The Retirement Trap

Traditionally, we are taught to work hard, save hard, pay off our mortgage, contribute the maximum to retirement accounts and plan on downsizing. Plus, word on the street is that you will be in a lower tax bracket when you retire (which under every tax code I know only means you have reduced your lifestyle).

We aren’t alone. Our government is in the business of retirement planning as well — except it is smarter. The federal government holds all the cards, providing tax incentives for us to contribute to retirement plans, requiring us to hand over our money for someone else to use. We carry all the risk and pay all the penalties when we finally need to access our capital.

It makes sense. Our country was founded on Capitalism, defined as “increasing cooperation amongst strangers.”

Stocks: We give money to other people. They have our cash and we have all the risk.

Bonds: We loan money to other people. They have our cash and we have all the risk. The borrower, not the investor in these financial vehicles, can make the situation better. The lender/investor must live with the borrower’s decision.

Bank accounts: We give money to a bank. The bank has our cash and we have all the risk. But we get a consolation prize: a pittance in interest. Banks also charge us four times the amount when we need to get cash out of our homes, which for many is our only source of non-taxable money. Then, adding to the insanity, we again pay interest to the bank on our money.

Now, here is where people get tripped up.

What is your net worth? In the eyes of Wall Street, your net worth is quantified by how much money you have invested in financial products. But realistically, your net worth is a combination of human capital and investment capital.

Your human capital is your knowledge and experience, which give you the tools you need to wake up every day to generate income and take care of your family. But as we go through life, we take the one thing we own and control and transfer it into risk capital.

We retire, only to realize that everything we worked for is at risk. At a time when we desire safety and certainty, instead we are trapped in retirement accounts: 15-year loans that handcuff us to obligations that may cost twice as much to support coming from a retirement account.

In the 1970s and ’80s, our parents or grandparents retired when interest rates were 10 percent; a million dollars meant one day you could live on an income of $100,000 a year. But interest rates don’t stay in one place. Waking up to find interest rates at four percent, people could no longer afford to visit their children on holidays.

You have a retirement plan. But do you have a plan for managing your retirement?