Financial Comfort Food

Financial Comfort Food

By

Marsha Walker Eastwood, Bs, MSHSV

A generation ago, working life was very different from today. Forget the impact of the COVID pandemic – we’re talking about how people lived in relation to their jobs, their neighborhoods, the city they lived in – even if the pandemic had never occurred things were very different! A generation ago (or perhaps even further back), people didn’t look at mobility as an overarching need. Life was all about security. Security meant that you followed a structure: you finished school, got a job, got married, bought a home (near your parents, your friends, or your job, or all three), and then you had your 2.4 kids, your dog, and enjoyed life in the rapidly growing suburbs of America. You mowed your own lawn, you knew all your neighbors, and you went to the church of your choice. Life didn’t offer some of the perks we’ve come to expect today like cable TV with six hundred channels, high-speed internet, smart phones, even convenience gadgets like wireless remote controls for nearly every electronic device and power windows and door locks for our cars.

Other changes came along – some so subtle we hardly noticed except as we look back over many bygone years and sigh as we remember how simple life once was. But if we’re really honest about it, it’s not just that life was so much simpler, it was more predictable, and for most Americans that made it more secure. The analogy of comfort food comes to mind. Pancakes with maple syrup, pot roast and mashed potatoes, fried chicken with – you pick it – ANYTHING! Comfort foods that make us feel warm, secure, and content. Nothing fancy, just the basics that keep us feeling satisfied. So where do we find our financial comfort? Think back to the list we just made, the job, the house, the family. Those are all part of our comfort, but now let’s focus in on the financial part – the JOB. There was a time when a person could get that job and work at it for 30 years, more or less, and count on that job being there as long as we wanted it. Maybe it wasn’t a glamour life, but it was secure, it was predictable – it gave us comfort knowing we would never want for anything so long as we did our part. Part of the comfort and security was knowing that most jobs had a pension plan. That meant the company would pay into the pension and when it came time to retire, we had a nest egg that would give us a portion of what we were earning during our working years – maybe 50% or 60% or possibly 70% of our pre-retirement income. Since we weren’t going to work anymore, we didn’t have the cost of commuting. We weren’t paying into Social Security. In fact, Social Security, as we began to collect monthly benefits, was another pension, we could count on to always be there as part of our retirement income. Retirement income was guaranteed. The job and the retirement plan that followed were our financial comfort foods.

Then several decades ago, Americans began to see changes in the lifestyle they had known since the late 1940s. Job changes became part of our culture. In fact, it became the norm rather than the exception for a worker to jump to a new company as a strategy for advancement rather than climbing the corporate ladder a rung at a time. Pension plans found themselves having to cash out employee holdings, and sometimes the employee even left the pension behind if they hadn’t met the “vesting” requirement. If it wasn’t theirs to take, employees walked away empty-handed but often they would receive a bonus from the new employer to make up some of the value of their lost pension. This was the “fast-food” version of financial comfort, but the reality was it came as cash in the paycheck and was spent rather than squirreled away for retirement. Workers weren’t too concerned, though, because most employers were beginning to offer attractive retirement plans called 401(k) plans that had the lure of double-digit earnings using stock market investment vehicles and employer matching to further add to the attractiveness. Retirement plans began to create “illustrations” to show employees what they could expect in retirement, based on certain levels of contribution to the plan. Forget the fact that none of the numbers were guaranteed, the figures were so enticing that pension plans and their plodding guarantees just seemed like that old clunker car that needed to be replaced for something faster and more efficient….and more fun!

Let’s take a moment to understand pension plans by seeing just how they are put together and how they provide income. First, the company brings in an actuary to calculate the average life expectancy of a retiree. Then they bring in the number corresponding to the income they want to create and calculate the number of years they have, based on the present age of that future retiree, for money to grow on deposit. They use guaranteed rates of earning, because the pension will be on the hook for the money it promises…. Remember, the income is guaranteed when the employee retires, and there’s usually an amount – maybe half or two-thirds of the pension payment – that continues to a surviving spouse even if the pensioner dies. Now, most people chose to retire at 65, but they also had the option to retire early, like 62. Since the payments would be calculated to start earlier and presumably last until death, early retirement meant taking a reduced pension payment. It’s the same way with Social Security. If a person lives a long time, they will actually benefit from waiting for the later retirement age, but keep in mind that we’re counting on having the comfort of the job for those few extra years to fill in the gap until retirement. If we have the financial comfort of the job and we can step right into the financial comfort of retirement income that’s guaranteed, what could be better?

Now let’s look at it from the standpoint of the person using the 401(k) rather than the guaranteed pension. First, they’re operating on the premise that there will be more money available to create income, so even if it’s not guaranteed money, more would be better, right? The short answer is yes, it would be better. Time has a way of allowing money on deposit to grow in a really dramatic fashion – compound interest as they call it. The problem is twofold: what if the employee (who, by the way, is the one taking on all the risk that their 401(k) will always earn) makes bad investment choices? What if there are large losses right before retirement is planned to happen? What if the markets have a long period of low earnings or even losses once income starts? Can the retiree afford to stop drawing money out each month and wait it out? We don’t have room to go into every scenario here, but with a self-directed plan like a 401(k), your success with income depends not on the average earnings, but also on the sequence of earnings. A few really bad years back-to-back and it may cut into the 401(k) investment deeper than a market recovery can mend, and non-guaranteed means the account value could drop to zero! Not financial comfort food!

Now we come to the present-day, and the way people live and work. Very few jobs have any kind of pension plan outside of government and schools. There is no guarantee a company will stay in business, and people find themselves laid off or fired as companies downsize, consolidate, or just disappear. Without the comfort and security of a job or even retirement guarantees, many people hang on in the workforce as long as they can – even into their 70s. Oh yes, there are a few who work because they want the social interaction or to keep their minds sharp, but let’s face reality: people stay in the work force because they’re afraid to give up the security that a paycheck gives them.  Working past “normal” retirement is the newest form of financial comfort food, and the trend isn’t going away any time soon. What once was the picture of retirement – meeting friends for lunch or to go shopping, taking a weekend trip to visit family, an afternoon on the golf course….all done within the constraints of the income that the retiree could count on – now replaced with “would you like cheese on your burger” and “welcome to xxx-mart.”  Jobs that are simple and easy to come by. Jobs that love to hire seniors…. dependable employees who show up, who are on time, who don’t spend their time texting friends when they’re supposed to be working…. who fear being without the comfort of a guaranteed income. When asked what they miss most about the working world today, many older employees say they miss having a pension – their financial comfort food.

©Marsha Walker Eastwood

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