The Death of Old School Retirement Planning
Retirement planning is evolving and not what it was just 20 short years ago. Retirement income sources that were once viewed as rock-solid, such as social security and pensions, are now considered shaky at best. Individuals must think differently when it comes to planning for the future and the major shift in thinking is towards personal responsibility.
Social Security is facing insolvency in less than 20 years unless it undergoes major reforms. In 2013, Social Security ran a $71 billion deficit, capping four straight years of deficits. This has led to 51% of Millennials believing that no money will be left in the Social Security system by the time they reach retirement age, according to a Pew Research Poll.
The outlook is much worse for the Social Security Disability Insurance Trust Fund. During a press conference briefing, Treasury Secretary Jack Lew said, “Social Security’s disability program alone has dedicated funds sufficient to cover all scheduled benefits for only two years.”
Over the past 5 years, Social Security cost-of-living adjustments have been 0.0, 0.0, 3.6, 1.7, and 1.5%. Cost of living increases for 2015 are expected to remain at record lows. Food inflation alone in the U.S. is now running at 22% and rising. You don’t have to be a math wizard to see that there’s a serious problem here.
Social Security has been running deficits for years, has been experiencing record low cost-of-living increases, is wrought with fraud, is expected to be insolvent in less than 20 years, and cannot keep up with the inflationary cost of food. Would you be willing to bet your retirement on that? Me neither.
In the early 1990s pension coverage for private sector workers was 35%. In 2011, that coverage had fallen to 18% and is falling further still today. Let’s face it, private sector pensions are becoming a thing of the past.
That brings us to public sector pensions. According to Moody’s Investors Service, the pension systems’ unfunded liabilities tripled to an estimated $1.99 trillion between 2004 and 2012. Moody’s Senior Credit Officer, Al Medioli recently said, “It is inherently difficult to recover an overall asset position after the double-digit losses seen during the recession.” Just as with many other areas of the economy, the public sector pension funding has also failed to recover from the recession.
In some areas of the country, it is situation critical for public pensions. New York City’s pension funds were more than fully funded in 2000, around 136% of what was needed for annual contributions. Today, those same funds are only at 60% of being fully funded. Detroit is bankrupt and Chicago is right behind them. On September 11th of this year, an article was posted on Forbes titled, Public Pensions Are Still Marching To Their Death.
I don’t like being Mr. Gloom and Doom, but public pensions are in trouble and are unsustainable without reform. Anyone being intellectually honest would tell you the same thing. If you are planning on relying on a public pension to sustain you during your retirement, I hope you have a backup plan.
Americans Are Living Longer
One more factor in old school retirement planning that deserves attention is the fact that retirements normally didn’t last very long. When President Roosevelt signed the Social Security Act in 1935, the average life expectancy for men was 58 and 62 for women. To illustrate that, here is a quote directly from the Social Security Administration’s website:
If we look at life expectancy statistics from the 1930s we might come to the conclusion that the Social Security program was designed in such a way that people would work for many years paying in taxes, but would not live long enough to collect benefits.
Draw your own conclusions.
In 1930, there were 6.7 million Americans age 65 or older. Today there are 44.6 million Americans 65 or older. The average life expectancy today is 76 for men and 81 for women and the retirement age is still 65. Americans are living longer and spending many more years in retirement than ever before.
It is clear to see that old school retirement planning is well on its way to the dust bin of history. The retirement systems of yesteryear are broken, overburdened, and unsustainable. Welcome to the new reality of retirement planning.
The New Reality of Retirement Planning
Retirement planning solutions of today have to be comprehensive and specifically designed to meet the needs/wants of each individual, couple, or family. There are no one-size-fits-all plans any longer. They have to be designed with explicit goals in mind and everyone’s goals are unique.
Plans have to be able to compensate for factors such as volatile stock markets, shifting interest rates, and the soaring inflation on the necessities of food and energy. Another consideration is increasing medical costs later in life.
In the past, a balanced investment portfolio was the tried and true 60/40 stock-bond ratio with a withdrawal rate of 4% per year during retirement. Today, the mix of many successful portfolios is divided into thirds – one-third guaranteed income instruments, such as fixed and variable annuities; one-third traditional investments such as mutual and bond funds; and one-third deferred annuities.
Again, I must reiterate that there are no one-size-fits-all plans when it comes to retirement planning. Everyone’s situation in life is unique and each of us has different tools to work with. The trick is in making the most of what you have to work with. Find a retirement planner that will help you do just that.
Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.