Next, the Retirement Bubble

NOTE: This article was published in the June 15, 2009 edition of Barron’s magazine, released in electronic form on the Web on June 13, 2009.

Politicians are irritating under the best of circumstances, but they are downright dangerous some of the time. How can they profess to have been shocked or surprised by the collapse of the real-estate bubble?

There was nothing secret about the dangerous direction that mortgage lending was taking a few years ago. It was a topic discussed widely in the financial press from all perspectives, including those who hit the nail right on the head. It wasn’t just Nouriel Roubini, Peter Schiff and others who were ignored. Even someone as respected as Robert Shiller could get little more than passing notice when he published the second edition of Irrational Exuberance in 2005. In it, he spelled out the dangers for the real-estate market in the same clear terms that he had used earlier, when warning of the stock-market bubble.

The taxpayers provide members of Congress with substantial budgets to hire several thousand well-qualified staff for their offices and their many committees and subcommittees. Many staffers have training in economics, finance, banking and related fields. They are faithful readers of Barron’s, The Wall Street Journal and other financial and investment publications. They read the warnings. Indeed, probably a good number bought copies of Irrational Exuberance when it first came out.

Why did presidents and Congress fail to warn taxpayers of the dangers? Where were the congressional investigations-when they might have done some good? Why didn’t politicians use the threat of regulation to straighten things out when that was still possible?

When you are a politician, you don’t rain on your constituents’ parade, even if they are marching toward a cliff. You don’t tell them that their dreams of an easy life and an easy retirement are based on fantasy, not fact.

That is why you aren’t hearing much now about the next bubble that’s going to burst – the Retirement Bubble.

It should be no surprise. We know that people are retiring as early as they can. We know they are living longer than ever. We know medical science is hard at work, looking for ways to increase our lifespans. With disciplines such as genetic engineering maturing, we can expect more such bounty for the rest of our ever-lengthening lives.

So someone needs to speak clearly to the tens of millions of people, particularly in North America and Europe, who are moving toward retirement right now. How about this:

“If you think you can retire and live for 30 or more years off the productivity of others, you are in for a terrible surprise and a great deal of pain. You haven’t earned a nonproductive retirement, nor have you ‘paid your dues.’ When you wake up to this in two, five or 10 years and realize that you are in big trouble, you will not only be in pain, you will dump that pain on all the rest of us who aren’t retired. Don’t expect us to be sympathetic for long. There are simply too many of you, and your demands will far exceed our willingness to sacrifice. And, no, we won’t want to hire you. You will have been out of touch for too long. The world moves on. Sorry. Lots of luck.”

If this sounds too brutal, it is better to be brutal now than to watch suffering later.

There are retirement planners who are warning people of future trouble. Much has been written about the baby boomers’ arriving at retirement age with insufficient funds. But most advisors are too gentle and considerate to force wannabe retirees to do the math before they jump into retirement.

Why isn’t anyone pointing out how soon the Retirement Bubble is bursting? Future retirees aren’t just gambling with bonds or stock. They are gambling with their lives.

There are few events in life that are fuller of emotion than retirement. Only marriage and the birth or death of a child can match it.

People on the edge of retirement are trying to work out the balance between their dreams and their resources. Many are emotionally attached to the dream of retirement. Rightly or wrongly, they believe they have a right to retire and they aren’t happy to hear otherwise.

What kind of advice do they need to hear? The worst thing is just tell them to keep on working. That dog won’t hunt.

People considering retirement may be willing, however, to try another route. They should employ a variation on an old idea – the sabbatical. A university sabbatical allows professors the freedom to expand their knowledge without the constraints of the daily grind, yet prepares them to return to productive work.

A “life sabbatical” could do the same for those considering retirement. Here is the advice they should hear:

“When you retire, consider it a three-year sabbatical. Do what you want to do, when you want to do it. But keep your eyes open for something that interests you, where you can earn some income. Look for something you enjoy, something that really pleases you. When your sabbatical is over, you should have found a new line of work that will help you enjoy the rest of your life and pay for whatever makes it comfortable. You may earn less income than before, but the purpose is to supplement your retirement funds, prevent total dependency on others for your income, and keep you growing. Then you can share your happiness with the rest of us, not your pain. Take full retirement only when you must, when you can no longer be productive.”

A retiree who has run out of money and has no idea what to do about it is one of the saddest people you will ever meet, and one of the most difficult to help. The three-year sabbatical can turn a threat into an opportunity.

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Copyright © 2009 Dow Jones & Company, Inc. All Rights Reserved. Republished with permission.