A number of people exited the workforce during the pandemic. That reduction in workforce participation is largely credited with the worker shortage. Some people chose to retire altogether. We have seen a big reduction in the participation in the workforce. People concluded that they were tired of their old jobs, they liked the at-home environment, and they would retire early.
The theory is that people in retirement spend less than at the peak of their career with kids and college and two cars, and sports.
There are a number of different calculations out there for how much money you need to retire. They’re all a variation of the net present value calculation.
But NPV calculations are complicated. Most people don’t know how to perform that calculation. To make it easier, some financial planners use simplified math. There is the 4% rule which is often quoted. That says that if you’re going to spend $x a year in retirement and you plan to retire at age 55, you should plan on spending no more than 4% of your retirement savings per year. But that’s a highly simplified calculation. There are a number of variables which can erode the value of retirement savings.
The first question is how much income can you expect your retirement savings to earn on an annual basis?
Many actuarial tables used by pension funds assume an investment income of 8% per year. But that income has been cut down in recent years as a result of a decade of low interest rate policy.
Many pre-retirees look at the value of their stock portfolio and calculate the 4% based on the value of the stock portfolio.
If you had a stock portfolio worth $1M, and let’s say that inflation was running at the government benchmark of 2%, and let’s say that you were earning a conservative 4% in your retirement account, you would need $1M to have your money last you all the way to age 90.
But there are a whole lot of assumptions in that amount.
When we see a pull back in hiring as companies experience a reduction in earnings, and at the same time you will also see a wave of people re-entering the workforce.
The Federal Reserve pointed to strong underlying economic metrics for their more aggressive interest rate policy. They pointed to strong ongoing hiring and historically low unemployment as to why they believe the economy has inherent robustness. But they have forgotten that the jobs picture is the result of years of loose monetary policy. The demand for employees and the shortage of workers is a direct result of the monetary policy. Asset price inflation is one of the reasons that there are so few workers.
Once people wake up and realize that their retirement is at risk, they will be forced to return to the workforce in large numbers. They will realize that not only will they need to get a job, but that the job market will quickly dry up when the economic downturn takes hold.
You won’t see this narrative in the Wall Street Journal. You won’t see economists from the Federal Reserve making this assertion. You won’t see members of Congress talking about this in the middle of a mid-term election campaign.