retirement income for the majority
of the boomers. It is hard to get data on the
saving rate in these plans, and it is impossible
to get any figures on the performance of
the accounts so their potential adequacy is
unknown. What we do know is that the
amount that can be contributed in fixed by
The problem of providing for retirement is a
balancing act between the factors of life expectancy,
post retirement tax rates, investment
returns pre and post retirement, inflation,
time, pre retirement savings, post retirement
living expenses, and demographics.
The devilish side of the computation is that
all the factors move constantly, the best that
can be said is that some move in a predictable
As an example, consider changes in the
demographics of the nation. We know that
the average number of live children born to
white females in the United States is 1.8,
less than the 2.1 needed to replace the population.
If death rates and longevity remain
constant and there is no in bound migration,
population counts must decline. Therefore,
each generation will be smaller providing
less people to pay taxes and to work. In that
scenario, the pension equation becomes insoluble.
However, life spans are increasing; people
are having fewer children and those later in
life so population should be constant right?
Wrong, the rate of fall in the death rates is
steeper than the number of children so population
increases. This increases the pressure
on pension calculations as fewer pay in and
benefits are required for longer periods.
Counter to all of this there is in bound migration
adding population every day at least
equal to the death rate.
When you deal with a number field of 300
million the numbers are so large that small
changes have dramatic effects. If the fecundity
rate increases to 1.9 the Social Security,
system will be in surplus in the last quarter
of the century. It is unlikely this will happen
in the progeny of the largely white boomers,
they are just too selfish.
Increased fecundity does however occur in
that demographic collection called the minorities,
African American, Native American,
Hispanic and among religious groups
such as Moslems, Mormons and evangelical
Christians. In these groups, large family
size is rewarded by cultural mores.
This being true it gives some hope that the
demographic side of the equation may not
be as stacked against success as it currently
appears. Of course, one side effect of this is
that the current minorities will not be minorities
long, reminding one of that line
from Gilbert and Sullivan "when everyone is
someone then no one is anybody."
Then of course, there is the question of what
happens if this lump of boomers does not
retire at 60, 62, 65 or 67? I have a hunch
that many will not retire at those magical
ages since the increased life expectancy will
also mean increased active life years. This
hunch seems to be supported by a recent
study indicating that 75% of boomers intend
to work at least part time in the years after
65. Boomers get restless easily and they
will not take well to enforced idleness.
Since a good deal of today's work is less
physical than in past generations there is no
reason for people to be forced into retirement.
Another side to this is that boomers
have workplace skills not easily replaced
and they may be recruited to work longer
just to maintain productivity.
While through a glass and darkly a path can
be seen by which Social Security's failure
can be mitigated (increased migration, increased
fecundity, longer work life) the danger
to other pensions is real and one of those
secrets not discussed by decent people,
which is no barrier for us.
There are few places more idyllic than San
Diego. Few places have been the home to
more financial stupidity and the areas are
currently in the midst of one of those very
stupid times. If they were businesses, they
would be bankrupt. It is hard to believe that
a place where 1200 square foot homes,
which can see the water only by reflection,
sell for millions can be bankrupt but it is
They are bankrupt because of the fecklessness
of leaders in handling the pension
investments for city and country workers.
Somewhere along the line, the genius consultants
to the plans and the unions came up
with the idea that any yearly gain above the
projected minimum growth rate necessary
to pay benefits should be shared in the form
of higher benefits.
Let us examine this paragon of investment
reasoning. Fact, a portfolio's value will
vary. Fact, trend line growth is determined
by averaging out a series of yearly results to
determine the mean. Fact, any gains above
the trend line are transitory. Fact, increased
pension benefits are not transitory. Conclusion,
sharing a transitory benefit to create a
permanent liability is stupid, and eventually
leads to bankruptcy.
It would be nice if it ended there but it does
not, most municipal and teacher plans have
similar features. With the markets unlikely
to produce the golden goose returns of the
past 18 years, most of these plans are under
funded. Ergo, the pensions of state and municipal
workers are unstable. Solutions, cut
benefits, raise taxes or default; which do you
think will happen first? Any choice municipalities
and big business make to shore up
their plans will lead to higher taxes and
more strain on the dc plans of individuals.
If the above sounds scary and difficult it is
not due to my soaring literary talents, it is
because fact is scarier than fiction. The decisions
we making (and I include myself in
this we) are going to be the most important
long-term decisions of our lives. Woody
Allen once made the following comment:
"we are at a fork in the road, down one path
lies nuclear war and the physical destruction
that follows, down the other is social disintegration
and anomie. Let us hope we have
the wisdom to choose correctly.
The cross roads we face is not so clear-cut.
We all have the option of taking charge of
our futures. They really do not make the big
decisions about your life in Washington DC
or Sacramento or Olympia they are made
between your ears.
So what do we do? First, get over your fear
of death, it is going to happen. Being afraid
of dying means that you did not live your
Second, if you are younger than 50 stop
thinking that Social Security will be part of
your retirement. It might be but that is in
the hands of politicians and therefore unstable
and not subject to good thinking.
Third, plan for longer life. Survey your
blood family and determine the ages of
death and the conditions of your predecessors
it will give you a clue to your expected
life, but whatever the result, add years to
Fourth, make some decisions about how you
want to grow old. Do you want to be independent
until you die, do you have family
that can care for you in your declining years,
what level of medical intervention is acceptable
to sustain life. Determine what your
definition of living with dignity is and communicate
that to your children, their spouses,
and to the executors and powers of attorney.
Understand that even though you may retire
at 62 you may have as much as 40 years of
life left. A century ago, that was an entire
lifetime. What are you going to do with
Fifth, demand that your financial advisor
turn his or her brain on. The industry has
gotten very soft in the easy times of the last
20 years; the going will not be so easy in the
next few years. Your financial advisor needs
to be thinking ahead for you and using the
benefits of their experience and knowledge
to create pathways to success in the new
environment. If they are not turning their
brain on or are incapable of that sort of action,
Sixth, save more money.
Seventh, explore your options spend at least
as much time on that exploration as you do
exploring options for vacation.
Eighth, if you feel you might not be prepared
and you are afraid don't whine; do
something about it you all have time left to
STOP THE BOOMER TRAIT OF PROCRASTINATION,
THERE WILL BE
NO MAGIC BEANS OR MUSHROOMS
TO TAKE YOU AWAY FROM THE
SITUATION, THE GREATEST GENERATION
IS NOT GOING TO RESCUE
YOU. DO SOMETHING AND DO IT
Remember finally, this paraphrase of that
great Australian philosopher Crocodile Dundee
"cat food, you can live on it sure, but it
tastes like S - - t."