Monday, February 29, 2016

Retirement is no longer a three-legged stool

When preparing clients for retirement in the early years of my career, I would often introduce the concept of viewing retirement as a three-legged stool. The three legs were represented by the client’s personal savings, his or her pension plan and, of course, Social Security. While all three legs were not necessarily the same size, all three were nonetheless vital sources of income during the retirement years.

But that was then, this is now. Things have changed over the years. Nowadays when preparing a family for retirement, it’s very likely that the pension leg no longer exists. If by chance it does, the dollar amount of the benefit is probably not nearly as large as had been initially projected.

That’s because many pensions were frozen several years ago and the pension benefit became fixed. The amount no longer increased with additional years of employment.

So today, the bottom line is simply that for people approaching retirement, the pension leg is either non-existent or very much shorter than anticipated early in their work careers. Unfortunately, for most young people beginning their career, there won’t be a pension leg.

As our society moves away from traditional pension plans, more emphasis is obviously put on personal savings and Social Security. Any working person has a certain amount of control over how much they save. But they have no control over Social Security. And as I have expressed numerous times, I’m concerned about the financial strength of Social Security.

Like it or not, Social Security is deeply intertwined with politics. That’s especially evident during an election year. I’m not necessarily criticizing the Social Security program as it stands today. I merely want to point out some of the red flags that are being waved by the Social Security trustees. Because it seems to me that the flags are flying under the radar.

I think it’s great that Social Security statements are once again being sent to those in the workforce. I suspect that most people skim the verbiage and simply look at the tables that project their income at early, normal and delayed retirement.

I hope they’re aware that the numbers are only projections, not promises. Because the statements point out that, on its current course, there eventually will only be enough Social Security funds to pay 77 percent of projected benefits. That’s a legitimate concern that needs to be addressed.

I also want to bring to the attention of my young readers a recent error made by the Congressional Budget Office (CBO). An error they corrected in early February. Last fall, the CBO projections for people born in the 1960s and retiring at age 65 were incorrect.

It was initially projected that Social Security would replace 60 percent of income for middle income workers and 95 percent for those in the lower quintile. The projections were corrected to 41 percent for middle wage earners and 60 percent for the bottom quintile. That’s substantially less.

I certainly understand that mistakes happen and commend that they were corrected promptly. But it doesn’t change the big picture. The program needs attention sooner than later.

Before politicians talk about expanding the program, the very foundation needs attention. As it stands, the current program doesn’t inspire long-term confidence. That makes long-term financial planning extremely difficult.

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