Retirement is an unpopular subject for governments and voters to deal with. For the former, the political risk of imposing unpopular costs is great. For voters, their twenty-plus years in retirement are a constant reminder of the truth expounded by economist Herbert Stein: “if something cannot go on forever, it will stop”.

The start of 2015 will see ‘stagflation’ stalk large sections of the global economy. Against this backdrop, it is highly unlikely there will be any meaningful upward revisions to productivity. Without them, ageing populations in western economies will cut growth by 30-50% over the next two decades. Increasing numbers of retirees will make the transition from becoming net contributors to government coffers to becoming recipients of pension and other supplementary benefits.

Between 2013 and 2025 the number of people globally aged 65 or older will double to 600 million, and by 2050 that figure will triple to 1.5 billion. The result for governments is that tax take is reduced, while companies sell less as demand falls. All people, young and old, face the increasingly likelihood of diminishing government financial support as national debt levels continue to soar. Between 2013 and 2025 the number of people globally aged 65 or older will double to 600 million and by 2050 that figure will triple to 1.5 billion. All presumably will require some degree of financial assistance.

In the US, the gap between what people need during retirement compared with what they have managed to save is vast – $6.8 trillion. This figure is equivalent to almost half of the notional national debt. Pensions now account for one-fifth of all government expenditure in the West. In order to compensate for the increasing proportion of those retiring, real GDP will have to rise by 1% annually. In the current environment, when even 2% annualized growth looks ambitious, that simply is not going to happen.

The simplest option, and the one most likely to be implemented will be to ‘reform’ benefits, a euphemism for cutting back on government generosity. According to the OECD, benefits will need to be cut by an average 20%. Such a move would be less traumatic if retirees could be assured that their workplace pensions were able to take up the slack. Yet this won’t happen; in the US since 1980, the proportion of private sector workers on defined benefit schemes has almost halved from 38% to 20%. This level is still falling, and will soon disappear as an option for most new workers. The benefits for existing participants will be frozen or even scaled back in response to the bleaker investment outlook.

The alternative, which are defined contribution schemes, usually require a higher degree of exposure to equity markets. This injects a greater degree of volatility and uncertainty precisely at the time when stability and predictability of returns should be uppermost for both providers and retirees. Widely reported research earlier this year by Bridgewater Associates suggests that 85% of public pensions in the US could go bust within a generation. This is because of the classic assets/liability mismatch. These pension funds at best are only likely to achieve 4% nominal compound annual returns, half the 7.8% target found near universally across the industry and on which their assumptions are based. While US public pension funds currently have $3 trillion in assets, Bridgewater has calculated they need to pay out almost $10 trillion to recipients over the next few decades. Something has to give.

With so much at stake, the solution to this deteriorating situation will come as no surprise to regular readers of our newsletters – self reliance and common sense. These include:

• Maximizing what help the government provides through 401(k) and employer savings plans

• The earlier savings begin, the better. It is important to remember that retirement is not a race; a lagging performance or underfunding in the initial periods cannot be compensated by a boost in the latter stages

• Anticipate one’s retirement needs. A minimum of 70% of one’s pretax annual retirement income should be budgeted for to be assured of the minimum 4-5% annual draw-down to pay for basic living expenses

Why Alternative Investing Fits The Mood

The attraction for investing in alternatives is the ability to deliver improved risk adjusted returns, timely, when valuations on Wall Street are high. Our favored (as it is more accurate) S&P 500 Shiller CAPE price earnings ratio shows a market on a 40% premium to its 18.9x average since 1950 and a 19% premium when calculated on a one-year forward ratio. By comparison, agriculture investments are being boosted by rising consumer demand which together with shrinking levels of available farmland will inevitably drive the value of farmland and food prices higher. The Food and Agriculture Organization (FAO) believe that a 70% expansion in global food production will be needed by 2050, while additional research[2] suggests this will be responsible for a 60% price increase over the same period in food commodity staples.

For a more visual guide to retirement planning, see our Costly Misconceptions and The Solutions infographic.