Retirement Planning

Retirement Crisis

Sixteen startling facts about the coming retirement crisis and how they may dramatically affect your golden years...

#1 Beginning January 1st, 2011 every single day more than 10,000 Baby Boomers will reach the age of 65.  That is going to keep happening every single day for the next 19 years.

#2 According to one recent survey, 36 percent of Americans say that they don't contribute anything at all to retirement savings.

#3 Most Baby Boomers do not have a traditional pension plan because they have been going out of style over the past 30 years.  Just consider the following quote from Time Magazine:

The traditional pension plan is disappearing. In 1980, some 39 percent of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15 percent, according to the Employee Benefit Research Institute in Washington, D.C.

#4 Over 30 percent of U.S. investors currently in their sixties have more than 80 percent of their 401k invested in equities.  So what happens if the stock market crashes again?

#5 35% of Americans already over the age of 65 rely almost entirely on Social Security payments alone.

#6 According to another recent survey, 24% of U.S. workers admit that they have postponed their planned retirement age at least once during the past year.

#7 Approximately 3 out of 4 Americans start claiming Social Security benefits the moment they are eligible at age 62.  Most are doing this out of necessity.  However, by claiming Social Security early they get locked in at a much lower amount than if they would have waited.

#8 Pension consultant Girard Miller recently told California's Little Hoover Commission that state and local government bodies in the state of California have $325 billion in combined unfunded pension liabilities.  When you break that down, it comes to $22,000 for every single working adult in California.

#9 According to a recent report from Stanford University, California's three biggest pension funds are as much as $500 billion short of meeting future retiree benefit obligations.

#10 It has been reported that the $33.7 billion Illinois Teachers Retirement System is 61% underfunded and is on the verge of complete collapse.

#11 Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern's Kellogg School of Management recently calculated the combined pension liability for all 50 U.S. states.  What they found was that the 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside in state pension funds.  That is a difference of 3.2 trillion dollars.  So where in the world is all of that extra money going to come from?  Most of the states are already completely broke and on the verge of bankruptcy.

#12 According to the Congressional Budget Office, the Social Security system will pay out more in benefits than it receives in payroll taxes in 2010.  That was not supposed to happen until at least 2016.  Sadly, in the years ahead these "Social Security deficits" are scheduled to become absolutely horrific as hordes of Baby Boomers start to retire.

#13 In 1950, each retiree's Social Security benefit was paid for by 16 U.S. workers.  In 2010, each retiree's Social Security benefit is paid for by approximately 3.3 U.S. workers.  By 2025, it is projected that there will be approximately two U.S. workers for each retiree.  How in the world can the system possibly continue to function properly with numbers like that?

#14 According to a recent U.S. government report, soaring interest costs on the U.S. national debt plus rapidly escalating spending on entitlement programs such as Social Security and Medicare will absorb approximately 92 cents of every single dollar of federal revenue by the year 2019.  That is before a single dollar is spent on anything else.

#15 After analyzing Congressional Budget Office data, Boston University economics professor Laurence J. Kotlikoff concluded that the U.S. government is facing a "fiscal gap" of $202 trillion dollars.  A big chunk of that is made up of future obligations to Social Security and Medicare recipients.

#16 According to a recent AARP survey of Baby Boomers, 40 percent of them plan to work "until they drop".

Companies all over America have been dropping their pension plans in anticipation of the time when the Baby Boomers would retire.  401k programs were supposed to be part of the answer, but if the stock market crashes again, it is absolutely going to devastate the Baby Boomers.

State and local governments are scrambling to find ways to pay out all the benefits that they have been promising.  Many state and local governments will be forced into some very hard choices by the hordes of Baby Boomers that will now be retiring.

Of course whenever a big financial crisis comes along these days everyone looks to the federal government to fix the problem.  But the truth is that after fixing crisis after crisis the federal government is flat broke.

At our current pace, the Congressional Budget Office is projecting that U.S. government public debt will hit 716% of GDP by the year 2080.

But our politicians just keep spending money.  In order to pay the Baby Boomers what they are owed the federal government may indeed go into even more debt and have the Federal Reserve print up a bunch more money.

So in the end, Baby Boomers may get most of what they are owed.  Of course it may be with radically devalued dollars.  Already we are watching those on fixed incomes being devastated by the rising cost of food, gas, heat and health care.

What is going to happen one day when prices have risen so much that the checks that our seniors are getting are not enough to heat their homes?

What are we going to do when those on fixed incomes are buying dog food because it is all that they can afford?

We are rapidly reaching a tipping point.  As the first Baby Boomers retire the system is going to do okay.  But as millions start pouring into the system it is going to start breaking down.

No, there is not much that we can do about it now.  We should have been planning for all of this all along.  Americans should have been saving for retirement and governments should have been setting money aside.

But it didn't happen. Now we pay the price.

Source: http://endoftheamericandream.com

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Spend vs. Invest – The Art of Money Accumulation

Tuesday, 09 June 2009 09:24

How a person spends money can be far more important than how he or she invests it. It is much easier to reach retirement goals by deciding how to live, rather than how to invest. Deciding what to do with the money we earn - how to spend it - is what brings about peace of mind, not how much we make or how much we have.

The late Loren Dunton, founder of the non-profit National Center for Financial Education in San Diego, wrote about his lifestyle decisions to buy new cars and spend weekends in Reno, instead of investing a hundred dollars each month in a mutual fund when he was in his late twenties. That fund would have been worth over a million dollars today.

An Expensive Car

Perhaps you think the difference between a full sized car, fully equipped, and a compact is only about $10,000. Actually, it is more like a million dollars. Consider this; borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381 a month.

If one saved the difference of $253 each month for 35 years, earning an 8% average rate of return, it would swell to $580,352. However, that is just the accumulation of the funds. What about the earnings as the funds are withdrawn during retirement?

If one were to get monthly payments of $4,479 from that sum from ages 65 to 90 (and some predictions say there may be over 250,000 people over the age of 100 in America in the 21st century), the total amount collected would be $1.3 million.

This is the magic of compound interest. However, it is not retroactive! One must save now to enjoy the benefits of compound interest in the future.

Waiting To Invest

For instance, if the difference in the example above were saved for only 25 years it would grow to just $240,000. Paid out at $1,857 a month, the total would be $557,000. It is amazing that the difference in saving an additional ten years is about a half million dollars. However, the monthly difference in payments of $2,622 monthly shows how today’s lifestyle decisions can be worth a million dollars in retirement years.

When should people begin saving money? Never soon enough. If ten years could mean a difference of $2,622 in retirement income each month, can you imagine what 15 or 20 additional years of savings would mean when you reach age 65?

Just A Little Postponement

For some, no doubt saving now would be easier if there was more current income. People 17 to 23 years old may think: “Me save? Are you kidding? I am just getting my education and besides I want to have a good time. When I get out of college and start my career, I’ll start saving.”

People 24 to 30 may be tempted to think: “You don’t expect me to save now? I have only been working a few years. Right now, it is important to dress well. I’ll save later.”

From 31 to 42, the reasoning may go something like this: “How can I save now? I am married with small children. Perhaps when they are older I can think about saving.”

Those 43 to 55 wish they could save now. However, many just do not, saying they cannot because of children in college and education loans to pay.

From 56 to 65 most recognize the urgency to begin saving now. However, money is tight. It is not easy for people that age to better themselves. It is tough to break years of over-spending habits. “Maybe something will turn up,” many say.

At age 65 and older, it is too late to begin saving money. You cannot save when there is no income. Many older people live with their children and are dependent on Social Security, which is inadequate, since Social Security was only designed to be supplemental.

If the choice between cars can impact retirement income, imagine the possibilities when applied to lifestyle choices such as a home, vacations, dining out, entertainment, wardrobes, furnishings, etc.

Try to develop the art of money accumulation now. Begin by saving every day. Start today!

Brock and Associates, LLC is a fee-based financial planning firm, specializing in financial planning, retirement, estate, and tax planning.

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How Pareto's Law Applies to Insurance Planning

Tuesday, 10 March 2009 08:49

You are probably familiar with Pareto’s Law.  It says, in effect, that almost everything in life somehow breaks down to an 80/20 ratio.  For example, 20% of the people accomplish 80% of the work, or that 20% of the people earn 80% of the money, and that losers outnumber winners by 4 to 1.

Vilfredo Pareto was an Italian economist who died in 1923.  More than sixty years later, we are finding ever-new applications of his “law” in modern economic circumstances.

No one really knows how Pareto’s Law holds up under scientific scrutiny.  However, we do know one place where it seemingly does have validity and that is in a mortality table.  We know, for example, that about 20% of males who reach adulthood will die before age 65 and the remaining 80%, of course, will die thereafter.

The only thing we do not know is which people are going to end up in that 20% category.  Not knowing into which group a person is destined to fall, makes it necessary to prepare for both the short term and long term problems.

Those who fall in the 80% category - who are going to make it to retirement age - have a more complex, but no less acute problem.

This larger group needs money for two reasons:

• To provide income during retirement years
• To provide for the inevitable event, death after age 65

They need to create an estate, conserve an estate or provide income to a surviving spouse.  In planning one’s estate, there are two kinds of death to contend with:

• Premature death (the 20% problem)
• Death somewhere around life expectancy (the 80% problem)

Term insurance can be a most effective way of solving the 20% problem.  Unfortunately, it is completely ineffectual in solving the death-at-life-expectancy problem.  Not only does the cost of term insurance become prohibitive over the years, worse yet, the coverage runs out.

Term insurance is actuarially calculated to expire about five years before the holder.  In New York, for example, term insurance is available only to age 70.  Just when the insured is getting ready to expire, the insurance company by law must take the coverage away.  To guarantee that term life insurance will be in force at death, no matter when it may occur, one had better make it a point to die before age 70!

Contrary to a popular misconception, life insurance companies make a lot of money on term insurance, because rarely are they at risk when the time for the pay-off of a death claim arrives.

In some states, a product called “Term to Age 100” is available.  Not only is this a most expensive form of term insurance, it is essentially a graded premium Whole Life contract without any of the inherent advantages of Whole Life, such as guaranteed cash values.

Application of Pareto's Law

How can one, with any degree of certainty, protect against both the 20% problem and the 80% problem and gain some important tax advantages along the way?  Well, that is precisely what permanent insurance is all about.

Financial advisors can now fashion life insurance policies that use both term (for high initial death benefit) and permanent (for cash accumulation and long term cost) elements at the same time.  The underlying investments (cash values) can be based on either an equity (variable) or fixed investment account.

The newest policies are children of the computer age.  Before cheap calculation was available, it was impractical to custom design a policy with precisely the death benefit, outlay and cash accumulation desired for each customer.  Now the consumer no longer must settle for a standard package, but may have a policy crafted for specific, personal needs.

In response to Pareto’s Law, it is now very easy to allocate 80% of the premium for the cash accumulation portion of an insurance policy, yet allow the 20% to pay for a full 80% of the death benefit!

Brock and Associates, LLC is a St. George, Utah based financial planning firm specializing in asset protection and generational wealth preservation.

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