Trent at the Simple Dollar recently wrote a post sharing a question he received from a reader. Here’s what the reader asked:

I’m twenty eight years old and am now debt free. I’d like to start investing, but I have almost no tolerance for risk. I don’t mind not earning a great return because of this, but the thought of losing any of my investment makes me feel very uncomfortable. Any suggestions?

Many people would read this and commend the investor for being sufficiently self-aware to recognize a low level of risk tolerance. And on the one hand, I completely agree. It’s good to know ahead of time that a decline in your portfolio value is likely to impact you in a significant way emotionally.

Here’s my problem though: “I don’t mind not earning a great return because of this.” I’ve heard that exact sentiment voiced by friends/coworkers, and it seriously concerns me.

What worries me is that people seem to assume that “not earning a great return” simply means that they’ll never be fabulously wealthy. In reality, it likely means that retirement will be nearly impossible without a drastic downgrade in quality of living.

For example…

Let’s run the numbers for the above (28-year-old) investor, using the following best-case-scenario assumptions for a “no risk” investment plan:

• The investor, seeking low volatility, invests in Treasury Bonds, and earns an annual return of 5.5% over her lifetime. (They actually earned 5.2% from 1928-2008.)
• Inflation averages 3% over the investor’s lifetime. (It’s actually averaged 3.25% historically according to the U.S. Department of Labor.)
• Social Security will provide for 40% of her cost of living in retirement.
• The investor plans to retire at age 65, thereby giving her 37 years to accumulate the necessary capital.
• The investor’s cost of living is currently $40,000

How much will the investor need to accumulate in order to retire? Approximately $2.86 million. And at a 2.5% after-inflation rate of return, how much would she need to invest every year to get there in 37 years? Just over $25,000.

I think we can all agree that’s nearly impossible.

What about with a diversified portfolio?

In fact, even if we assume the investor was 50% in stocks and 50% in bonds, thereby earning a 7.13% annual return over the period (the average of the 5.2% earned by bonds and the 9.07% earned by stocks), she’d still need to be investing $10,495 each year. Not impossible, but certainly not easy for a person making $40,000.

In short, if you’re truly OK with the idea of not retiring, then “not earning a great return” might be just fine. If, however, you are planning to retire, it’s probably a good idea to look into owning stocks.

I just read what is without a doubt the most thought-provoking thing I’ve encountered in a good while: Chapter 4 to Stephen Pollan’s Die Broke. The chapter is titled “Don’t Retire.”

Now, I’ve read that piece of advice several times before. Many people make the case that if you’re doing work you love, there’s no need to plan on retiring. And that makes sense to me.

But that’s not what Pollan is saying.

He’s saying to give up the traditional idea of retirement because it’s a lost cause. Literally. He believes that the Baby Boom generation and those after it have roughly zero chance of retiring in the way that our society has come to imagine (that is, retire at age 65 then play golf in some nice sunny community in Florida until the day you die).

The history of retirement

Pollan explains that the concept of retirement didn’t even arise until the Great Depression. As part of the New Deal, Social Security was created. The goal: Pay the older workers to leave the workforce in order to make room for younger workers. Of course, back when the age for Social Security benefits was set at 65 years, the average life expectancy was only 62 years. In other words, the first generation to receive Social Security enjoyed, on average, very short retirements.

It was the second generation to retire (the Baby Boomers’ parents) that actually created the spend-the-rest-of-your-life-traveling-and-playing-golf image of retirement. However, Pollan argues that their ability to retire was simply the result of a freak coincidence of economic forces:

• They had absolutely no doubt as to the solvency of the Social Security system.
• Many had been able to accumulate wealth through their entire working years due to never having had giant student loans to pay off. (The GI bill had covered college for them.)
• More than half of them had pensions.
• As they were retiring and selling their homes to move southward, they were able to make out like bandits due to the spike in demand created by the Baby Boom generation becoming the right age to start buying houses.

Is retirement impossible?

Pollan argues that none of those things will be the case for future generations. To make matters worse (in terms of being able to retire), every generation is likely to have a longer life expectancy than the generation before it.

Combine those facts with the reality that most investors:

• Invest far too little,
• Invest far too conservatively, and
• Ruin their returns by bailing out of the market after declines…

…and you get a bleak picture indeed.

But look at the bright side!

Fortunately, giving up the idea of retirement as the ultimate financial goal can be surprisingly liberating.

A few thoughts:

• When retirement was created as a goal, older workers were less productive than younger workers. (A huge portion of the work being done was still manual labor at that point.) This simply isn’t the case today.
• It frees you from the necessity of having saved X dollars by age Y. You’re no longer in a race against the clock. What a nice feeling! (Of course, that doesn’t mean we wouldn’t need to save & invest at all. It’s very likely that even if a person doesn’t retire completely, his/her income would still drop significantly starting around age 60, so having investments to provide income is still necessary.)
• If you’re planning on working forever (or close to it), disability insurance becomes extremely important.
• Doing work that you truly enjoy becomes that much more essential.

What do you think?

Is retirement (in the traditional sense) an attainable goal for most people? Should we even be striving for it in the first place?