Retirement

Austerity Is Coming, One Way Or Another

By Charlie Farrell

Updated on: December 3, 2010 / 4:29 PM EST / MoneyWatch

In the US, it's hard to get away from the likelihood that we'll have to go through a period of austerity if we want to solve our public (government) and private (at home) financial challenges. We basically spend more than we earn on a public and household basis. One way or another, we have to reverse that trend.

Austerity can come in a number of forms. The most obvious is for us as a nation to all save more and spend less. That means we become bigger investors and smaller consumers. The only way to make that transition is to cut spending at both the household and government level.

Yes, it's also possible to do this by growing our income significantly above the rate of inflation. That means you earn more in real wages, save more, but are still living about the same lifestyle. Now that might be possible for some of us on an individual basis, but not so for us as a nation. Increasing workforce productivity can only do so much because we've dug ourselves such a huge financial hole.

Americans, however, aren't great at cutting spending and increasing savings. We used to be, but we aren't any more. And because such a national period of saving more and spending less would put a serious dent in our economy, no politician or policy maker is really interested in forcing us to do this. So we'll most likely continue to encourage people to spend almost all of the money they make, and continue to use fiscal and monetary policies to manufacture more growth. It's just easier. And the economy will look better, but in reality we won't have solved many of our structural financial problems.

So if I say austerity is coming, what will it look like if we're not really going to spend less and save more to any significant degree? What I think austerity will look like is a longer period of time spent working for many Americans. If people won't save more and spend less, then more work is really the only solution. And it's a good solution if you don't mind working into your mid to late 70s.

But working longer is not the type of austerity you have to accept. You can choose to aggressively modify your finances today to put yourself on a path to a more secure retirement. You can decide to run an ironclad budget, work harder to earn more money, pay down your debts and then save more. It's possible, but it takes a lot of will power, and only you can decide if that's the austerity path you want to follow.

Bottom line. Many people will choose to face austerity later in life by working longer. You can choose something different.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.