“The Social security trust fund is neither. It is neither trustworthy, nor is it a fund.” Unknown author

In an article in AARP Bulletin February 2006, the author writes that a baby born today is already $156,000 in debt. “That’s the estimated debt that every American owes the federal government, courtesy of the annual budget deficit, plus the national debt accumulated over the past century, plus promised but long-term unfunded commitments like his parents’ Medicare and Social Security payments.” (Povich, 2006).

To fully understand the issues related to our own personal retirement plan, we must thoroughly understand those social issues that will affect our society and impact them as a whole. One cannot stick their head in the sand and pretend these issues will go away or not affect them. Once we understand the greater picture we can then translate that understanding into our own personal lives. In this way we can identify the true potential risks that we may face to our retirement plans. In this way you become a Personal Risk Manager (PRM). Many corporations employ Risk Managers to identify potential hazards to the company, and then to employ tactics to guard against those hazards occurring.

If we think of our own financial lives as Us, Inc., we can utilize many of the ideas and tactics sound business operations require in our lives. A business cannot lose sight of what is really taking place in the marketplace that it competes in, microeconomics. It must also be aware of other influences outside of the business such geo-political and macroeconomic issues. We too, if we are to be successful financially, must be aware of our own microeconomics and the macroeconomics of the world we live in.

As a PRM in our own personal lives, we must evaluate the issues related to the successful implementation and accomplishment of our retirement plans. First, we must evaluate the issues related to our successful retirement. Second, we must evaluate any obstacles that may limit our abilities to accomplish our goals. How much income will be enough to sustain us in retirement? How will we fund our retirement? How can we plan for those things that are called in life our “unfortunate situations”?

Life is a tough task master and will only give back a return on what was actually put in. As we will see shortly, some people have more time, resources, and ability to prepare than others. If they don’t prepare they will have no one to blame but themselves. Others have less time and money, but still must plan just the same. Time does not play favorites. We will all age and be in a situation where we will be dependent on our own personal resources and planning. With no plan, we are at the mercy of the current circumstance and resources available to all Americans as a whole. As you will see, that may not be very much and surely will be much less than we would have hoped for.

Although some of the facts related to retirement are somewhat startling, they are the facts and we all must deal with them. We must utilize these facts as potential motivators to assure the quality of our senior years is equal to the level of our desired goals. The vast majority of Americans today has no financial plan, and is literally unprepared for retirement. This fact is understandable given the number of variables involved, the fast pace of life, conflicting and competing priorities, the cost of raising children, and so forth, coupled with the lack of understanding by most people of what to expect in life until they actually personally experience it.

Our personal experience in life is limited when it comes to retirement, unless it has impacted us forcefully through others close to us, such as parents, grandparents, or other relatives or friends. If we have witnessed the high cost of no financial planning on the lives of others we love, then it may cause us to plan earlier in life and more vigorously for ourselves. If, however we have seen it easy and everything has seemed to work out OK so far, we could be in for a serious surprise.

In this course you will discover most of the issues facing those planning on retiring in the next twenty or so years. You will have a leg up on the rest of America because you will establish your realistic goals based on your own personal situation. You will explore all of your options. And finally, you will put together a plan based on your own personal situation, needs, and options.

Very few single individuals in America today can live on what Social Security provides alone for them.

The Facts

What will life after retirement be like? We would like to thank AARP for most of the statistics related to retirement in their landmark report to the nation. (AARP, 2001) This report explores the needs and issues affecting those 76 million people 50 and over.

“Four in ten Americans over age 60, regardless of their economic circumstances, will experience poverty at some point in their lives.” (AARP, 2001) The report goes on to say those numbers for people just above the poverty level, 125% of the poverty line, will be more like one in two. Low-income pre-retirees age 50 to 61 have a median savings of just over $6,000.

What these statistics suggest to us possibly is that very few people, at or approaching retirement is really prepared for what they will encounter. It isn’t important what has caused this situation to begin with.

We can argue forever over the political and economic issues that brought this situation on, but that will do no one any good. What is important is to understand the need to either find a way to circumvent the potential devastation to your personal retirement plans, or have a plan to deal with it. Remember no plan is a plan. It is just a very bad plan.

Most people will continue to work well beyond the years they had hoped to be retired. Census data shows a recent pick up in the number of 65 and over Americans who are working now. A 1999 national AARP study of 2,000 Boomers found that 80% said they planned to work well beyond retirement.

I recently talked with one of my clients who is still working and in her mid-sixties. Her husband passed away and she did not have enough to live on after he was gone so she had to go back to work at a local retailer. We were discussing whether she could retire when she reached sixty-five and could get full Social Security retirement benefits. I advised her she needed to talk to social security and find out how much of a benefit she would qualify for. Later, after she had talked to Social Security, she was extremely depressed. She had learned that her Social Security retirement would amount to less than $400 a month. No one in America today could live on that. Her rent would most likely amount to more than that. She would never be able to retire! Some individuals want to continue to work until they cannot any longer. Others, want to retire, some are forced to retire.

Now maybe she should bring in her family to discuss the situation. I would hope her family would rather have her live with one of them, rather then make her work for the rest of her days. Americans are a little too proud at times and they would rather place themselves in an extremely difficult situation than ask for assistance from someone else, including family. If reality is that we are to face this type of scenario personally, then we should bring our family into the planning earlier rather later.

Initially social security was meant to be only one leg of a three-legged retirement stool. The other two legs of the stool were supposed to be private pensions and personal savings. Although social security was intended only as a supplement to other retirement income sources, many, if not most, of the people began viewing it as a sole source of retirement income. Whether this was due to political issues or not is not important. What is important is that we are headed for a crisis in this country if people continue to rely on social security as their only retirement income source.

Over the last twenty years, the number of those over 65 who rely on Social Security for 90% or more of their income jumped to 27 percent, from 23 percent in 1980.

Overall, Social Security provides 40% of retirement income. Without it poverty would increase five-fold to nearly 50% among those over 65.

Noting that Social Security provides all of the income for 17% of 65 and over beneficiaries, the programs importance to retirement security can scarcely be overestimated.  (AARP, 2001)

Official projections under the current payroll tax and benefit rules, the Social Security Trust Fund will be broke by 2029. Total Social Security income will begin to fall short of total outgo by 2019.

Social Security assets are invested exclusively in government securities with interest financed out of non-payroll taxes. Once payroll tax revenues fall short of mandated benefit payments, non-payroll tax will have to be tapped to cover the difference. Hence, the date of Social Security’s insolvency should be based on the date when payroll tax can no longer cover current benefits, not when trust fund assets are exhausted. Under current projections that will occur in the year 2012, just four years after the oldest baby boomers retire.  Source: Federal Reserve Bank of Cleveland

What all this means is that in the year 2012 Social Security will be paying out more than it takes in and will keep doing so until the well runs dry in 2029. Some individuals say it will not run dry that fast but will last a few more years. The issue is that Social Security is running dry. This means either a substantial tax increase, or a substantial reduction in benefits, or some of both must take place.

Here is another politically charged issue. The political parties in power here in America each will give you a different story. Regardless of who you choose to believe, if any of them, can you really take the chance that social security may not be there, or at the very minimum drastically reduced? How will you survive if they are wrong?

Why is this happening? 

Well, most people are aware of the baby boom bubble moving through society, but maybe not the overall impact it is having on society. The baby boom bubble is currently estimated, as I stated earlier, at about 76-80 million people. It is generally considered to be those individuals born between 1946 and 1964. They are currently at or approaching retirement age. For the last forty years that large block of people has been subsidizing our Social Security system for the relatively few (30-35 million people) that has been utilizing it. The baby boomers are now moving to the point where they will be consumers of the social security system benefits instead of paying for others to use them. The generations behind the baby boomers who will then be subsidizing the future Social Security system will be approximately two-thirds the size of the baby boomers. Unless there is a serious increase in taxes, the Social Security System cannot survive as it is today.

Do you think the next generation would stand still for a 50% increase in taxes? 

Will those retiring be willing to see their benefits drastically reduced?  These are just two of the many unanswered questions we are all faced with. There is only so much revenue for the government to subsidize all of its expenditures. If we increase spending in social security for the greater number of beneficiaries in the future, money must be taken from some other well-deserving programs. The other two alternatives if we want the government to pay for the increase in benefits numbers, is to either increase taxes drastically, or put more money into the economy. Raising taxes will hurt future generations. Increasing the money supply enough to cover the shortfall will fuel serious inflation which will make your money worth less.

I believe the bottom line here for us all is that we each must take on a greater share of the responsibility for ourselves and the well being of our loved ones than we may have realized in the past when considering our retirement years.

The situation is very disproportionate for women. Women over 50 earn only about two-thirds what male full time workers earn. Woman age 50 or older, are less likely than men to work full time. Older women are even more likely than men to fall into poverty.  And as we all know, today women outlive men thus putting a longer demand on whatever resources are available to them. The statistics can go on and on. What we face will not go away if we ignore it. We can retire in comfort and peace, but it is not going to happen by accident… but rather by diligent planning and action.