Americans need to realize that they cannot and should not rely on any government for the financial future. It requires a disciplined saving strategy along with a globally diversified portfolio. You don’t have to know everything about investing but you do need to know the right things. Your retirement plan needs the assistance of an investor coach to keep you on track and disciplined through the tough times.
1) Making employees more aware of how critical it is to save now for their financial futureThis is the first step. After all, you need to be aware of a problem before you can address it. Our research report identifies six key possible threats to the ability of many Americans to afford a comfortable retirement:
Rising health care costs. A recent Fidelity study projected a 65-yr old couple retiring today will need about $240k (or $10,750 per year) to cover health care costs not covered by Medicare (not including long term care). Since health care costs have been rising at 6% a year—more than twice the rate of inflation—future costs are likely to be much higher. As if that wasn’t bad enough, the study didn’t factor in the effect of future cuts in Medicare that may be needed to keep the program solvent. Both major presidential candidates have targeted reducing the growth of Medicare spending to GDP plus 0.5%. Guess who’s going to make up the difference? While it’s difficult to calculate the exact effect of each candidate’s plan, a Congressional Budget Office study estimated that a similar plan proposed earlier by vice presidential candidate Paul Ryan would increase the share of health care costs paid by Medicare beneficiaries from 49% to 61% by 2022, or about $6,400 a year per person. In addition, Romney has advocated raising the retirement age for Medicare, cutting Medicaid (which largely pays for long term care for retirees), and repealing Obamacare, which could lead to higher prescription drug costs for retirees and higher health insurance premiums for anyone retiring too early to qualify for Medicare. The good news is that if you’re eligible for a health savings account (HSA), you can use it to save for these future health care expenses tax free.
A troubled Social Security system. The Social Security trustees have estimated that starting in 2033, there will only be enough money in the Social Security Trust Fund to pay about 75% of projected benefits, meaning a 25% cut in benefits if nothing is done. Obama has suggested raising the cap on payroll taxes while Romney has suggested increasing the retirement age and reducing the growth in benefits for higher-income workers.
Saving for retirement must become a priority for most Americans. You will be disappointed if you plan on relying on the federal government. Sadly, most baby boomers have this plan in mind. This might explain why many lost huge amounts in the 2008-9 crisis. They substituted a disciplined savings plan with excessive and inappropriate risk in their portfolios.
Late baby boomers and the generations that follow are slowly beginning to realize and accept that 70 is the new 65. Retirement on The Golden Pond at age 65 is fast becoming a luxury that few will be able to afford. Most workers haven’t saved enough, and government programs cannot be counted on for a bailout. The solution is to work to age 70, at least part time, and delay taking Social Security benefits.
The past few years saw a sharp decline in Americans’ confidence about their ability to secure a financially comfortable retirement, according to 2012 Retirement Confidence Survey (RCS) published annually by the Employee Benefit Research Institute (EBRI). The age at which workers expect to retire is slowly rising. In 1991, 89 percent of workers expected to retire at or before age 65. Twenty-one years later, in 2012, only 63 percent of believe they will have the same opportunity.
Other interesting facts from the survey show that in 1991, about 50 percent of workers thought they could retire earlier than 65. The number today has dwindled down below 24 percent. In fact, more people today believe they will be working at age 70 than retiring before age 65. In 1991, only 9 percent of workers believed they would still be working at age 70. The number today is 26 percent.
One reason people expect to work longer is because saving for retirement has become more difficult. Only 66 percent of workers reported that they or their spouses have saved money for retirement. That’s down from 75 percent in 2009, according to the RCS.
More than half of workers (60 percent) report they and or their spouses have less than $25,000 in total savings and investments (excluding home equity and the present value of a defined benefit plan). About 30 percent of workers reported savings of less than $1,000.
Saving at work has helped. Workers who contribute to a retirement savings plan at work are considerably more likely (76 percent) to have saved at least $10,000 than those who are offered a plan but choose not to contribute (42 percent) or are not offered a plan (37 percent).
Another reason people are expecting to retire at a later age is a growing skepticism about Social Security. About two-thirds (64 percent) of workers are not confident that Social Security will continue to provide benefits of at least equal value to the benefits retirees receive today. Workers today are half as likely to expect that Social Security will provide a major share of their income in retirement (31 percent) as retirees are today (69 percent).
One benefit to working to age 70 is that a person can significantly increase their Social Security benefits. This is called delayed retirement credits. A person who delays taking Social Security will increase their monthly benefit increase by 8 percent annually after age 65 until age 70. For example, if a 65 year old waits until age 70 to collect, their monthly benefit will be approximately 40 percent more. Delayed retirement credits end at age 70, so there’s no reason to wait after that.
The 2012 RCS finds that workers also feel more uncertain about Medicare’s future. About two-thirds (64 percent) of workers are not confident that Medicare will continue to provide benefits of at least equal value to the benefits retirees receive today. In addition, 75 percent of workers believe they are very (42 percent) or somewhat (33 percent) concerned that the eligibility age for Medicare will increase before they retire.
Unfortunately, workers don’t see employers funding the health care gap between age 65 and whatever the Medicare retirement age may become, although attitudes appear to be changing. In the 2011 RCS, one-third of workers reported that they expected to receive health insurance from an employer (36 percent) after retirement. That’s better than the 27 percent of current retirees who reported they actually received health benefits from previous employment.
Today’s workers are beginning to see their retirement future, and one fact stands out clearly − age 70 is the new 65. People realize they’ll be working longer, delaying Social Security benefits to take advantage of delayed retirement credits, and relying more on employers for the health care gap if and when the age for Medicare extends past 65. Life on the Golden Pond is still possible in America, but it take a little more time.
Americans are beginning to believe that if they do not save for their own retirement, they will not be able to retire. Saving for retirement should become a part of your budget. The fixed part, that is, it does not change.
There is no substitute for a disciplined savings strategy. This combined with a risk adjusted globally diversified portfolio will lead to a successful retirement. Unless of course, you believe you are smarter than every other investor in the world. Attempting to find the next hot investment class is futile and dangerous to your financial future.
The stock market will save you.
Hopefully, the 2000–2002 bear market and the 2008 financial meltdown did away with any notion that the stock market can do your saving for you. For long-term planning, it’s smart to plan on high single-digit equity returns and (despite today’s extraordinarily low interest rates) about half that for bonds. Also, don’t assume the same return every year. Market returns (even real estate) fluctuate from year to year. Your planning should consider a range of outcomes to help assess the likelihood of meeting your goals.
There’s always Social Security.
With Social Security, it’s especially hard to separate truth from fiction. According to some, the status quo is fine. Others see bankruptcy as imminent. The Social Security Administration projects that the current system is sound through 2036, but beginning in 2037 benefits could be reduced by 22% and could continue to be reduced annually.2 One scenario we might see, besides benefit reductions and tax increases, is means testing, which could result in a middle-class squeeze: The wealthy aren’t eligible but are fine on their own, and the needy are entitled to receive full benefits, but those stuck in the middle get something less than hoped for. Wouldn’t it be preferable to save a little more for the future—even if it means spending a little less now—so you can treat any Social Security payments as icing on your retirement cake, rather than the main course?
Don’t be a “Gloomy Gus”
A small dose of skepticism can be healthy when it comes to conventional wisdom, but avoiding the Pollyanna label doesn’t mean you need to become a hard-core cynic. After all, a high single-digit return for stocks still means you could double your money every eight years or so, which wouldn’t be bad. And it’s doubtful that every last penny of Social Security will dry up or that every single corporate and public pension will fail. Stay balanced—don’t be overly optimistic and run the risk of failing to meet your goals because your plan depends on everything going just right, but don’t be overly pessimistic and sacrifice more of your lifestyle than is necessary.
Reality check: Spend less, save more
No other factor comes close to ensuring retirement success as the amount that you’re able to save. The flip side of that, of course, is how much you spend. Living below your means before retirement has a double benefit—it allows you to save more for the future and reduces the size of the nest egg required to maintain your standard of living. The alternative means growing accustomed to a lifestyle of spending you won’t be able to support when you stop working. Spend less and save more, and you won’t need to pin your hopes on wishful thinking.
Most Americans rely on their company 401(k) to fund their retirement. With the typical plan the employee must choose their mix of funds. This adds anxiety and results in no action toward their goal. Plans should become more pension fund like and leave the decisions to experts.
Still, the survey of 1,500 employees last month recorded an 18.2% decline in overall retirement confidence compared to September of 2010. More telling, there was a 31.7% drop in workers’ confidence that they will have both the defined benefitassets and employee health benefits they need to support a comfortable retirement when they’re done working.“This represents the most significant drop in retirement confidence we’ve seen in the four years we’ve compiled the Sun Life Unretirement Index,” Wes Thompson, president of Sun Life Financial U.S., says in a statement. “Although the recession officially ended in 2009, average Americans feel that the downturn has not ended for them, which is substantially eroding their trust in their retirement future.”
It’s so bad for some workers that one in five polled say they plan to never retire.
Only 23% of working Americans say they feel “very confident” that they will meet basic living expenses in retirement — way down from 42% who felt that way last year.
Confidence in the future of Social Security has plunged over the last four years, to 9% in 2011 from over double that (22%) in 2008 while confidence about Medicare benefits has also plummeted, to 8% in 2011 from 20% in 2008.
Plan sponsors can change this statistic by taking a more active role in the design and monitoring of their plan. Part of this role should include bench marking their plan against plans of similar sizes.
Please comment or call to discuss how this affects you and your company.
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