The Trouble With Retirement

When the government offers something for nothing, watch out. There is going to be a ringer in the system.

The government offers income-tax deferral for certain kinds of government-approved investments. The great advantage of these programs is that they allow tax-free compounding. If your fund’s investment portfolio grows in value — a huge if — you are not taxed until you sell the portfolio and start living on the income. Presumably, you will drop into a lower tax bracket at the time of your retirement. This assumes: (1) no price inflation; (2) the tax code isn’t re-written to raise tax rates.

One major problem with tax-deferred investment programs is that the money is channelled into government-approved investments. This money balloons these subsidized markets upward until such time as a significant percentage of people want to retire. Then they start selling.

How large a percentage is “significant”? I don’t know, but I think 10% will be enough. The people who are invested in these government-subsidized markets got in early. Their capital gains are high, on paper. New investors must pay top dollar to buy the old-timers’ assets. There will not be enough of these new buyers to replace the capital of millions of sellers, dollar for dollar.

When the retirees’ selling starts to produce a panic, new buyers will stay out. Those still invested in the subsidized markets will at last grow weary of hanging on for the long term. They will be too gray. They will sell out prematurely, before they retire. This will compound the contraction.

At that point, income-tax deferral will not work as a slogan to lure in more investors. There will be too much risk. The Ponzi-scheme nature of the retirement strategy will be exposed. There will not be enough well-heeled investors to buy out the old timers, whose dreams of easy living in retirement will go the way of all government-subsidized dreams.


We can see that the government cannot balance its budget, yet the politicians are eager to get us into a retirement program. Why?

One reason is that the public pressured politicians to do it, primarily through profit-seeking intermediary pressure groups (retirement plan management firms). We all want to delay the day of reckoning.

Another reason is that the politicians are willing to defer a tax just so long as they will eventually be able to collect it. It is a kind of “forced saving” by the government. They forgo the revenues this year in order to skim the funds at the point when you retire. The problem with this theory is that there is so little deferred gratification elsewhere in politics that it is difficult to imagine it here.

A third reason is that the IRS and Treasury bureaucrats see the potential benefits mid-term. They know that Americans are happy to declare anything they own, just so long as they receive tax exemption. Americans do not think twice about the government’s demand that they fill out forms, keep records free of charge, and limit themselves as to what they will invest in, if only the bureaucrats promise — cross their hearts and hope you die –that they will leave these retirement accounts sacrosanct.

By getting Americans to save more, the bureaucrats to some extent help the economy to boom (assuming that investment creates growth, in contrast to the Keynesian myth of consumer spending’s creating wealth). Interest rates can be kept lower, since entrepreneurs are presented with a larger supply of loanable funds, if the resulting federal deficit (heavy borrowing) doesn’t offset the increase.

But, more to the point, the bureaucrats get their potential victims to put trillions of dollars into easily monitored accounts that usually are managed by government-regulated third parties — firms that are ready to comply to government demands in order to reduce the threat of IRS investigations or other regulatory pressures on them.

When the size of this newly created pot of invested wealth gets large enough, the government can then sit back and wait for a scandal or two. Maybe some fund manager runs of with the funds. Maybe he invests in some crackpot scheme and loses most of the funds he managed. Maybe personally managed accounts are mismanaged by government standards. Maybe in the case of corporate retirement plans or long-term Keogh plans, the firm’s owner mismanages the funds of his employees, and the government can highlight such mismanagement. You know: Enron Plus.

The government then will create a new series of debt instruments, “Guaranteed Retirement Bonds.” These bonds are bought with maturities that equal the number of years remaining on each worker’s expected retirement (to age 59, or 62, or 65). Then the government will issue new regulations: each tax-deferred retirement plan manager must invest 25%, then 30%, or even 40% of the funds in these guaranteed, fixed-interest bonds, for safety’s sake.

The government will then skim hundreds of billions of dollars worth of long-term notes. The bureaucrats thereby will get access to the money, and yet avoid outcries, since the psychology of resistance is lowered to such confiscation. After all, New York City unions consented a quarter century ago to the union pension funds buying New York’s “Big MAC” bonds in order to save the City from legal bankruptcy.

It is this psychology of deferral which is crucial. People want immediate tax relief, yet they are only marginally concerned with distant returns. Wealthy people would not put so much money into “tax shelters” if this were not the case. Avoiding immediate pain is high on everyone’s list; avoiding distant losses is far lower. Ludwig von Mises called this general phenomenon “time-preference.” I call the desire to avoid immediate taxation “bait.” It sells well to fat mice.


A lot of voters keep hoping that the deficit will somehow be reduced without a crisis or higher taxes, yet without major spending cuts in their personal pet projects. So they think to themselves, “Well, maybe things will get better later on. Maybe tax rates will be a lot lower when I retire. If I can defer getting hit with today’s high rates, and we can get Congress to back off later on, then I will wind up with more money when I retire.”

It might be true. Maybe there will be some way to achieve this miracle. Also, maybe there will be a collapse, and your personal retirement fund somehow survives, and a gold standard is restored, and then deflation hits, and tax rates aren’t raised, and you “cash out” with lots of real wealth, untaxed. Maybe. Probably not.

But people keep hoping. A tax deferred could become a tax avoided. In any case, it defers the pain of paying immediate, visible taxes. People are willing to take tremendous risks in order to achieve this.

Will there be a way out before the confiscation plans long-term federal retirement bonds — are imposed? Will your personal retirement portfolio survive the crisis, and still be there, purchasing power fully intact, for you to prosper when you are least able to defend yourself? Will you find a way out?

My suggestion is this: don’t open a retirement program, until you have a plan for avoiding the pitfalls, especially official emergency political pitfalls, that today’s deferred tax retirement programs offer you.

Here is what you need to ask yourself, minimum:

How many years until I think I will retire?
What is my goal for the after-tax retirement capital base?
What could I do with the after-tax money instead?
How much will I have to contribute per year?
What rate of return I expect to get?
Will I be totally dependent on this nest egg?
Will I retire into an inflationary or deflationary world?
Will I retire into a controls-produced shortage economy?
How flexible will the program be?
Who will make the major and minor investment decisions?
Will others be covered by the program?
What will my legal liabilities be to these others?
Do I really want these liabilities?
Will the bureaucrats change the rules?
What will the penalties be for premature liquidation?
What criteria should I use to liquidate the program?
Will my psychology allow me to pay the penalty?
Will it become illegal to liquidate the programs?


I offer this rule as the foundation for any government-approved, tax-deferred retirement program: assume in advance that you will liquidate it before you retire. If you are age 55 or more, you have no big problem. You are allowed to liquidate a Keogh or IRA at age 59.5 without paying a penalty. They are unlikely to change this rule. If they do, liquidate immediately and pay the penalty.

I don’t think they will go from the present 10% penalty to “illegal to liquidate” overnight. The bureaucrats understand that the real inhibiting factor is that 50% of ordinary income that you will have to pay, not the paltry 10%. If this factor were not strong, people would not go into these programs in the first place.

To brace yourself, you need a psychological ploy. Here is my recommended ploy: always mentally reduce the equity in your fund by the amount of tax you would have to pay. You don’t have $250,000 in the fund, you have $150,000, or whatever you would have left over after the tax bite of your ordinary income bracket. Learn to think this way.

Then you tack on the 10% penalty, or whatever it is raised to, and assess the damage of premature liquidation. But you must always discount the capital base by the liquidation costs. If you don’t, the bureaucrats will probably suck you in “for just a few years more.” They will get your money, and then increase the penalty for early retirement.

Want to know what I really think will happen? The worst-case scenario? A demagogue gets into office and pushes an emergency order (which Congress will not override) which deposits all these funds into the Social Security system, for everyone who has a net worth (not counting home ownership) of [$ ]. Fill in the blank with whatever the tyrant thinks he can get away with. We could see an envy-grab of the retirement programs of the upper middle class.

As I said before, I don’t think this will be done overnight. There will have to be a major crisis for any President to risk this sort of emergency action. But it is during such emergency-type conditions that you need access to your funds; they should be liquidated before the Federal government’s fiscal crisis gets so bad that some tyrant is willing to take such a risk.

The time to start thinking about a premature liquidation is when a new President is elected on a radical platform, probably with a shift in Presidential political parties, and with both houses of the new Congress belonging to his party. Alternatively, after a President is assassinated, or after he resigns in the midst of a fiscal or monetary crisis. In the first case, liquidate at least by the week preceding his inauguration. In the second case, liquidate a few days after the newly inaugurated President’s reassuring addresses to the nation have sent the stock market up 30 or 40 points from the assassination or resignation low point, but before he gets around to rewriting the tax code.

Another time to start thinking about it is when the price of gold goes over $1,500 per ounce, in response to three or four near-bankruptcies of major oil companies, banks, or Fortune 500 corporations.

If you start reading about more major scandals in managing retirement programs, start getting ready to liquidate. The orchestrated press will have to be whooped up in advance. This happened with Enron. It can happen again.

Never forget, Congress has the fattest retirement program in the land. They will not rely on corporate funds to tide them over, at least not those who have been re-elected three or four times. They take care of their own. They are not under Social Security. So whatever they do to the rest of us will not affect them.

Anyone who is not psychologically ready to liquidate, or who has no mental criteria to force his own hand, should not get into any retirement program more high powered than an IRA.


Will you really need the money when you retire? In short, do you really intend to retire? Not if you’re smart. Your number-one priority should be to create a home business into which you will “retire.” You will simply shift the percentage of your time which is devoted to jobs A and B, with 100% of your work days going to job B. What I recommend is retirement avoidance.

I think there will be increasing demand for independent contractors along the lines of “Kelly Girl” and “Manpower.” I think it will pay entrepreneurs to set up firms that hire retired experts part time. I guess I might call it “Old Coots and Geezers, Inc.” (If the Rolling Stones can still dodder onto the stage, thinning hair, and all, then why not the rest of us?)

Let me give you an example. My father is a retired FBI agent, Hoover era. For years, until he hit age 80, he worked part time for a very savvy firm, M.S.M. Security, Inc., of Lanham, Maryland, which figured out that there was a bank deposit full of money lying around in the form of retired FBI agents and other retired professional investigators. The company started lining up retired agents all over the country. Then it went to the Department of Defense and offered to do the screening of high security placement personnel that the Air Force or other armed forces might want to hire or promote. The military’s internal screening program, being bureaucratic, is comparatively slow and expensive. M.S.M. can cut the screening time by something like 60% to 70%, and cut the costs accordingly. It can sell this service profitably. This also frees up full-time military personnel for other jobs more closely associated with national defense. The company hires skilled retired agents who spent a career doing this sort of work, and pay them an hourly wage, plus travel expenses. These men are glad to get the supplementary income. The government retirement program at the moment is generous, so they don’t have to be paid full-time professional wages. I see this sort of company springing up all over the place as the economy gets into crisis mode.

If you are a “knowledge professional” (as most newsletter subscribers are), there is no reason short of laziness, enormous wealth, or Alzheimer’s disease which will prohibit you from staying in the work force at least a decade after retirement age. Your first retirement strategy is to decide not to retire and plan accordingly. I think that the best tax shelter is starting up a business that provides tax-deferral opportunities as part of its basic structure. (Mail order firms offer long-term development opportunities along these lines.)

If you can free yourself from the dark cloud of forced retirement, and therefore from the limitations of retirement income (capital consumption), you then can start talking about how to structure a tax-deferred retirement investment program.


How should you look at your retirement program? As a nest egg (emergency fund)? As a way to get untaxed capital growth (the “miracle of compound growth”)? As a way to get the money needed to fund an already operating small business after retirement? As a way to finance a real estate empire after retirement? What?

I have a distinctly unconventional approach to this question. I see a retirement fund as a dual fund: (1) mental back-up for higher-risk investing today, or (2) as a high-risk capital growth vehicle for a person with good income possibilities.

Let me give you some examples. If you are willing to take Saturdays or week nights for building up a family business over a ten-year period (or more), then your retirement fund should be a high-compounding vehicle to supply you with “mental reserves.” Your real goal is the growth of your second business. You need to develop the skills of business management, entrepreneurship, and all the other skills that go into operating an independent business. That retirement fund soothes your wife’s fears. It also is legally immune to bankruptcy proceedings, should that grim possibility ever occur. You can say to her (or yourself): “If I fall on my nose with the second business, at least I will have reserves later on.”

On the other hand, maybe you are a physician or other self-employed professional. Or maybe you can “take your job with you” when you retire. Maybe you are a consultant now. In this case, you don’t really need to retire at age 65. This is just what everyone needs. Your job with your retirement fund to take advantage of the tax-deferred status of the fund. You need fast capital growth, compounded. You need a solid chunk of it in high-risk, high-return speculative ventures, on the understanding that you could lose the whole thing, or 50% of it, if your guesses are wrong.

In both cases, you need goals. You need a much larger goal for your crap shoot, since only a large goal justifies the risks. But you need to be able to sit down at the end of each year and see if you’re “on target.” If you need 15% per year growth, see if you have achieved it. If not, are you willing to stick with the program on the assumption that you will hit 100% next year? But you need to re-evaluate it every year, and if you failed to meet your goal, you have to think about shifting to a lower goal (which I don’t recommend), or change managers, or stick with it, but by raising the annual return that you’re trying to achieve (because you didn’t achieve it this year).

If price inflation soars again, you will need to re-evaluate your after-tax retirement-day capital base. It will have to be increased, and so will your per capita appreciation numbers.

It is far easier to sit down and set goals with a retirement fund than with anything else. It is a strictly “dollars and cents” evaluation. A business has many side-effects, good and bad. It has psychological inducements. To evaluate the success of a business in terms of mere dollars is ridiculous, if it’s your business. But a retirement program is cut and dried. You set it up in terms of a supplemental strategy to your overall life plan. As a supplemental capital base, it must be evaluated coldly. Has it increased according to the plan in each year? If not, why not? And what to do about it?

It is the formation of your long-term capital goal which takes the greatest concentration. You must be realistic. You need a contingency fund, of course, but for major emergencies, your retirement fund will not be sufficient. Don’t expect it to be sufficient.

The ultimate contingency fund is your children. If you become a total basket case, either your children or the State (ha, ha) will protect you. Your money will not survive a major catastrophe — not the way today’s full-time professional medical care in a “rest home” eats up a budget, unless you have at least $1,000,000 in reserve, pulling 3% per annum. If your children aren’t able to care for you, there’s not much your nest egg will do after two or three years.

But, on the assumption that you will still be functioning productively at age 80 — and you should pace yourself on the assumption that you will be — then you need a goal for that retirement capital base. Get it down on paper before you open anything more grandiose than a simple IRA.


What I am trying to get across is that your tax-deferred retirement fund is strictly a supplemental program. If you expect it to support you in the future, you are probably making a mistake, unless (1) you have a lot of income that can be legally deferred, (2) you can continue to do this for well over a decade, (3) you make few investment mistakes, (4) the government-approved markets for retirement programs stay solvent, (5) the government doesn’t change the rules, and (6) you don’t suffer a stroke or other major illness.

You have to decide what your tax-deferred retirement investment program is to supplement: (1) a long-term occupation from which you need not retire, or (2) a higher-risk family business that might work out as the long-term employment source that you had better be looking for. Your program should compensate for your primary source of expected future income. If your expected future earning source is high risk, the retirement program should be a high-return but conventional program. If your future employment income stream is reasonably likely to continue after retirement, then adopt a “go for broke” program.

October 1, 2003

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

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