The lie about saving for your retirement

I got out of college in the late 90s in the middle of perhaps the best job market in decades. The biggest requirement for a well paying job with great benefits was being able to fog up a mirror consistently. So like many in my class, I put my dreams of graduate school on hold to pursue a well paying job and never looked back. The company I worked for hired me and a few dozen others as "College Hires" and sent us out for  two week of training in of all places Mishawaka IN. There were close to 60 of us and since for most of us, our first paycheck was the most money we had ever made, our employer, being socially responsible, felt it was necessary to give us some training on retirement planning.

The session was taught by So-and-so from Such-and-such Investments LLC and focused on the 401K plan and a diversified portfolio and made some grandiose claims about how saving a nickel a day when we were 23 could be turn into a million dollars when we're retired. There wasn't a word about anything other than ways to manage your money in how to plan for retirement. We all bought it. All of it. 

The Cliff Carl took us too

Fast forward 15 years and a day after my wedding I met Carl. He was walking along the beach in Palos Verdes, CA when my wife and I ran into him and he told us about a small cliff we could dive from about a mile away. He led the way and we followed. He was fast and in our great wedding shape we had a hard time keeping pace. After a few dives I talked to Carl and quickly found he was a Viet Nam vet and a retired professional who now works part time as a consultant. What came next was a total shock. Carl was 73. I had figured him for 53 max. He told me about his grand kids and how he can still outrun them and how he spends most of his free time with them playing around.

Carl made me think of all the others in his age who spend most of their time at the doctor's office and hardly ever have time for their families. And even when they have time, the quality of the time they spend with their family is affected by the poor health. They can't be active and they spend most of their money on medical expenses. That short conversation with Carl showed me the inauthentic lie retirement planning had been all along. What were we saving all this money for? To pay our medical bills when we get old? That's precisely it.

Medicare covers only 59% of the cost of health care for seniors and that's predicted to only decrease making the personal contribution a larger percentage of the care. In fact, a couple aged 65 might need $387,000 saved in order to be confident of covering their health care costs in retirement, not including outlays for long-term care, finds a report from the Employee Benefit Research Institute (EBRI). Add that to the fact that the cost of healthcare and the worker contribution are increasing at a much faster rater than compensation and inflation, and you get to know why saving money for your retirement should be re-branded as saving money for your healthcare.

Healthcare expenses for seniors increased by 5% in 2011 from the previous year. And that percentage increase is likely to be small compared to what we see year-over-year in the next 20 years. So the dollars you save today will have to grow by 5% annually just to meet the increase in your future healthcare costs, and they have to grow by an additional 6% to meet Such-n-such Investments LLC's projections for you to retire by 70. That's 11% annual increase in your retirement savings just so you can have 90% chance of having enough money to survive. If you know anything about money, you know that 11% is a ridiculous expectation.

You may have already jumped ahead of me here and figured out for yourself that an investment in your health and wellness is far greater than an investment in your 401K. Not only is being healthy going to prevent unnecessary healthcare dollars from being spent, but you'll be able to work and keep active well into your sixties and seventies if you are healthy and well. I'm not saying that you shouldn't save your money, but I am confident that your health and wellness will count far more than your money. No amount of money is going to cure diabetes, heart disease, or any of the other dozens of completely preventable killers that will have you spend your old age in a wheelchair.

What's more, my new friend Carl, even though retired, still works 20-25 hours a week doing consulting. That's additional income he can count on in his 70s which is allowing him to be net positive far longer than the average for his generation. I'm no mathematician, so I used Bloomberg's 401k calculator to determine how much a very well deciplined 23 year old could save for retirement if he starts out making 50k/year and contributes 5% of all his income for the next 42 years towards retirement.

401K Summary
Your Contribution:	5%
Employer Match Rate:	50%
Percentage of Contribution Employer Matches:	100%
Investment Rate:	5%
Salary Increase Rate:	5%
Value of Your 401(k)Plan in 42 Years:	$1,223,797.79

The answer is $1.22M. That's with a 5% consistent salary increase. Not a bad loot. But if that 23 year old starts today, he'll be 65 in 2055. Now earlier we said that the cost of Healthcare is increasing at 5% a year and for a 65 year old in the US it's close to 15k/year. If the growth continues at 5%, then in 2055 the cost his health care will be closer to $116k per year. Not to mention that if his additional living costs go up by even 2% year over year at a modest 40K for current cost of living, he's looking at $92k/year to pay his non-healthcare related expenses living very modestly. 

$92K + $116K(healthcare) = $208K Total cost of modest living in 2055

And that's just his 65 year old self. If you notice the graph above has a much higher rate of change when he's in his 70s. His cost of living is likely to be well into $300k/year when he's Carl's age. And the majority, more than half, of the cost will be his healthcare cost. 

Well, it doesn't take a rocket scientist to realize that an investment in your wellness will pay much higher dividends than an investment in your 401K when you retire in 2055. I'm not saying you shouldn't save your money. But I would rather see a few of those dollars go towards:

• Eating healthier and natural foods
• Buying better, more natural groceries and cooking at home
• Gym membership and exercise equipment
• Adventure travel that involves activity
• Better chairs, beds, and furniture that ensures better posture
• Moving to geographical areas with lower smog and other environmental hazards
• Cycling or walking as a means of transportation
• Dedicating yourself to an active lifestyle

What investments are you making in your wellness?