| Bob Sherman Credit |
Retirement Savings
Retirement Savings: Is it Enough?
You need money for your retirement years.
The question is: Are your retirement savings sufficient to provide the needed retirement income?
For most people in the United States there are four places retirees get their retirement money:
- Social Security
- Company pensions
- Savings and investments
- Income from earnings, relatives, or other organizations
Social Security
Many people rely on the government to do the investing for their retirement.
For two-thirds of the elderly, Social Security is their major source of income. For a third of the elderly, Social Security is virtually their only income.
Social Security is now taking in more money than it pays out in benefits, and the remaining money goes to the program’s trust funds.
Of course, the problem with the "trust funds" is that all they contain are government bonds and certificates of indebtedness. The excess money you now pay in Social Security taxes is spent by Congress and Congress puts bonds and certificates in a special "lock box" that contains the trust fund. While they may talk about the trillions of dollars in the trust fund, all that's really there are pieces of paper.
Government bonds are merely IOUs indicating that, somehow, the government will raise money in the future to pay the holders of the bonds. In this case, the holder of the bonds is the Social Security trust fund.
So, the government isn't really investing for your retirement. They've already spent the money and promise to spend more later for your Social Security benefits. To pay these benefits the government will have to raise the Social Security taxes on those still working when you retire.
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Under the intermediate assumptions, OASDI cost will increase rapidly
between about 2010 and 2030, due to the retirement of the large baby-boom
generation. After 2030, increases in life expectancy and relatively low fertility
rates will continue to increase Social Security system costs, but more
slowly. Annual cost will exceed tax income starting in 2017...
The OASDI annual cost rate is projected to increase from 11.13 percent of
taxable payroll in 2005, to 16.74 percent in 2030, and to 19.08 percent in
2079...
The primary reason that the estimated OASDI cost rate increases rapidly
after 2010 is that the number of beneficiaries is projected to increase more
rapidly than the number of covered workers. This occurs because the relatively
large number of persons born during the baby-boom will reach retirement
age, and begin to receive benefits, while the relatively small number of
persons born during the subsequent period of low fertility rates will comprise
the labor force.
THE 2005 ANNUAL REPORT OF THE BOARD OF
TRUSTEES OF THE FEDERAL OLD-AGE AND
SURVIVORS INSURANCE AND DISABILITY
INSURANCE TRUST FUNDS
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This simply means that, if the benefits remain as promised, the tax rate required to pay for those benefits will increase.
The reason is simple. There will be more retirees than ever before while the number of workers paying for the benefits will not increase rapidly enough to keep pace. Because there will fewer workers per retiree, workers will need to pay more to support the baby-boom generation.
So, benefits will become increasingly political in the future. If workers will not allow their Social Security taxes to nearly double, the benefits will have to be reduced.
Company Pensions
About half of households are covered by some type of employer provided pension plan. If you are promised a company pension and your pension fund is properly funded, you can look forward to a stream of income in your retirement years.
Many companies are attempting to save money by switching their "defined benefit" plans to "defined contribution" plans.
Defined benefits plans promise specific payments, often based on age and number of years of service. The company must contribute to the plan an amount that will be sufficient to pay the promised benefits.
Defined contribution plans promise only that the company will contribute some defined amount to your plan during your working years. Each worker has a separate account. The retirement income you finally receive depends on the total amount in the plan; this is the amount contributed to the plan and how successfully those contributions were invested.
The Pension Benefit Guaranty Corporation indicates that:
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There have been some major shifts recently in America’s pension system. While the number of workers covered by traditional defined benefit pensions has remained relatively level, there has been significant growth in defined contribution pension plans, especially 401(k) plans. Many employers began offering workers both a defined benefit plan and a 401(k) plan. Other employers offer only 401(k) plans.
A PREDICTABLE, SECURE PENSION FOR LIFE
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Defined benefit plans are clearly easier to understand. If you have a defined contribution plan, however, you should take the effort to fully understand your contribution and investment options. This will help you understand how to maximize your retirement benefits.
Savings and Investments
Many people hope to be able to budget money for long term savings. But, too many have difficulty actually finding extra money to invest for their future.
One cause is an increase in consumer spending, as Alan Greenspan, former Chairman of the Federal Reserve Board indicated:
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The sizable gains in consumer spending of recent years have been accompanied by a drop in the personal saving rate to an average of only 1 percent over 2004--a very low figure relative to the nearly 7 percent rate averaged over the previous three decades.
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The discipline to save is being overcome by the desire to have the good things in life now.
The Congressional Budget Office cites two studies that recommend savings rates for American households:
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Two studies published in 2000 compared households' actual saving rates with the rates recommended by popular software packages. One study, by Mark Warshawsky and John Ameriks, applied the Quicken Financial Planner program to data from an extensive set of survey respondents between the ages of 25 and 71, taking into account college expenses for dependents, housing wealth, expected retirement age, life expectancy, future Social Security and pension benefits, and a postretirement drop in living expenses. That study found that under the authors' assumptions about future incomes and rates of return, about half of those households were on track to fully finance their retirement. The other half, however, were likely to run out of assets--15 percent were expected to reach retirement with no financial assets; 20 percent would run out of assets within a decade of retiring; another 10 percent within 20 years; and another 5 percent within 30 years. The study concluded that, on average, households would be able to fund 24 years of retirement, but the half who were not fully prepared would face an average of 19 years of unfunded living expenses, amounting to $300,000 (in 1992 dollars).
A similar study by Douglas Bernheim and coauthors in 2000 used the ESPlanner software package to calculate saving rates that would allow a sample of preboomer households to maintain a constant level of consumer spending for the rest of their lives, given their expected earnings and intended retirement age. That software recommended very little saving for households in the bottom 15 percent or so of the income distribution, whose working-age income would be largely replaced by Social Security. For households with income of more than $15,000 per year, its median recommended saving rates ranged from 13 percent to 23 percent (depending on the households' current age and planned retirement age)--higher than those households' actual average rates of saving. Under the assumption that Social Security benefits will be cut in the future to bring the Social Security system into long-term balance, the program recommended even higher saving rates.
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So, what is the average saving rate among US households? It is much smaller than recommended and growing smaller all the time.
For at least half the households, saving rates are inadequate to fund a comfortable retirement.
You should carefully examine your plan for retirement saving. Look at your personal saving plan, your employer pension (if you have one) and the potential for reduced Social Security benefits.
If you have not consulted with a financial planner, you should determine what your optimal saving plan should be. Your future is in your hands.
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