The Retirement Illusion: What does it take to retire on your 401(k)?

The Retirement Illusion

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The German Pension Model

German pensions work very similar to the US social security system: workers pay a mandatory amount from their income to the government-run pension system. After fifteen years of contributions a German worker is eligable to receive pension payments starting at age 65.

The amount which retirees receive depends on the total contributions. Somebody who has worked and contributed all his life can count on retirement payments that equal 80 percent to 100 percent of their last months' income.

Europe isn't just the land of "socialized" medicine. It is also the land of "socialized" retirement plans.

"40% of U.S. workers over age 62 say they have delayed their retirement because of the recession. In France, the retirement age is 60."

"In 2008, 30% of people aged 65 to 69 were still in the labor force; in France, this number was just 4 percent."

"The typical American receives just 45 percent of her pre-retirement wage through Social Security. A worker in Denmark receives 91 percent of his former salary through the country's retirement system."

(New York Times, 3 September 2009)

The Retirement Problem

For the past thirty one years, Americans have basked in the illusion that a modest regular contribution to a 401 (k) retirement account will provide for their income during the retirement years. How flawed this assumption was came to light during the 2007 recession. Not only did the stock market together with the entire economy take a substantial hit, many Americans today find themselves devoid of their nest eggs they accumulated for many years of their working lives.

The reason for this dilemma is quite simple: Stock brokers and 401(k) insurance companies kept suggesting that the stock market grows at a sustainable rate between 10 and 20 percent. This assumption has a double flaw:

The average return of the US stock market from 1932 to 2007 adjusted for inflation was a meager 3.5 percent and not the double digit figure we are all taught to believe.
The stock market is mainly driven by psychological factors and not by hard data, which makes it look much more a casino than reliable instrument for retirement planning. For some exciting reading check out "Casino Capitalism" by Susan Strange.

If we accept the findings of my short analysis, we have to begin thinking about new retirement paradigms that are independent from the whims of the global capital casino. I am comparing conventional approaches from the western industrialized world to more tradional systems and will propose some new ways of looking at the retirement question.