Forbes recently ran a story entitled the "Triple Threats to Retirement" in which they spelled out the three headed monster that could affect your retirement. In this story they laid out the grim facts that face pre-retirees today and the measures they must take now to revise their strategies before they encounter these unexpected challenges ahead.
We decided to look at these triple threats one-by-one and lend our expertise to solving this retirement dilemma.
Challenge #1 – Employers are increasing shifting the burden of funding retirement to employees and the government is following suit with reductions in Social Security.
Forbes states that "in 2007, 63% of employees were covered only by a defined contribution plan such as a 401(k) compared to 12% in 1983." Formerly, these participants were covered by defined benefit plans where the employer saved on behalf of the employee. Forbes also makes the case that Social Security will replace less and less retirement income.
InTrust's Answer - stop spending and start saving. Do you have a budget? If not, shame on you! You need a budget to see where your funds are going. Off the top of your monthly net income after taxes should go 10% to charity and 10% to savings. You have the balance of the 80% to live off. This may involve some change in your life, but wouldn't you agree it is certainly worth it for the freedom you will have in retirement?
If you don't know how to do a budget, consider one of the many available financial classes. I teach Dave Ramsey Financial Peace University at my church. It covers budgeting, debt reduction, investments and more. Email me and I will help you find a class wherever you may be in the U.S.
If you say, "well Jeff I don't make that much." Again shame on you! There are always creative ways to increase income or cut expenses if you really wanted to save for retirement and not be a burden to the state. The latter is not a good solution because they own you and will control your golden years.
Challenge #2 – Home equity, once a major source of retirement income, has declined significantly and is showing no signs of recovery.
Forbes states that retirees formerly relied on equity in their homes to supplement these defined contribution plan assets, but now with the financial crisis the ratio of homeowner's equity to value was just 38% (60% was the prior lowest value). Further, they state that this has pushed the number of those unprepared for retirement to a high of 86% of U.S. employees. 78% have not even taken the first step towards saving for retirement.
InTrust Answer – Forget about borrowing on home equity and do not plan for Social Security. Set up your planning so it is entirely based on your ability to save and your current retirement assets. This will afford you some room for error and an above average retirement no matter what home prices do or Congress decides with regard to Social Security.
If you have not even started to save yet, start with something…anything to get that savings muscle moving and flexing. I would suggest your first savings be a $1,000 emergency fund. Thereafter you should increase that fund to 3-6 months of living expense because "stuff happens." Next continue to funnel your 10% savings into tax deferred retirement savings like your employer matched 401(k) or a Roth or traditional IRA.
There is really no excuse not to save something and if the last few months have show us anything, you cannot depend on the clowns in Washington to bail you out.
Challenge #3 – The Stock Market Performance is well below its historical average over the last 11 years
The stock markets annualized more than 11% from 1926 to 2000. Since 2000, the return is less than 2% per annum.
InTrust Answer – I must point out that Forbes failed to mention that it did not go up 11% each year. In fact there were periods where returns were sub 2%, like in 1966 to 1982. So planning for some is dependent on when they are saving and what kind of market we are currently enjoying.
2% investment returns don't have to be the rule no matter where we are in the market cycles. We are in what is called a secular bear market, a period of 17 to 25 years where markets move sideways in a big range. This most recent secular bear market started in 2000.
You must learn to trade the range (or hire an advisor who can) or you will end up after 25 years in such a cycle with little or no annual return. Many trend following strategies that we manage or promote on our sister site (www.stock-signal.com) have historical or proforma return streams well in excess of 8% per annum since 2000. If you are not making enough towards retirement, it means you are in the wrong solutions. Our suggestion is to save more, live leaner and find a boutique manager like us to help you maximize those savings.
Other Challenges – Here are some other challenges Forbes isolates
- Forbes makes the case that Social Security and Medicare could become means tested and taxed in the future to fund additional benefits. In other words, the more you make the less benefits you will have. They suggest you target a higher replacement income level for retirement by saving beyond the traditional 80% of today's income.
- They further suggest the triple threat does not stop with you, but affects your heirs as well. The suggest you revisit your estate planning and consider leaving tax free assets to your beneficiaries such as life insurance proceeds or assets in which the basis at death is stepped up.
- Higher income taxes to fund government deficits.
Their suggestions are as follows:
- Become an extreme retirement saver (I think we pretty well covered this above).
- Consider alternative strategies to reduce expenses. Their suggestions here are weak, but might I suggest a garden, driving used vs. new vehicles, paying off high interest debt (or all debt for that matter), using coupons, buying in bulk at lower costs, and reexamining your auto and other insurances costs and deductibles. There are a ton of other cost savers like refinancing high interest mortgages at today's low interest costs. Also consider cutting expensive gym or country club memberships. Hey, no pain no gain!
- Generate alternative sources of income. Here Forbes suggests a mother-in-law quarters on your property to rent out or buying a duplex and renting the other side. May I be so bold just to suggest a second job. If your spouse is a stay at home parent, coix him/her to get a part-time job. It all helps. The ideas of endless.
- Rethink big expenses such as paying for children's college education.
- Run retirement projections.
The bottom line here is that your financial future takes planning. You cannot continue to stick your head in the sand like an ostrich and have a rich and rewarding retirement. It takes work and it may take some sacrifice.
The government can tax you take away some benefits, but if you are continually planning, saving and being prudent with your finances, you can still have the retirement of your dreams. You don't see the rich worrying about future tax increases do you? They know that there are always ways to minimize or eliminate taxes or increase benefits to them, all you have to do is your homework.
So why not start today?
Please share with me your thoughts or experiences as you save for retirement in this tough economic climate.
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