Journey Into Retirement

Nobody is aware of what the future holds. To take advantage of uncertainty is to hope for the best and prepare for the worst.

Blaze Olamiday

In this blog post, I want to talk about how retirement finances are becoming increasingly uncertain. Sources like 401K savings, Social Security, and pensions are supposed to be adding to our financial security. However, as the wave of boomer are beginning to retire, many of the promises seem to be in jeopardy. It is not that these expected sources of income will not be available to fund our retirements. The question is how much income to expect. As we close in on retirement, you would think that estimates of income become clearer, but it beginning to look muddier and muddier.

SOCIAL SECURITY

Let’s talk about Social Security. Most of us have been paying into the system for several years with the expectation that it will be a significant source of income when we retire. I think that the reality is that it will be there. However, the question is how to plan for this income. Estimates are that by 2020, taxes coming into Social Security will be less than benefits going out. The trust fund, which is the accumulation of taxes paid into the system over the years that have not gone out as benefits will cover the slack for a time. However, this is expected to last only until 2033, at which time incoming taxes will only be able to cover 75% of promised benefits.

However, it could be even more of a problem than that. After the 2020 date, the government will have to start redeeming treasury bonds to cover benefits. You see, all of the money that you have been paying into the system all of these years have not gone into a saving account. The government has purchased treasury bonds with the remaining taxes after benefits and the proceeds of those sales have gone into general revenue. Another way of saying this is that these taxes are gone for all practical purposes and we are left with IOU’s. So, as the government redeems the bonds to fund Social Security benefits, this will add to the Federal deficit. Herein lies the problem. There is already significant pressure and political jockeying to cut future Social Security benefits as a way to reduce Federal deficits. In other words, Social Security has not added to the Federal deficit, but redeeming the Social Security IOU’s will. Somehow this does not seem fair, but it is the current state-of-affairs. So, what can you expect from Social Security is yet to evolve.

PENSION PLANS

What about pensions? The number of people who work for companies that offer a pension are very limited at this point. If you are one of these people, you should feel lucky. However, I read an article on Yahoo-Finance recently talking about how many companies are freezing pension plans. The implications for a person moving towards retirement is that while you can normally project pension benefits to your anticipated retirement date, the uncertainty about whether your company will keep their plan creates income uncertainty. By law, any benefits that you have accrued must be paid. But, if benefits are frozen, you do not continue to accrue after the date of the freeze and if you were expecting more, this could put a crimp in your retirement planning.

RETIREMENT SAVINGS PLANS

And, then there are 401k retirement savings plans? At this point, the estimates I have seen suggest that only about 50% of American workers have access to one of these plans. For those who do, many do not take advantage of the opportunity or are saving minimal amounts. Notwithstanding a schizy stock market, this is one of the few retirement income sources where you can exercise some control. The recommendation is to save to the maximum that you can. However, there is a lot of inertia here and the psychology goes against the need to delay current pleasures for future needs. There are ways to get around this. I have included a video clip from a TED presentation that talks about how to overcome this psychology and to save more. I hope that you find this useful:

http://www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow.html

So, it is beginning to feel like two core strategies need to be included in your retirement financial planning. They are to save as much as you can (and I would use the advice in the video clip) and to find some source of additional income, such as a part-time job or a home-based business, once you retire from your fulltime career. Of course, you can always delay retirement to take some of the pressure off.

I remember a recent commercial by one of the financial companies. A middle-aged woman talking about her retirement finances said: “I don’t know how much money I will have, but that’s what I will live on.” That’s a great perspective and one that could be relevant to most of us in these uncertain economic and political times.