By Mark Bruno
By David Bach
By Timothy Ferriss
Random House, 2007
Don’t Be Shy About Retiring
The U.S. retirement infrastructure that created wonderful post-retirement lifestyles for so many baby boomers is being dismantled. It seems like younger Americans haven’t “gotten the memo,” with fewer than half of their eligible workers participating in employer retirement schemes. An even smaller proportion are taking advantage of employers’ matching contributions to 401k plans-in effect, they are turning down free money from their employers.
Although new legislation will make it much easier for employees to participate in retirement plans-requiring employers to make the plans “opt out” rather than “opt in”-this low level of interest does not bode well.
Right now, you might be thinking, “What is this guy talking about? Free money? Dismantled?” Let us backtrack. I was asked to review Save Now or Die Trying by Mark Bruno. As its title suggests, the book is largely about saving, which is boring, though better than the alternative. It was particularly interesting to me because I had been discussing with relatives one of the “classics” of the genre (the genre being monetary self-help) The Automatic Millionaire by David Bach. Save Now did not turn out to be a particularly valuable book, but it did focus on an important subject. So let’s talk about that.
Very briefly, at retirement, traditional pensions, also known as final salary or defined benefit retirement schemes, pay workers an amount of money based on their final salaries. The more years you serve at the company, the higher the proportion of your final salary that you receive in retirement. You are then guaranteed that sum (adjusted for inflation in some very generous schemes) every year for the rest of your life. Sounds like a great deal. And it is.
However, if you are under 50, chances are you are not getting that type of pension. These defined benefit schemes live on for a small and shrinking portion of workers-when I ask for a show of hands in my classes, the only ones entitled to such plans tend to be students working for defense firms or utilities, and federal, state, and local government employees.
Whereas a defined benefit scheme guarantees a portion of your final salary, the defined contribution schemes, which the vast majority of current workers have, guarantee precisely nothing. “Defined contribution” says it all-your contribution is all that is defined. It is the “bonne chance” pension-good luck, buddy; you are on your own.
Instead of your employer guaranteeing you money to fund all those trips to the Bahamas that you are planning for your dotage, the company gives you the opportunity to invest your own money at (for the most part) your own risk to fund whatever you can afford-most likely, trips to the local chain restaurant for the senior citizen special. This sounds like a poor deal, and it is. But here’s the thing: It’s the only deal available and it’s time to get on board.
I am not going to waste my time and yours railing against the system that has brought us to this pretty pass. It is not going to change anything and, anyway, that’s not my style. Incidentally, it is not Save Now author Mark Bruno’s style, either.
One of the best messages Bruno has is that this is nothing new; it is a trend that has been taking shape for the past 20 to 30 years. Although we may not have “read the memo,” we have received several copies of it and we do have the time to plan. It is actually pretty easy if you start at a young enough age.
Bruno’s book is unashamedly aimed at the twenty- and thirty-somethings who can best use the “power of compounding,” that is, gaining interest on interest. Sooner or later, you’re talking about serious money. The younger you start, the easier it is-start saving for retirement in your 20s and you can set aside about 10 percent of your salary and be fairly confident of funding a decent lifestyle in retirement. If you wait until you are 40, you may need close to 30 percent!
But here we encounter our first problem, as Bruno states on his Amazon.com book page: It is not the twenty- and thirty-somethings that are reading this book; it is attracting a much older readership.
There are a lot of possible reasons for this: Save Now is arranged as a group of short articles on various retirement topics, interspersed with profiles of “typical” young folks. It is entertaining and very informative in parts, but if you want to get the basic information on retirement as a topic, you have to plow through the whole book, including the typographical and other errors about every 10 pages. (At one point, Bruno refers to “salary after tax” as “gross salary”!)
But perhaps the book’s organization is not the problem-maybe young folks cannot afford to put money aside, think they cannot afford it, or just do not think about it. If so, it is a pity because nobody, absolutely nobody, is thinking about it for them. The system is complicated, and you have to know what you are doing. If you do not know what you are doing, you will be relying on $1000-per-month checks from Social Security (assuming it’s still around in 2040).
The Automatic Millionaire is a much simpler book. It specifically eschews the idea of budgeting (Bruno does not exactly push this either, relegating it to an appendix), viewing it as something that frequently scares people away from the practice of saving. Nor does it stress current regulations. Instead, this book focuses on two main messages: first, you can afford to save (the “latte factor” concept, for which this book is most well-known); and second, you need to take the money out for savings before you even see your income (the “automatic” concept).
The “latte factor” points out the discretionary purchases that many of make as a matter of course in our daily lives-these could be lattes, sodas, cigarettes, or dining out-and the huge impact this money can have if applied to retirement. Five dollars a day, or the cost of a latte and muffin, if saved tax-free every day from age 25, can generate well over one million dollars at retirement!
The automatic deduction idea (Bruno supports this practice as well) is certainly working well for the U.S. Internal Revenue Service. Automatic Millionaire author Bach suggests that you “pay yourself first” by automatically deducting money from your regular paycheck to contribute to a retirement plan or other savings account. It is a good message that is entertainingly and succinctly presented. Even the chapter on buying a home passes (if barely) the test of time since Bach stresses the importance of paying mortgages off early-no negative amortization here.
Finally, a comment on the rather strange but very enjoyable book, The 4-Hour Workweek, which is less about retiring than modifying your work life so that your working years feel more like what many people envisage as the ideal retirement. Author Timothy Ferriss rails against the traditional idea of retirement, viewing this as wage “slavery,” followed by a long period of exhausted (and most likely bored) vegetation, which is frequently accompanied by insufficient funds and inactivity.
Ferriss advances the idea of taking several “mini-retirements” to recharge the batteries in between periods of working, but his main thesis involves using the power of technology and the power of self-control to work productively. Think of this book as a guide to “personal offshoring” and you won’t go wrong.
Taking the concept of outsourcing to perhaps a rather ludicrous extreme, the most amusing passage is not actually written by Ferriss at all, but by Esquire Editor-at-Large A. J. Jacobs, who chronicles his attempts to outsource his rows with his wife, and eventually even his therapy appointments, with the help of a Bangalore-based assistant bearing the delightful name “Honey K. Balani.” I certainly recommend The 4-Hour Workweek, but I’m not sure you will want to tell your boss you are reading it.