Dollars and Sense
Chapter 1
The Reality
Has retirement become impossible? With the stock market losses in 2008 and 2009 many people began to rethink their retirement age. Many of the recently retired returned to work, fearful that their diminished retirement funds could not support them for the twenty to thirty years they would spend in retirement. Those who planned to retire soon recalculated their retirement age and chose to remain employed if the company they worked for allowed it. Some companies, who were downsizing, would not permit retirement-age employees to remain on the job. Many retirees (who thought they were past the age of working) began looking for jobs as well. In a shrinking job market, there are not many choices.
Most people dream of inheriting wealth or winning the lottery, even though they realize it is not likely to happen. Whether it is a state lottery, a weekend in Reno, or pork bellies we hope our lucky day will come. Unfortunately, when retirement is treated the same – just hoping for good luck – the reality is likely to be poverty. These individuals have not saved for retirement, have not set up any financial goals for retirement, and are not at all prepared financially for retirement.
Tough Economic Times
Retirement can be difficult in the best of times, but when the economy is bad, it is even more difficult because there are likely to be fewer programs and fewer funds available for the low-income elderly. There are additional concerns that Americans will have to pay for the indiscriminate spending of our government through additional taxation at both the federal and state levels. Politicians tend to seek funding from those least likely to retaliate at the voting booths; businesses often are selected for higher taxation since voters view companies as having more than their fair share of income. Unfortunately, that sometimes equates into fewer employment opportunities as businesses cope with higher taxation. It will also equate into higher goods and services to cover the company’s increased taxation levels. One way or another, every citizen is affected by a difficult economy.
Inflation and Retirement
Inflation affects every aspect of our lives and retirement is no exception. Inflation can devastate even a good retirement plan because it devalues the investment.
An individual who believes he or she needs $55,000 post-tax dollars per year to support his or her current lifestyle must factor in the variables of inflation over the 20 to 30 years they will live in retirement. Many people enter retirement hoping to live only on their interest earnings; they may not be able to do so over the duration of their retirement due to inflation.
“Inflation is when you pay fifteen dollars for a ten-dollar haircut you used to get for five dollars when you had hair."
-Sam Ewing
"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man."
-Ronald Reagan
"Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of at the culmination of your career."
-Bill Vaughn
"Inflation is taxation without legislation."
-Milton Friedman
"Bankers know that history is inflationary, and that money is the last thing a wise man will hoard."
-William Durant
"Inflation is the crabgrass in your savings."
-Robert Orben
"Inflation is when sitting on your nest egg doesn’t give you anything to crow about."
-Unknown
While such quotations might make us laugh, there is little doubt that inflation has a profound impact on those living on fixed incomes.
The Fourth Edition of the American Heritage Dictionary defines inflation as, "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services."
What Exactly is Inflation?
Simply stated, inflation makes goods and services more expensive and decreases the value of one’s money.
Economists use the term “inflation” to denote an ongoing rise in the general level of prices quoted in units of money. In simple terms, inflation means each dollar buys less than it did a year ago or even just a month ago. The magnitude of inflation (the inflation rate) is usually reported as the annualized percentage growth of some broad index of money prices. Inflation is the ongoing decline of the overall purchasing power of our money. Not all countries experiences inflation at the same time since it generally has to do with internal factors rather than global conditions.
Inflation is typically a problem to some degree in every country. Inflation rates vary from year to year and from currency to currency. Since 1950, the U.S. dollar inflation rate, as measured by the December-to-December change in the U.S. Consumer Price Index (CPI), has ranged from a low of -0.7 percent (1954) to a high of 13.3 percent (1979). Since 1991, the rate has stayed between 1.6 percent and 3.3 percent per year. Since 1950 at least eighteen countries have experienced times of hyperinflation, which means the CPI inflation rate has soared above 50 percent per month. Japan recently experienced negative inflation, or deflation, of around 1 percent per year, as measured by the Japanese CPI. Central banks in most countries today profess concern with keeping inflation low but positive. Some specify a target range for the inflation rate, typically 1–3 percent.
We often hear that we must return to the gold standard although it is most unlikely that we will actually do so. The gold standard meant America had quantities of gold to back up our paper dollar. Although economies based on silver and gold standards could experience inflation it seldom exceeded 2 percent per year, and the overall experience over the centuries was inflation of close to zero.
Today no country’s economy is based on the gold standard; all have gone to paper money. Economies on paper-money standards experience much more inflation than what occurred under the gold standard. The United States ended its last commitment to a gold standard in 1971. Our government cut the U.S. dollar’s last link to gold, which meant it ended its commitment to redeem dollars for gold at a fixed rate for foreign central banks.
Measuring Inflation
The chart, graph and table below displays annual US inflation rates for calendar years through 2017. Rates of inflation are calculated using the current Consumer Price Index published each month by the Bureau of Labor Statistics (BLS). Historical inflation rates are available from 1914 on.
The last column, “average,” shows the average inflation rate for each year. They are published by the BLS but are rarely discussed in news media, taking a back seat to a calendar year’s actual rate of inflation. We only had a partial year for 2018, so it was not included in the graph below.
|
Year |
Inflation Rate YOY |
Fed Funds Rate |
Business Cycle (GDP Growth) |
Events Affecting Inflation |
|
2002 |
2.4% |
1.25% |
Expansion (1.7%) |
War on Terror |
|
2003 |
1.9% |
1.00% |
Expansion (2.9%) |
JGTRRA |
|
2004 |
3.3% |
2.25% |
Expansion (3.8%) |
|
|
2005 |
3.4% |
4.25% |
Expansion (3.5%) |
Katrina. Bankruptcy Act |
|
2006 |
2.5% |
5.25% |
Expansion (2.9%) |
Bernanke is Fed Chair |
|
2007 |
4.1% |
4.25% |
Dec peak (1.9%) |
Bank crisis |
|
2008 |
0.1% |
0% |
Contraction (-0.1%) |
Financial crisis |
|
2009 |
2.7% |
0% |
Jun trough (-2.5%) |
ARRA |
|
2010 |
1.5% |
0% |
Expansion (2.6%) |
ACA. Dodd-Frank |
|
2011 |
3.0% |
0% |
Expansion (1.6%) |
Debt ceiling crisis |
|
2012 |
1.7% |
0% |
Expansion (2.2%) |
|
|
2013 |
1.5% |
0% |
Expansion (1.8%) |
Government shutdown. Sequestration |
|
2014 |
0.8% |
0% |
Expansion (2.5%) |
QE ends |
|
2015 |
0.7% |
0.25% |
Expansion (2.9%) |
Deflation in oil and gas prices |
|
2016 |
2.1% |
0.75% |
Expansion (1.6%) |
|
|
2017 |
2.4% |
1.50% |
Expansion (2.2%) |
Core inflation rate 1.8%. |
|
2018 |
1.9% |
2.5% |
Expansion (2.9%) |
Core rate 1.9 %. The current rate is updated monthly. |
|
2019 |
1.8% |
2.5% |
Expansion (2.1%) |
|
|
2020 |
1.2% |
2.5% |
Expansion (1.9%) |
COVID |
|
2021 |
4.7% |
2.5% |
Expansion (1.8%) |
COVID |
|
2022 |
7.5-9.1% |
|
|
COVID, Russia’s war on Ukraine |
Calculating Annual Inflation Rates
Annual rates of inflation are calculated using 12-month selections of the BLS’s Consumer Price Index. For example, to calculate the inflation rate for any particular month, take its CPI and subtract from it from the same month in the previous year’s CPI. Divide the resulting number by the previous year’s figure CPI and then multiply that by 100 and add a percentage sign. The result is the month’s annual inflation rate.
Causes of Inflation
Simply stated, inflation occurs (meaning the dollar buys less goods and services) to the extent that the nominal supply of dollars grows faster than the real demand to hold dollars. A standard approach to analyzing the connection between the money supply (M) and the general price level (P) is an accounting equation called “the equation of exchange” of MV = Py, where V denotes the number of times per year the average dollar turns over in transactions for final goods and services, and y denotes the economy’s real income (usually measured by the real GDP). Since V is defined as Py/M, the ratio of nominal income to money balances, the equation follows. The quantity theory of money states that a higher or lower level of M (money) does not result in any permanent change in y or desired V; in other words, it does not permanently affect the real demand to hold money rather than spend it. Most people would agree that a larger M means a proportionally higher P. In simple terms, putting more dollars in circulation dilutes the purchasing power of each available dollar because the quantity of dollars has increased (based on the principles of supply and demand); prices rise when there are more dollars available to buy the same amount of goods.
Consumers often have difficulty understanding why printing more money would cause inflation. To achieve understanding, consider an economy in which all prices are balanced. Now imagine that the numbers on all money are magically doubled; at the same time all bank account balances are also suddenly doubled. Those selling goods and services would then also double their prices to keep up with the availability of money (items are typically priced according to the market indicators, in this case a doubling of the money supply). Price tags must be simultaneously doubled to keep the economy in equilibrium (balanced).
Another example: Fred T. Ford wants to sell his antique car. He initially thought he wanted to sell the car for $10,000 but Dale Doubling arrives with $20,000 because all the numbers on his money were doubled. Why would Fred still take only $10,000 for his car when $20,000 is now available? The answer: when the money supply doubled, the car’s value (and therefore price) also doubled.
We know that the numbers on our money are not going to magically double, but if the buying power of each dollar falls, instead of requiring one dollar to buy bread it may take two dollars (a doubling in the amount required). In effect, the numbers on the money doubled because the cost of the bread required two rather than one dollar to purchase it. That, my friend, is inflation.
The actual process by which the federal government injects new money (typically by purchasing bonds in the open market with newly created federal liabilities) differs from our examples since they obviously do not double the numbers on our money or in our account balances at the bank. One major difference: the initial spending of newly created money is on bonds, not on the consumer goods Americans would be buying. Following the sale of the bonds, the bond sellers’ banks, into which the federal government has wired newly created reserves, will themselves buy additional securities (or make additional loans), expanding the banking system’s deposits as they do so. The actions of the federal government (and the subsequent actions of the commercial banks) expand the supply of money available for loans and therefore may lower the real interest rate. The commercial banks’ borrowers (predominantly business firms) may, at least temporarily, raise the relative prices of the assets they buy (business plants and equipment). Many economists assume that such relative-price effects are negligible, but others assign them a key role in their theories of the business cycle. If a company or manufacturing firm finds they owe more due to business loans, it is reasonable that they would then charge more for the products they sell to cover the higher cost of doing business. If the products we buy cost more (but we don’t simultaneously earn more) then our dollars are buying less and that, my friend, is again called inflation.
In short:
1. The government buys bonds in the open market;
2. The federal government creates money by wiring funds to the banks selling the bonds they bought;
3. The banks that sold the bonds will buy additional securities or make additional loans to businesses;
4. If a business borrows money, it must recoup the cost; sometimes that means raising the prices on the goods or services they sell.
5. Our dollars no longer buy as much, at least not from the company that raised their prices (which is why rising costs of goods may not affect every consumer equally, only those that want the goods this company sells are affected).
Americans are dedicated consumers since they typically consume more than they produce. A consumer is a buyer of goods and services. Americans have long been the global consumers, buying much more than most other countries, most of it on credit. If an American is a “saver” by nature and does not buy many goods or services, he or she is less affected by rising prices (inflation) than the individual who buys needlessly or has high credit card debt, since the cost of the interest charged on the credit card will erode the consumer’s buying power. The very poor are nearly always affected by rising costs and eroding dollar values because they do not have extra dollars to save; their money is spent on necessities, such as heat for their homes and food for their children. When their dollars buy less, it means turning off the furnace or going without higher priced food items, such as fruit and meats.
Money itself is neutral; money is merely a symbol of value. Once the gold standard was eliminated, money became a tool for trade. The actual dollar itself is worth only the few pennies it took to manufacture it. The dollar’s value comes from the words printed on it by the federal government: “This note is legal tender for all debts, public and private.” If our government did not exist, our paper money’s value would not exist either.
Many people have traditionally believed the ups and downs of our economy are natural and generally not harmful since everything tends to rise in proportion, including wages. In fact, wages have not risen at the same pace as prices over the last twenty years. The standard of living for the middle and lower classes have fallen in America rather than kept pace with rising prices. We also want more sooner, which is why some of the economy’s measurements are hard to compare to standards that existed fifty years ago. Our grandparents did not expect two cars in the garage; technology was much different fifty years ago, with no demand for computers, cell phones, and big screen televisions. Our grandparents were more likely to be savers (rather than consumers). Most children did not have to keep up with their classmate’s clothing standards in order to be accepted; there were no competitions for the newest technologies. In many ways, we have created our financial nightmare and it is we who must find the solutions if we wish to return to the financial comfort America once knew.
In the long run, it is reasonable to assume that rising prices largely wash out with rising wages, although some Americans will be more severely affected than others depending on the job industry that employs them. When the economy begins to also affect employers, however, it is very difficult to gauge the long-term effects. An unemployed person does not spend; if enough people do not spend, business and manufacturing is affected, causing additional loss of jobs and a downward spiral of the economy. At some point it will level off, with goods and services costing less than before and eventually (or so the theory goes) bringing back balance between money and pricing.
Most professionals feel achieving zero to low inflation generally requires the central bank, which controls the money supply, to refrain from expanding the money supply too rapidly. The Federal Reserve System could theoretically maintain zero inflation by appropriately controlling growth in the stock of American dollars. In recent years central banks elsewhere in the world (Australia, Canada, the euro zone, New Zealand, Sweden, and the United Kingdom) have announced a target range for their inflation rate, generally 1 to 3 percent. For the most part, they have been successful. Current times may stress their past success, however.
Consequences of Inflation
Inflation can be harmful; that comes as no surprise to any adult who has seen the changes brought by inflation. If the actual inflation rate is anticipated the economy generally has the ability to deal with it effectively (interest rates go up and down in relation to inflation, for example). The harm is greater if the actual inflation rate is not that which was anticipated because then corrective measures come after the event rather than before or simultaneously with it.
Although lenders and borrowers generally do not suffer from a higher inflation rate when the rate is well anticipated, holders of non-interest-bearing forms of money, such as currency, do (the dollars stuffed in the mattress go up and down with the inflation rate). Inflation has the same effect on currency as would higher taxation, since buying power is eroded with no interest earnings to offset the erosion. Inflation drives investors into sometimes costly strategies in an effort to avoid holding actual currency.
In addition to the tax-like effect on cash balances, at least one other harm stems from higher inflation even when perfectly anticipated. With higher inflation, published prices become obsolete more quickly, and so price setters must more frequently incur the costs of adjusting nominal prices in brochures, catalogs, restaurant menus, and so forth. Economists sometimes call these “menu costs” since they include reprinting restaurant menus as well as changing price tags on supermarket shelves, revising catalogs, replacing numbers on gas station price signs, and so on.
Low inflation is clearly preferable to high inflation, but ordinary citizens typically feel powerless to correct such issues. Additionally, what is the optimal inflation rate? Few of us would have any idea, although “zero” sounds pretty good to most of us. Economists often state around 3 percent as a desirable inflation rate.
While it is definitely necessary to save for our future, it is also necessary, from society’s point of view, to spend. President Obama was asked why the United States was proposing a stimulus package to encourage American spending while many economists were stressing America’s inclination to overspend, rather than save. Wasn’t that encouraging the very actions that got America into her crisis? While many feel the financial crisis emerged from the mortgage sector (giving loans to people who could not afford them and often could not repay the loans) our lack of saving is certainly an element of the financial crisis. Naturally occurring inflation seldom entered into the discussion as a reason for our recent financial depression.
Where the tax code is not fully indexed, higher inflation increases the distorting effects of taxes. Before the U.S. income tax brackets were indexed, inflation pushed income earners with unchanged real income into brackets where they faced higher marginal income tax rates. This discouraged people from making taxable income. With indexing of federal tax brackets in 1985, this distortion disappeared. However, the capital gains tax is still levied on nominal gains, not on real gains (inflation-adjusted gains). It is important to realize that an asset with interest earnings the same or below inflation rates has not grown; in fact it loses value once taxation is applied (one reason annuities and other tax-deferred vehicles are favored in high inflation periods). The asset’s gain is not adjusted for loss to inflation; it is taxed along with any real profit. The higher the inflation rate, the higher the effective tax rate on the real capital gains, even with an unchanged nominal capital gains tax rate. Higher inflation discourages capital formation by discouraging people from accumulating taxable assets that will be penalized by inflation.
Unanticipated Inflation
When inflation rates are incorrectly anticipated, financial trades are upset. If inflation is higher than expected, the borrower must repay loans in less valuable dollars, at the expense of the lender who gets less back in purchasing power. If the inflation rate turns out to be lower than anticipated, the lender gains at the expense of the borrower (assuming the borrower is able to make the greater real payment). For example, the federal government, because it is the U.S. economy’s biggest debtor, gains from unanticipated inflation and loses when inflation is less than anticipated. As a result, the federal government is biased toward higher inflation.
One of the reasons money becomes tighter when future inflation rates are uncertain has to do with whether the lender feels it will gain or lose in dollar-repayment values. Uncertain future inflation rates translate into uncertainty for new loans, since the lender cannot be sure repayment dollars will be less or more than current values. It also might mean risk-averse parties shy away from making debt contracts (deposits, loans, bonds). Because inflation becomes more variable as the average inflation rate rises, high-inflation economies have stunted banking and bond markets. The real returns from holding bonds and loans of long maturities on such things as thirty-year corporate bonds or thirty-year fixed-rate mortgages are especially sensitive to inflation variability. That is one reason mortgage loans with ten to fifteen year pay-off dates (maturities) have lower interest rates than thirty year contracts. It is easier for the lender to make inflation estimations on shorter term loans. When an economy moves to higher or more variable inflation risks some long-term contracts might be unobtainable for the majority of borrowers. Long-term investments are discouraged due to the greater risk in financing them.
High-inflation currencies can stunt stock markets, although the reason for this is not universally agreed on. One possible reason is that higher inflation is associated with less uniformity in price changes. This is sometimes referred to as inflation “noise.” It is the constant change in pricing without uniformity. In other words, some markets begin to experience constant price increases while others seem unaffected or moderately affected; prices may also be changing at different speeds with all going up but not uniformly. As a result, investors are not able to put as much credence in the earnings reports of companies listed on the stock exchange. High profits for a firm may only be temporary having more to do with luck than company stability or profits. In such an economy, established savers often shy away from stock markets, along with other higher risk vehicles. They may save less, or they may save in different ways, utilizing financial vehicles with greater guarantees. Again, annuities often benefit during such times as the savers divert their dollars to inflation hedges. In the past many of these investors also invested in real estate, gold and other precious metals.
Another possible reason why inflation reduces the value of corporate shares is that the corporate income tax system in many countries is not fully indexed. Firms face higher real tax burdens as inflation rises. Any additional taxation passed during difficult times is also likely to be levied against businesses since the federal government traditionally feels they are better able to absorb additional overhead than poor or middle-class America. What is often not realized is that the businesses often affected by higher taxes are the smaller companies employing fewer than 100 people (the “low income to middle class” of business entities).
The so-called “noise” generated by high inflation can also affect us in ways we do not realize. The constant changing of prices (or “noise”) brings about poor communication of actual facts. It might relate to misinformation (which distorts investment and employment decisions), lack of information, or distorted information. Additionally, in such times investors often do not trust the information they receive, even if it is currently accurate. Inflation takes even good information and changes the facts over a short period of time. For example, XYZ Company reports a good third quarter income. Even though the facts reported are accurate, investors know that the quarterly figures can be very different in the next reporting since high inflation often means consumers spend less. XYZ Company could experience reduced consumer spending in a very short period of time.
So, does inflation have any benefits? Some Keynesian macroeconomists once believed that higher inflation could “buy” a permanent reduction in our employment rate. Economists now agree that no such exploitable trade-off exists; it seemed to exist in the 1960s only when higher inflation was a surprise. A surprise rise in inflation can reduce layoffs (by making dollar sales unexpectedly high) and shorten job searches (by making dollar wage offers unexpectedly high), and lowering the unemployment rate below its natural level. When workers come to expect a high inflation rate, unemployment returns to its natural rate. Using the same logic, a surprise reduction in inflation can raise unemployment above its natural rate, creating additional problems.
Although everyone agrees that high inflation is not desired, opinions vary over whether an inflation rate of zero percent is better than an inflation rate of 3 percent. There are two main cases in favor of a positive inflation rate. Some argue that zero inflation would lead to inefficiency if wages and prices became stagnant. In their view, a little bit of inflation provides “grease” to the economic system. Others believe a positive inflation preserves the Federal government’s ability to cut rates if a looser monetary policy is needed.[1]
Do the Math for Retirement Requirements
Failure to account for inflation when calculating retirement needs is a huge mistake that is only realized when it is too late to correct the miscalculation. The real-world implications of inflation can be seen by the following: assume that you now require $75,000 a year to maintain your lifestyle and would like to maintain that standard of living in your retirement. A three percent inflation rate is used - the historic average (neither low nor high):
Adjusting the inflation rate upward just two points to five percent then changes the $122,167 required for 20 years of support (until age 85) up to $198,997. The math is even more staggering for an individual that is currently living on $100,000 per year and wishes to continue that lifestyle. At just a three percent inflation rate the retiree will need the following amounts to support the same expenses:
Obviously, everyone should adequately plan for their retirement and it seems ridiculous that this statement even needs to be said. The sad news, however, is that far too few people make any plans at all for retirement, apparently assuming that their lives will somehow be taken care of by the government, their children, or simply through good luck. Americans are an optimistic bunch of people!
Retirees will have Social Security and perhaps a pension to live on in retirement and help compensate for inflation but if the retiree has not also personally saved, it may not be adequate. Those that are living in retirement by withdrawing from principal as well as interest earnings will require far more money to support their lifestyle throughout retirement than those that have adequately planned. Inflation harms all investors, but especially those that are dependent upon their principal as well as their interest earnings.
Insufficient retirement planning is common in America. While some
planning is better than none at all, there are three mistakes commonly made:
Not guaranteeing one’s retirement income or effectively protecting retirement assets is a serious problem, but they are only problems if the investor actually has achieved some savings. Those who failed to save anything obviously have nothing to protect and poverty is already in their future.
Although many people may believe they have adequate resources for retirement, few actually do. That old toy or stamp collection is not likely to bring in the fortunes that were dreamed about.
A report from the Employee Benefit Research Institute (EBRI) found that 45 percent of all U.S. households have less than $25,000 in assets (excluding their home), yet two-thirds of all workers said they expect to live as comfortably in retirement as they did when they worked. The average person will spend that $25,000 in two or three years – even with their Social Security benefits. Let’s face it: $25,000 is not much money considering what it takes per year to live.
According to the EBRI report:
Both groups are wrong. Most financial experts agree that individuals will need between 70 to 80 percent of their employment income to live comfortably, not counting inflation. Therefore, if the individual currently earns $50,000 per year and expects to live in retirement for 15 years, depending on how assets are held and how inflation performs, well over $500,000 in interest producing retirement assets will be required. That figure could be much higher depending on health care requirements. Long-term care needs, such as care in a nursing home, are among the costliest retirement expenses. Few people currently plan for these additional costs during their working years and it is often just current costs (utilities, food, and so forth) that are used to determine retirement needs.
The biggest fear in retirement is having more life than money; living beyond the individual’s assets do. Planning for retirement means having enough money to cover living expenses for every day of life. The difficulty lies in knowing how long one will actually live. Therefore, it is always best to save more than necessary versus less than necessary.
According to the U.S. Census Bureau, in 1900 only 3.1 million people were aged 65 and older. Currently, those age 65 and older tops 52 million. By 2060 the United States will see that group reach 95 million people (those who are 65 years old or more). This will be an increase from 16 percent of the total population to 23 percent. Bear in mind, that is nearly a quarter of our total population in the United States. This will reshape how America views the older population and present challenges as well.
The average life expectancy figures in the U.S. are misleading, as many insurers selling long-term care insurance discovered over the past ten years. We became accustomed to making broad statements, such as people will live an average life span of 77 years, with that expanding to age 85 by the year 2065. However, what is not always stated is that those who reach age 65 may live well into their eighties and even nineties. Long-term care policies were typically sold with three-year benefits, in the belief that the “average” two-and-a-half-year stint in nursing homes would remain at that level. Today, however, it is common for people to live in nursing homes beyond five years. Policies sold with a lifetime benefit became very expensive for the issuing insurers. According to the U.S. Census’ latest report, as the baby-boom generation began turning 65 years old in 2011, the older-age population became one of the most expensive aspects of government funding through Social Security and Medicare. However, the poverty rate for 65+ people has greatly decreased to only 9 percent today, although many over age 65 citizens continue to work.
Today the United States has many people who are over age 80. Life expectancy figures are averaged for all deaths regardless of age, so they include mortality figures from infancy to elderly, making the average “life-age” appear deceivingly young. When young deaths are eliminated from the studies, the U.S. shows a much longer life expectancy for older Americans.
Past studies showed this, but for some reason, news articles continued to show all people rather than just those reaching age 65. For example: life expectancy for people who reached age 65 was actually 83 years old (not 77) in studies reaching back to 2001. According to the CDC, as of 2019, a 65-year-old woman lived an average of an additional 20.8 years, and 65-year-old men lived an average of an additional 18.2 years. Those reaching age 85 and older are projected to more than double from 6.6 million in 2019 to 14.4 million in 2040 (that is a 118% increase). Similar trends are being reported in all advanced countries, not just in the United States.
Women continue to live longer than men, but the difference is narrowing (called the gender gap). While that may be due to many factors, it is generally accepted that women have begun experiencing the same work-related stress factors as men and women now have the lifestyle habits that were previously attributed mostly to men (such as smoking).
If we view retirement based on the current statistics for longevity it means Americans need to plan for longer life spans than previously assumed, which means more assets are necessary than initially believed. Since people have a good chance of living to age 85 or longer, retirement funds must reflect this. Good health and good genes contribute to a long life so individuals may be able to judge some of this by their relatives but lifestyle also plays a huge role. Most people are born with a set of genes that would allow them to easily live to age 85 and to age 100 under the best conditions; it is lifestyle that reduces those odds. Those who take good care of themselves may add as many as 10 quality years, living to at least age 95. A major indicator is the activity level; those that are physically and mentally active will live longer than those who are inactive. Individuals who are overweight, smoke or fail to practice preventive medicine may subtract substantial years from their lives. New studies tell us that remaining active and socially involved is important to maintain not only physical health, but mental health as well.
For many retirees, retirement represents a step down in their quality of life, with less travel opportunities and vacations, less ability to buy luxury items, and sometimes even less ability to purchase necessary items, such as home repairs. Especially when health problems exist that require frequent out-of-pocket expenses or when necessary dental care takes up extra savings retirees find they no longer have extra funds for the pleasurable activities they once participated in.
Particularly threatening to the retiree’s savings will be long-term care requirements, such as a nursing home admission. Nearly two-thirds of U.S. households (64 percent) won’t be able to maintain their standard of living in retirement because of the cost of long-term care. Some of these individuals will have a nursing home policy that is inadequate, so while some benefits are perhaps better than none, it does not mean freedom from potential long-term care expenses, according to a study conducted by the Center for Retirement Research at Boston College.
It is common to hear retirees refer to their homes as their future retirement fund. However, even tapping into home equity does not necessarily help. Researchers found that 65 percent of households using a reverse mortgage to pay for long-term care costs were still not living as well in retirement as they did while employed.
Not everyone will require long-term care, of course. Even without these costs, most retirees retire to a lower standard of living. Research indicates that 44 percent of households without current long-term care requirements still have a lower standard of living in retirement. Few people entering retirement consider the costs that will remain or even rise with time, such as dental care, prescriptions, heating costs, gasoline, and other routine expenses that continue to go up over time. For many retirees, their rising costs of living are not offset by rising income.
Experts expect this situation to get worse, not better. Households unable to maintain their standard of living in retirement will increase dramatically as each subsequent generation retires, due to less savings and greater expectancy for help from the government. Research indicates that 52 percent of baby-boomers born between 1948 and 1954 are at risk of being financially unprepared for retirement. It will get worse: 64 percent of those born between 1955 and 1964, and 71 percent of those born between 1965 and 1974 are not prepared for retirement. Americans seem to be consistently saving less rather than more for retirement. We also seem to be spending more, maintaining debt into retirement, which increases the difficulty of meeting daily needs in retirement.
This is not something we have just discovered: a survey conducted in 2009 by the nonprofit Employee Benefit Research Institute found only 13 percent of adults said they were very confident that they would be able to afford a comfortable lifestyle during their retirement years.
So, given the results of this study, why haven’t Americans made some changes in how they plan for their retirement? There are many answers to that question, but one element stands out: younger people seem to have less disposable income than our grandparents even though households generally have two incomes versus one income in our grandparent’s era. Part of the reason is obvious: the level of spending is much grander among those between thirty and fifty than in the past. Younger Americans travel more, buy more electronics, cars, and luxury items than our grandparents did. In other words, fewer Americans understand the concept of saving versus spending. What today’s people view as ‘necessary’ is very different than the views our grandparents held.
In the past it was common to see workers expressing the desire to retire in their fifties or even forties. In today’s economic times workers find that more difficult to do. Our life spans are increasing dramatically requiring greater assets for retirement. We may still wish to retire earlier than our sixties but the likelihood of accomplishing that is becoming more difficult. Additionally, workers have jobs that enable many of them to continue working since their job is not physical. Even with health issues, many people can continue working and earning an income.
Our expectation of retirement was not always part of life. A hundred years ago, most people worked until the end of their lives. Until recently only 16 percent of men in the U.S. worked past their 65th birthday, but that seems to be changing, as people reassess their ability to retire or at least retire by age 66 (full retirement age currently).
What prompted our workers to begin retiring at age 65? While there are no firm studies to tell us, two theories seem probable:
Social Security began: the rules governing Social Security were written in the 1930s. Program guidelines favored retirement around the age of 65 at that time, with a higher rate of taxation on wages earned at older ages. Social Security payments can start as early as age 62, but full retirement age was originally 65.
Rising Income: the other theory says Americans began to retire rather than continuing to work because leisure activities became valued more than work. As Americans earned more money, often due to two working adults instead of one, workers could afford leisure activities. It was simply more enjoyable to do what was fun instead of continuing to work.
The point is not whether one is better than the other (leisure versus work), but rather a discussion of funding those leisure years in retirement. Few individuals save adequately for emergencies; they certainly don’t save adequately for retirement. While Americans earned more, they still failed to save adequately, perhaps because Social Security was created. While we now realize that it would be difficult to live solely on Social Security, we still do not save as we should for our retirement years.
The majority of Americans continue to start collecting Social Security at the age of 62, even though they receive a reduced benefit for doing so. This leaves many years of life to fund if they are no longer working, and it also reduces the amount of money received each month from the government.
As workers approach the age of 62, he or she must decide when to begin taking Social Security benefits. An individual can begin collecting benefits as early as age 62 or wait until full retirement age, which is currently age 66, depending on when the worker was born. He or she could also delay benefits until age 70 or later.
The earlier Social Security benefits are collected, the less received each month since the government will be funding the worker for more years. If the worker begins to collect benefits, but continues to work, benefits may be reduced even more.
Up to 85% of Social Security benefits are taxed.[2] If the worker is forced into retirement by his or her employer, Social Security benefits may be needed to cover living expenses. In such a case, there may be no choice as to when to begin collecting Social Security. If the worker does not immediately need the income from Social Security, then the choice is more complex.
Even gender and marital status makes a difference when deciding when to apply for Social Security benefits.
· Married couples in which the wife has low or no wages tend to do better to claim benefits for the wife as early as possible (waiting will not greatly increase her SS income) but delay benefits as long as possible for the working husband.
Early benefits from the wife allow the couple to collect for an extended period of time, while preserving the couple's maximum benefit for the wife. A wife who survives her husband is eligible for 100% of his benefit.
According to research done by the Center for Retirement Research at Boston College, the best formula for the average household was for the wife to claim at age 62 and her husband to claim at full retirement age or later, but no sooner than age 66, which is the current full retirement age.
Retirement Funding
Certainly no one expects to live in poverty once they retire; it just happens due to lack of planning. The ideal retirement occurs when the individual has:
It is surprising how many retiring individuals do not consider the higher costs of medical care in retirement. Out-of-pocket medical spending can ruin finances very quickly at any time, but especially in retirement since there won’t be any way to earn extra money. While most retirees realize that Medicare will not pay for all their doctor and hospitalization bills, too often the costs of long-term care are overlooked. While we most often associate long-term care with nursing home costs, this is not always the case. It could also be extended costs for care at home or in the community.
Many retirees are not prepared for the high cost of medical care in retirement after their company-sponsored plan is no longer available. As we know, Medicare covers many of the expenses connected to hospital and physician care, though not all costs. There are deductibles and co-payments if another supplemental insurance is not purchased. While this may seem obvious, those with few assets may have difficulty covering the co-payments and deductible amounts, as well as items not covered at all by Medicare, such as dental. This is especially difficult for retirees with little or no assets. The fewer assets available, the faster they will be used to cover medical care, leaving even less money available for basic needs.
Medical costs may be higher in retirement for several reasons:
The cost of medical care has outpaced inflation for the past 20 years. Industry experts expect these increases to continue. Some industry surveys predict that costs will rise as much as 15 percent each year, which affects everyone, but especially those on fixed incomes and those who need care more frequently. Increased medical costs are likely to double the cost of retiree health care in just five years.
Health care spending (as a share of after-tax income) will probably continue to rise dramatically as retirees’ age. Forecasting health care spending is not easy. It depends upon many factors, including new developments within the health care sector and even on our economy as a whole. As individuals age such things as dementia, drugs and other elements greatly affect older-age people.
The 2013 Economic Report of the President took an optimistic view of future national health care expenditures, based on the slowdown in the rate of medical growth seen at that time. However, as people age, their medical expenditures does not slow down; it escalates as new prescriptions are needed, extended care is required, or new diagnosis emerge.
As the baby-boom generation enters retirement with too few dollars saved, they are likely to be financially devastated by the health care costs they will eventually face as they age. Additionally, our medical knowledge continues to advance, providing additional types of care for many ailments of aging that were not previously available. If the retiree is requiring more health care services, obviously someone must pay for the care received. Healthcare costs are increasing because of:
We cannot blame the patients who seek out care, nor the professionals providing the care. We all expect the best medical care available whatever our age. The medical profession is continually advancing in their knowledge and treatments. Medical care developments promise remarkably long and healthy lives, but these advances can also be costly both in the research involved and the discoveries made. Often, they promote longer lives, but those additional years may be frail years, requiring nursing home care due not to disease or illness, but simply from becoming frail and helpless.
We know that getting older means increased health care costs; even such things as reading glasses, hearing aids and dental work increases with age. In these tough economic times it is difficult to fund the increasing costs of Medicare and Medicaid. Both the federal and various state governments are having difficulty funding all the programs desired by our citizens. We do not currently meet the medical needs of our poor and disadvantaged children, yet the nation’s elderly will receive the majority of our health care funding (and even they will not be fully cared for).
Social Security is already overtaxed by large numbers of people entering retirement and our increasing longevity. Policymakers are concerned it will be difficult funding the needs of the retiring baby-boom generation, possibly creating severe shortages in Medicare and Medicaid funding.
Medicare trustees predict program costs will grow rapidly over the next 75 years. From now until 2024, health spending is projected to grow at an average rate of 5.8 percent per year, which is 4.9 percent on a per capita basis. Health spending is projected to grow 1.1 percent faster than our Gross Domestic Product (GPD), reaching 19.6 percent by the year 2024. This is a staggering percentage of the nation's budget and is probably unsustainable, especially as our work force dwindles in comparison to the percentage of those in retirement.
We do not know how the United States government will fund these programs in the years to come, but it is very likely that all types of benefits will be lowered. The overall structure of medicine might even change dramatically in an attempt to solve the rising health care costs associated with growing older. There is likely to be a greater emphasis on less costly types of care.
It is not just our government that is wrestling with the growing costs of health care in the United States. Companies must also figure out how to fund private insurance for their workers and retirees. Many companies are simply discontinuing medical coverage for retired workers, stating the costs are overwhelming and detrimental to the survival of the business.
Such developments are making it more important than ever for employees to familiarize themselves with what their employers offer in retirement (if anything at all) and to evaluate how health care costs will impact their retirement. Many considering retirement do not realize the cost of health care beyond the experience they already have. There has not been much consideration for the types of care that will emerge. This is especially true of those planning to take an early retirement. Medical care will be expensive at any retirement age, but the costs can be far greater if retirement is taken prior to age 65 (when Medicare benefits becomes effective), especially if there will be no company-sponsored benefits for medical care in retirement from the employer.
Retirement medical costs are likely to increase simply due to aging. Many financial advisors stress the following issues to their retired clients:
There are other issues that are relevant to retiring and are often discussed by financial planners prior to retirement. These include, but may not be limited to:
Statistically, many people over the age of 60 will need some form of long-term care prior to their death. The majority of these will require such care in the final years of their life, but many people do enter a nursing home, recuperate, and return home.
For some years there was much controversy as to whether or not an individual needed to consider purchasing nursing home benefits. Agents were often criticized for selling “unnecessary” coverage to their clients at high premium rates. As people aged, however, and the LTC policies paid benefits, many of these attitudes changed. Those who advocated “saving cash to cover such expenses” have come to realize the error in this recommendation since few people will be able to save sufficiently for the high costs of nursing home care. There were even a few lawsuits filed over such faulty advice. This is not to say that every person needs to buy a long-term care policy, but such coverage should be understood and each individual situation considered. For those with assets, such a purchase is likely to make financial sense.
Many people automatically assume we are talking about care in a nursing home when we use the term “long-term care insurance.” Actually, long-term care can happen anywhere and does not necessarily occur in a nursing home, although that may be the most costly location. Long-term care is a category of healthcare provided for people who are physically or mentally unable to provide independent care for themselves. Such care might include:
Of course, not every retiree will end up needing long-term care services beyond what their family members are able and willing to supply. When creating a retirement plan, it is very important to understand what care the family may be able and willing to supply and whether or not such care would be realistic. Medical professionals often say that the retiree’s family may be willing to provide care, but do not truly understand the full implications of providing such care day-in-day-out, around the clock. Therefore, some questions must be considered, including:
1. Depending upon how they are arrived at, statistics vary, but most people consider the risk to be one-in-four that an individual aged 65 and over will need long-term care at some point. If the retiree has family members who needed such care, it can be important to consider family history. If high blood pressure runs in the family, for example, we always tell our doctor because we deem it important. It is just as important to the retiree’s probable future if their parents or grandparents both ended up needing long-term care.
2. If the retiree reaches age 85, he or she has a one in two chance of needing long-term care services. Is there a family history of longevity? The older one becomes the more likely the need for some type of care for an extended period of time.
3. Do some medical conditions run in the family, such as Alzheimer’s or even some types of arthritis? Maybe the retiree is already dealing with a physical condition that might warrant the purchase of a long-term care policy. Long-term care policies underwrite differently than other types of insurance, such as life insurance. The underwriters are less concerned with conditions that kill suddenly and more concerned with conditions that do not kill but continue for many years, such as some forms of severe arthritis that make taking care of oneself difficult. As with all types of insurance, the time to buy is before such medical conditions exist.
4. What is the retiree’s lifestyle? Does he or she stay active, maybe golf several times each week, or participate in physical activities such as aerobics, walking regularly, or other types of activities that help both physical and mental alertness?
People have always required increased care as they aged, but in the past it was handled by stay-at-home family members, so care was not so expensive. It is not actually the long-term care itself that is the problem. Rather it is the high costs of receiving long-term care that causes financial ruin. Long-term care services are not covered by Medicare, Medigap supplemental policies, or other private major medical insurance; only policies that are specifically written to pay for long-term care costs will cover the care. Many people will face a major health care crisis in retirement, yet few people plan financially for it. The money spent on long-term care could significantly reduce or even wipe out a retiree’s savings.
Few people have amassed sufficient financial reserves to cover a long-term care medical need. The government will not pay these costs until the retiree first spends down all their own assets (unless a Partnership asset-protecting policy has been purchased).
Selecting the Appropriate Insurance Policy
Long-term care insurance could be considered a type of disability coverage as well as medical coverage. These types of plans have been around far longer than most people realize, first being offered in the mid-1980s. Initially long-term care insurance was primarily inadequate, often not covering such important areas as custodial or personal care. Today’s policies are obviously much better as state and federal requirements were passed and industry competition required better coverage.
Those considering the purchase of a long-term care policy must take some prudent steps to insure the company will still be financially strong when benefits are requested. Many long-term care insurance buyers will not need to use their insurance until ten or twenty years after purchase. Only the highest rated companies should ever be considered. No agent should promote policies from companies that are anything less than top rated.
Partnership long-term care policies are recommended by many most insurance professionals, since they offer asset protection for the consumer. The Deficit Reduction Act of 2005 allowed all states to offer this type of product, if they passed the required legislation regarding Medicaid asset recovery requirements.
It is important that the long-term care coverage purchased, whether Partnership or traditional, be sufficient. While some coverage may be better than none at all, it is usually best to purchase adequate benefits. Not everything will be covered by even a good long-term care policy. Drugs, supplies and special services are not generally covered by long-term care insurance policies. Additionally, some plans are very specific in what they cover, such as care in the nursing home or care in one’s home. Partnership LTC plans all have inflation protection included (it is a requirement of the policy); traditional non-tax-qualified long-term care plans generally have it available as an option (at extra cost). Since inflation protection is very expensive, many chose not to purchase it, but it is a valuable element since these policies may not be used for many years.
Long-term care insurance is expensive. The younger one buys it, the less expensive it is so this is one case where it makes sense to purchase early. It is not unusual for policies to cost between $3,000 and $4,000 per year, but just a few months of receiving benefits often returns all the premiums paid, with every month of benefits thereafter representing preserved assets because they will not be depleted to pay for care costs.
Many types of retirement funding are held in financial markets that are subject to highs and lows. When planning for retirement it is important to have at least some retirement assets in guaranteed markets, such as annuities, to maintain protection from swings in financial markets. Such things as a sluggish economy, natural disasters, terrorist attacks, corporate scandals and other unforeseen events affect the stock market and the retiree’s ability to fund their retirement.
Those nearing retirement must plan for specific income every year he or she lives. That is not always easy, since we don’t know how long we will live, but it is possible to plan for continual income from assets that will continue to pay for as long as the plan beneficiary lives. Most assets do not guarantee a rate of return forever, as a company-sponsored retirement plan might, so it is necessary to have adequate assets to survive even in a down economy. There is one investment that can provide guaranteed lifetime income: the fixed rate annuity (once annuitized) and we will probably see them used more often if other types of investments show volatility.
Stock market declines significantly affect the retirement plans of individuals who do not have guaranteed retirement income. It is necessary to know how much money will be available each month in retirement. Since many individuals plan to live entirely from their interest earnings, the ups and downs of stocks can be difficult to deal with when there is no steady income from a job.
Hoarding money in accounts that offer no or very small interest earnings is not the answer either since the assets may be losing value by not keeping pace with inflation. Earning adequate interest may make the difference between preserving principal and being forced to spend it.
Planning for retirement is not easy. It is difficult to find the most appropriate way to allocate assets and still avoid undue investment risk.
When living in retirement on a fixed-income, accumulated debt nearly always means financial stress. Once retired, it is most unlikely that the retiree will have more money tomorrow than he or she has today. Therefore, he or she absolutely must live on a budget and never spend more than is coming in each month or year.
At one time debt was a young person’s issue but that is no longer true. Retirees have learned to use their credit cards and the stigma attached to debt is not present today. On average, the debt carried by U.S. households is equivalent to 100 percent of their personal disposable income. The trend has continued, with senior debt becoming a major problem as retirees are less prepared today than our grandparents were when they retired. Few retirees now retire without a mortgage; in fact, many carry both a mortgage and an equity loan on their home when they retire.
There are opposing views on carrying debt in retirement. The conventional wisdom has been to be debt free when retirement arrives. Successful retirement planning has always involved both sides of the household balance sheet: acquire sufficient savings and manage debt.
As we said, not everyone agrees with this age-old concept. A wealth manager at Morgan Stanley, Tom Anderson, authored a book titled The Value of Debt in Retirement. He feels today’s world needs a more sophisticated view of debt in retirement since our society is not the same today as it was fifty years ago. He argues that there are advantages to low-cost borrowing to boost liquidity and wealth.
Whether his view is right or wrong, there is no doubt that retirees’ today carry debt. The percentage of older Americans carrying debt has been running higher than historical levels since 2009. This has been primarily driven by higher mortgage debt but credit card debt is also higher than ever before.
Surprisingly, according to the federal Consumer Financial Protection Bureau, even student debt is on the rise among retirees. The U.S. Government Accountability Office (GAO) found that 706,000 households headed by someone 65 years old or older have outstanding student loans. While this is just 3 percent of all older households, student debt hit another all-time high in 2022, with borrowers collectively owing over $1.59 trillion in student loans.
Those entering retirement with debt, including mortgage debt, report increased stress and worry regarding their future ability to sustain comfortable retirement. Even so, Anderson says some debt should not cause worry. He breaks debt into three categories:
Oppressive debt, which is not desirable. Any debt with a 10 percent or higher interest charge is oppressive debt. This includes credit card debt, payday loans, and other non-productive debt. Anderson agrees that this type of debt must be eliminated as quickly as possible.
Working debt, which includes loans at low or subsidized rates. For example, a mortgage rate of three or four percent is tax deductible and the home is probably building equity.
Enriching debt, which is debt that has been chosen in order to have money in the bank or obtain some type of investment that will deliver more than it costs. This type of loan should ideally only be taken when it could be paid off at any time. It would be used to obtain something that will increase in value, such as rental property.
No individual should retire with high credit card debt. It would be better to delay retirement until all credit cards are paid off. Debt wastes money through interest and finance charges. The average family between the ages of 55 and 64 who carry credit card debt spend 31 percent of their income on servicing their debt. While that is certainly a senseless waste, it also means additional stress which can affect one’s health.
While debt is certainly a problem, it is made worse by the decline in savings. That may be a contributing factor to the increasing debt retirees acquire. Retirement income derived from assets has been steadily dropping over the last twenty years.
One reason for the increased debt of retirees is directly related to housing. Many people, including those entering retirement or already in retirement, acquired mortgage debt. It might have been an equity loan used for improvements or even travel or it might be a new loan to upgrade to a pricier home. In the past, retirees chose to decrease their housing costs by trading in their large home for a smaller, less costly home. Recently retirees seem to be upgrading rather than trading down on their homes. Because of the mortgage crisis, some of those newly acquired homes have larger mortgages than the home is worth (called an upside-down mortgage). However, as time goes by, this type of debt is likely to correct itself so if the retiree can afford the payments without affecting other aspects of their life, it may not be critical.
The worst debt is credit card debt or other types that produce nothing positive and can affect all aspects of the retiree’s life. Credit cards are often used to cover medical bills so now the retiree owes the cost of medical care placed on their credit card plus the added interest each month. This creates a downward spiral with no solution in sight.
A study on financial literacy found that approximately one-quarter of the survey respondents had unpaid medical bills. The study also found a surprising number of student loans, as previously mentioned. Many of these were taken to help their children and grandchildren get through college. It can be difficult to tell a child or grandchild ‘no’ when the request comes from someone they love trying to get through college, but it is a severe mistake to take on added debt at older ages.
Both medical costs and tuition costs have skyrocketed so many of those involved in producing this study were not surprised to see that retirees were affected as well as the young. So many aspects of debt that are not recognized by people as affecting retirement debt (and did not affect it in the past) is part of the problem today. Grandparents often want to help grandchildren or even their children and fail to realize that they must pay their household expenses for up to thirty years in retirement.
Debt Affects Insurance Rates
Why are we talking about retirement debt in an insurance course? Excessive debt affects insurance rates. It may make buying a long-term care policy impossible. If the retiree cannot pay off his credit card each month, how will he or she afford a new policy?
Some types of policies charge more if there is excessive debt. It is felt that excessive debt in relation to income (called debt-to-income ratio) presents an increased risk for the issuing insurer. Policies are issued and priced according to the insurer’s risk.
Debt is also a health issue. The amount of debt and especially large debts that are hard to visualize paying off (like a mortgage) directly contributes to symptoms of depression and chronic stress; both affect health. If there is already debt that cannot be adequately managed, increased health costs merely make it worse. Debt also reduces lifestyle options; it might not be possible to travel to another state to spend Christmas with family, or even afford cable television. When debt is higher than income, few luxuries will be affordable.
Many people who would like to retire continue working because they cannot afford the loss of continued income. Whether they continue working just a few years or many years is affected by the amount of debt they have.
A home mortgage does not necessarily cause concern in retirement if the retiree’s finances are solid in other areas. This means little or no credit card debt and low living expenses. A steady stream of income from pensions, personal savings, and Social Security will allow a comfortable lifestyle without stress if debt is low and day-to-day expenditures kept reasonable. The biggest mistake many new retirees make is over-spending in the early years of retirement, leaving little to live on in the latter years of their retirement. Their reasoning is understandable: “I want to travel now while I am healthy enough to do so.” “I want my grandchild to be able to attend college.” “I have enough money; spending this today won’t affect tomorrow very much.”
Whatever the reasoning, retirement money must last a very long time and expenses are sure to rise as the years go by. Prescriptions will get more plentiful (and expensive), taxes will rise, and heating costs will go up. Teeth will need care, and medical expenses in general will increase. It will take more to live on as the years go by, not less.
Saving for the Future
Of course, every American should be saving for their future, whether that happens to be a cushion against unemployment, a home purchase, or retirement. Some people save but do not do so wisely or with dedication. Perhaps it is a “put-and-take” account, where money is deposited one month and withdrawn the next for something that is needed or simply desired. Perhaps they save, but then invest in a get-rich-quick scheme. We all know the old saying: if it sounds too good to be true, it probably is. Acquiring a sufficient financial cushion against hard times is not a “get-rich-quick” process; earning wealth (and keeping it) takes knowledge and hard work. The lazy man is unlikely to acquire or keep wealth. Even if an inheritance comes his way he will spend it or lose it quickly because he does not do what is necessary to make the dollars work for him.
The term “wealth” is vague. What one person considers wealth another may not. Wealth deals with monetary quantity and some people require more dollars than others do. The poor man is likely to view wealth differently than the rich man. A hungry man may be satisfied with enough to eat and a warm place to sleep while the rich man may not be satisfied at any point if earning wealth has overtaken his perspective on life.
There was a time when the retired population held much of the country’s assets but that is changing. Citizens are more likely today to keep their homes mortgaged whereas the goal in the past was paying off the home prior to retirement. Along with the rest of America, today’s current retirees are more likely to spend than to save. Along with the rest of America, today’s current retirees are more likely to be in debt, and struggle to make their monthly obligations.
While decreased retirement savings are an issue, it is not just the rate of saving versus spending that has made the difference. Income growth has certainly slowed and the average rate of interest is much lower today. Throw in the stock market declines and even those individuals who thought they had adequate retirement savings may no longer be in a secure financial position.
Retirement-age people have always remained in the workforce. Some enjoy working and do not want to retire; others must keep working because their retirement income is not sufficient to support them. Unfortunately, most people do not begin planning for retirement soon enough so the amount of money set aside is inadequate. According to Money Magazine the average person does not begin saving for retirement until the age of 40. While twenty or twenty-five years, depending on retirement age, may seem like enough time to save for retirement, it seldom is. Few people put enough away to adequately supplement whatever benefits may be received from Social Security. It is easy to see why: if a couple is currently living on $80,000 per year and will live in retirement for twenty to thirty years, depending upon retirement age and their expected year of death, at minimum the couple will need to have saved between $1,600,000 and $2,400,000 for twenty to thirty retirement years ($80,000 multiplied by either 20 or 30 years). This does not take into consideration inflation or additional medical costs that commonly occur during retirement, such as long-term nursing home care.
While a small amount saved routinely from the age of twenty is desirable the failure to do this is easy to understand. Following school, a college graduate is faced with thousands of dollars in college debt. Even if there is no college debt, the first working years will not be high-earning years. The new worker must establish themselves financially, which might mean having car payments, high mortgages, and child-rearing expenses. Saving even $20 per paycheck for future needs (including unemployment or a disabling injury) may not seem possible to the individual at the time. However, that small sacrifice is the easiest way to have a comfortable retirement without doing anything more than develop a systematic savings routine.
The lack of retirement planning seems to be universal among all income groups, but especially new workers may believe it is impossible to do. That doesn’t mean new workers should not still save; there will be other reasons to save besides retirement. Every person should put aside cash for emergencies, unemployment periods, or even a sudden and unexpected disability.
Those with higher incomes save no better than those with less monthly income. Insurance agents, like other business owners, may spend countless hours managing their business but spend virtually no time planning for a financially secure retirement. In fact, few people even have a written family budget, preferring to guess where their money goes. Few people could accurately say what they spend on dining out each month, the amount spent on clothing, or what they buy on impulse and unnecessary purchases. Often, they do not even know how much their utility costs are each month.
One of the most important things a person can do financially is to sit down and study where they are spending their money. No written budget almost always equates into no savings account. It is difficult to save when the individual has no idea where he or she is spending.
A major reason people resist having a written family budget is resistance to responsible spending. Let’s face it: it is more fun to spend than save. It is easy to pull out the credit card and buy a new big screen television; there is much less satisfaction putting the same amount of money into a money market fund or annuity. The television is something that can be casually shown off to friends; few of us would whip out our portfolio to show our friends.
Some families do understand the need to minimize their spending because they have already experienced job downsizing. Unfortunately, unless that awareness came prior to job loss it may now be impossible to adequately prepare.
Those who are facing less income due to job loss, a new lower-paying job, or an increase in a particular expense (such as medical costs) must make difficult decisions relating to the family’s finances. This might mean giving up entertainment and eating out; it might even mean giving up a car and using public transportation. Even those who are currently not experiencing any financial fallout from the current economy must plan as though they could be affected at any time – because no one can be sure what tomorrow will bring.
It would be hard to find someone who is not aware of the current problems we are experiencing. Every day there are more reports of layoffs, cutbacks, and economic stress. There are fewer jobs, but more people searching for work, including those who have already retired and new college graduates. When we see reports of 600 people applying for a single low-paying position there is no doubt that it is tough to just pay the bills.
The economy fluctuates; this is an established truth. Knowing this doesn’t really make anyone feel any better if they are unemployed. Mid-20th century economist Joseph Schumpeter and others have suggested these fluctuations move in cycles, with periods of rapid economic growth and then periods of decline. Some professionals believe recessions are necessary since they bring us back to financial reality (let’s hope that is true for our government spenders as well), and pave the way for the next expansion. As painful as it is, a recession is a natural part of the economic cycle, especially when some values become excessively high, such as real estate. Eventually it turns around but in the meantime, we must do what is necessary to financially survive. Part of that survival is reining in expenditures and giving up what is not necessary.
Ralph Waldo Emerson once wrote, “Do not go where the path may lead, go instead where there is no path and leave a trail.” Many who have recently experienced a job loss, the disappearance of retirement funds, or other economic results of today’s economy may need to blaze that new path, leaving their own trail. Agents may need to seek new types of insurance business or seek out education in new fields to survive this economic climate. While others are intently focusing on economic despair and ruin, those who continue to make the best of what is available will see this time through. The same is true for our clients; there will be those who buy or invest nothing out of fear and those who look for the opportunities that are still available. The optimistic agent will find the optimistic clients, and both shall survive to the recovery that will eventually come.
An Aging Nation
The United States is becoming a graying nation – there are more older people than ever before. Certainly, we are living longer and that is part of the reason for our graying nation. We are also having fewer children as parents try to figure out how they will be able to support their children and maybe plan for college as well. While it may not seem that fewer children should affect us financially it eventually does. Each person receiving Social Security is not drawing on what they personally contributed; they are being supported by the working population. As we have continually fewer workers it becomes necessary for those that are working to contribute continually more dollars to support those who are retired. If the taxes workers’ pay increase, their ability to save for their own retirement becomes less likely.
It is when our children appear to be financially stable that we are most likely to begin saving for our retirement. Today’s children are finding it harder to become financially stable and are likely to rely on their parents far longer than they used to. Of course, some of the difficulty they are experiencing has to do with buying more than they should. Our parents tried to pay cash for the things they bought; it they didn’t have the cash they waited until they did. Today we are encouraged to acquire credit card debt; even the government wants us to spend to bolster the economy (ignoring the fact that debt is a severe problem in the United States). No one emphasizes saving money it seems. No one advocates waiting until a desired item is affordable.
There are some unfortunate statistics on money and retirement. According to the Social Security Administration, Social Security benefits account for 90 percent of income for four out of every 10 unmarried retirees and two out of every 10 married couples. The average monthly income from Social Security in 2022 was around $1,632[3]. When Medicare’s Part B payment is deducted it is even less. If Social Security monthly income is not supplemented by personal savings or a company pension, it means the recipient must live on just under $20k per year. Due to the prosperity, we have seen over the last fifty years, the average person expects to receive more from our society and the government, even though current times are clearly demonstrating financial difficulty. Our citizens believe they deserve more from their employer, the government, charitable organizations, or anyone who seems to have more than they do. Many Americans have lost the desire or focus to survive financially from their own efforts. Saving for the future is no longer an American priority even for those who should know better.
The solution is not likely to be government intervention; it is likely to be a realization that we must prepare for our own futures. Countless financial experts have told us for years that we need to save for our retirement; our failure is not due to lack of knowledge. We have been told that we need to start early and have the discipline to leave the money alone. We know what we need to do, so why doesn’t the majority of people actually save? The simple answer is because it is hard to do and most people don’t want to do anything that is difficult. Even so, if one begins early it really isn’t all that hard to do. A 25 year old that sets aside $335 per month, without using it for anything else, will have more than a million dollars 40 years later at age 65. Yes, it will be difficult to do during the first ten years, but it does get easier as time goes by. The longer one waits the more difficult it becomes. If an individual does not begin saving until age 35 that same $335 per month produces only $500,000 or half what would have accumulated by starting at age 25.
How do we fail so miserably to set aside funds for retirement? There are many ways to fail. The major reason we fail to save is simple: we spend too much. Americans buy more than any other nation and we buy things we don’t need and can’t afford. Much of our income goes towards credit card interest – money we are giving away to the credit card companies.
Anyone who has a job must plan for their future. America cannot count on others or the government to care for them during retirement. In fact, we may find the government having difficulty meeting Social Security and Medicare/Medicaid expenditures. We may find our children and grandchildren tied down by such massive government debt that they are unable to spare the cash to take care of Grandma and Grandpa. America is changing from the world’s creditor to just another world debtor. In fact, America is now burdened by debt that is increasing dramatically in its attempt to bail out companies and industries that did a poor job of monitoring their business practices.
Since the early 1980s America has been spending without any thought to the future. Our spending has been largely subsidized by foreigners who have been financing more than half the Federal budget deficit. Foreign investors are also purchasing real estate and corporate stock, often at bargain prices since cities want their business.
Americans spend more than they earn, consume more than they produce, and go deeper in debt each year. As a result, our standard of living has not risen since the early 1970’s. Between 1947 and 1973 average family incomes rose 111% but since then income has risen only 5 percent. Many economists believe it would not even have risen that much if wives had not entered the workforce. Only 20% of the nation’s households, those with incomes above $80,000, have gained ground on inflation since the early 1970s.
Our national debt has more than quadrupled since 1981 due to poor government management and simple greed. With the exception of the great depression, every generation that came of age in any decade in the nation’s history improved over their parent’s generation until the 1980s. Now each new generation faces the prospect of having a lower standard of living. Newsweek columnist Robert Samuelson observed: “prosperity is what binds us together; if we don’t all believe in a better tomorrow, America will become a progressively less civil, less cohesive and more contentious society.”
Individuals are not in a position to rein in government spending but we are in a position to secure our personal futures by refraining from buying every new gadget on the market and putting away some dollars for our future. We must do so if we are to have any shine in those golden years.
Employing the Right People
There was a time when most people did their own goal setting and saved in whatever method they felt appropriate. As financial options became better known specializations emerged. Professionals emerged in nearly every financial field, including insurance.
There are now many insurance designations that emphasis the specialized education they have achieved. Many of these professionals do not work on commission; they charge an hourly wage. These planners offer financial advice, but do not sell financial products. Their clients are paying for planner’s time and the specialized knowledge they have acquired.
Some financial planners work only on commissions; it is important that the financial planner make the distinction clear to his or her clients prior to performing any work. There is certainly nothing wrong with earning a commission since everyone, including agents, deserves to make a living, but clients should clearly understand the difference early in the relationship.
Whether the financial planner works on an hourly basis or a commission basis, the first step is to assess how the client spends and currently saves. It is not unusual for the client to come to the planner expecting miracles. There are no miracles when it comes to saving for a future goal, whether that goal is retirement, buying a house, or saving for a child’s college education. If it were easy to save money everyone would be well financed in retirement and all children would attend college. Saving money is difficult!
Most people handle their money without recognition of where it is spent, what is obtained in return, and with no regard for future financial requirements. In other words, they spend in the immediate moment and worry about saving later (usually too late).
It can be difficult to change a client’s financial habits. The man that buys everything he momentarily wants, everything his friends have, or every new gadget that comes on the market will probably resist changing his habits. Let’s face it: spending is more fun than saving. For some, financial security will simply not be possible because they do not have the discipline required to achieve it. Their self-destructive spending habits will follow them into retirement and ultimately to the grave – literally. Study after study has shown that those who did not financially prepare for retirement are more likely to experience health problems and often die earlier than those that did financially prepare. While there are few statistics as to why non-savers die earlier, many believe their ability to care for themselves is limited because they lack financial resources in retirement. For example, they may not receive proper dental care, nutrition, or medical care, all of which would contribute to an earlier death.
Spenders seldom take the financial planner’s advice even though they may have paid an hourly rate to receive it. Since the advice does not fit their spending lifestyles, they choose to ignore it, rationalizing why they are doing so:
“He just didn’t seem to really know me and my needs.”
“She expected me to give up the things I enjoy; I am not going to go without just to save a few dollars.”
“I don’t think he really knew his job. Bob saves on his own and I can do that, too.”
“Uncle Charlie has given me better advice and I don’t have to do without.”
The financial planners that work on an hourly or fee basis are often called Investment Advisors because they “advise” rather than sell. Some will charge by the hour; others have a set fee that is charged whether it takes an hour or a week to fully assess the client’s current financial situation, determine their goals, and create a financial plan.
It is not unusual for an advisor to be given complete authority to make buying and selling decisions for their wealthier clients, without prior consultation. On the other hand, many clients would never give such broad rights over their finances to another person; these clients what to be fully appraised before financial decisions are made on their behalf.
When an advisor has authority to financially act on behalf of another there is often a discretionary account created specifically for this purpose. The investor puts the amount of money they are willing to allow the advisor to work with into this account. Typically, advisors state minimum amounts that must be put into the discretionary account; it is not worth their time to work with smaller amounts of money. The advisor will buy and sell securities, stocks or other financials on their client’s behalf without authorization or further consultation.
Compounding Power
It is the interest earnings that make early planning favorable. It is not a new concept: an individual who saves a little each month during all their working years (age 25 to 65) will be better off financially than those who try to save a lot in the last twenty years (age 45 to 65) prior to retirement. The additional twenty years of savings will mean twenty more years of interest earnings and compounding power. Interest or dividend earnings, kept at work (not withdrawn) earn additional interest or dividends. It becomes interest earning interest. Compounding power will partially offset inflation. Inflation removes value while interest earnings add value.
Retirement Income
According to the Social Security Bureau, income for those 65 and over comes from:
· Social Security income: 34%
· Earned income: 29%
· Assets/Accumulated capital: 15%
· Public pensions: 7%
· Private pensions: 5%
· Public assistance: 4%
· Veteran’s benefits: 3%
· All other sources: 2%
· Help from other people: 1%
Note that the second listing, earned income, means income from wages, so these retirees are still working. Certainly a portion may be working because they want to, but that may not necessarily be true for many of our working elderly. Many people would prefer to be traveling or golfing during their retirement but they do not have sufficient income, so instead they are saying: “Welcome to Wal-Mart.”
Accumulated assets accounts for a low 15 percent - the only income that we actually have control over. Arguably it should be the highest category listed since it directly relates to what we have saved for retirement.
Americans have no problem spending money. Most of us expect to live by the same standards in retirement as we did when we worked. In fact, Americans are fantastic optimists. Even though the majority of Americans save far too little for retirement we cling to the optimistic belief that between Social Security, the company pension if we are lucky enough to have one, and some other mystical income source we will be fine. The question should be what will our sources of income be during retirement? The following are the most common sources of retirement income:
· Social Security Benefits
· Employer Pension Benefits
· Tax Deferred Retirement Benefits, such as IRA's and 401(k)'s
· Individual Savings
Social Security Benefits
During one’s working years each paycheck has FICA (Social Security) taxes withheld. It is a contribution to the fund that pays retirement, disability, survivor, and death benefits to individuals currently entitled to receive these benefits. The money withheld from a specific worker’s paychecks does not go to an account in his or her own name. Current workers are paying Social Security benefits to those who are now retired or otherwise qualified to receive Social Security benefits. Each generation of workers pays for those in retirement or receiving Social Security benefits due to a disability.
No matter when the worker begins collecting his or her Social Security benefits, the system is designed to break even at around age 81. Therefore, whether reduced income begins at age 62, full benefits at ages 65-67, or delayed benefits at age 70, the value of the three options is designed to come out approximately the same by age 81. If an individual delays benefits and dies early less will have been received, but if the recipient lives past age 81, he or she comes out ahead.
Many high-earning workers may do well to delay receiving benefits as long as possible, but lower paid workers may do best collecting at age 62, even though the monthly amount will be less than if they waited to full retirement age. Workers who earn more than $100,000 will see increased benefits as the maximum benefit rises, which may be a reason to delay benefits.
A person who continues to work past age 62, earning higher wages than previous years, may drop off lower-earning years. Social Security payments are based on the 35 highest-earning years in one’s career. For every additional year worked, the worker may drop off one of the lower-earning years.
The age at which Social Security benefits are collected is a personal decision and should be based on individual situations. Life expectancy should certainly be a consideration since nearly one-third of all women and one fifth of all men who live to age 60 will live into their nineties.[4]
We all know we need more than Social Security to live comfortably in retirement. Social Security income is intended to supplement what we have done for ourselves. When Social Security was created no one realized citizens would end up living into their nineties or even to age 100. Since we are living much longer there is concern for Social Security funding. That has resulted in changing full retirement age for some individuals to age 66 or 67.
Even with Social Security income, many elderly people live in extreme poverty. Too many retirees are relying solely on Social Security since they did not save appropriately to supplement what they receive from the government. AARP reports that more than one-third of retirees depend on Social Security for 90% of their income. These figures leave little doubt that far too few workers are adequately planning for their retirements.
Women Live Poorly in Retirement
Any retiree could end up with too little to live on, but single, divorced, and widowed women seem especially vulnerable to this situation. Women comprise 73.4 percent of seniors who are considered poor. One out of four older women receives 90% of their income from Social Security and many of these women live in or near poverty.
No one should be surprised at these figures. Women were the primary caregivers not only for their children, but for their elderly parents as well. Women were more likely to leave the work force before establishing a pension, or work at multiple jobs that did not offer pensions. Combine less time in the work force with less earnings and the result is retirement poverty. A recent survey commissioned by MetLife's Mature Market Institute found that lost employment for caregiving translates into an average decrease in Social Security benefits of $2,160 per year, or $180 less per month.
Since Social Security benefits are based on earning history, many women have not accrued enough benefits over their lifetime to earn a sustainable income from Social Security. If they did not hold jobs that provided private pension programs then Social Security benefits are their only income, unless they were wise enough to prepare for retirement through personal savings. By the mid 1990's only 18% of women over age 65 were receiving private pensions. As fewer companies offer pensions, men are now finding themselves increasingly in the same position women have been in for years – without access to a company-sponsored pension.
Lifestyles were different when Social Security was designed in the 1930s. Husbands were the primary wage earners; most wives stayed home to take care of the home and children. Many things have changes since then, including the rising divorce rate (nearly half of all marriages end in divorce). According to the Social Security Administration, divorced, widowed, and never-married women depend heavily on Social Security for income in retirement. Social Security accounts for half or more of the income of nearly three-fourths of these non-married female recipients of Social Security. For one in four, it is the only source of income.
Social Security Benefits can be a significant source of income during retirement, depending on one’s retirement needs. The benefit received will directly reflect the amount paid into the system by the worker prior to retirement. Single low income workers (earning $30,000 or less) can expect Social Security benefits to provide 42% of retirement needs. A married low-income worker with a same age non-working spouse can expect Social Security to provide 63% of retirement needs. In contrast, a single higher income worker ($100,000 or more) can expect Social Security to provide just 13.5% of retirement needs. A married higher income worker with a same age non-working spouse can expect Social Security benefits to provide 20% of retirement income needs. The reason for this disparity is that there is a limit at which workers do not continue to pay Social Security taxes and the calculation of the retirement benefit is based on a decreasing percentage as the AIME (Average Indexed Monthly Earnings) increases.
Primary Insurance Amount (PIA)
The basic Social Security benefit is called the primary insurance amount (PIA). Typically, the PIA is a function of average indexed monthly earnings (AIME). The PIA is determined by applying the PIA formula to AIME. The formula used depends on the year of first eligibility (age 62 in the case of retirement; disability would be any applicable age).
PIA Definition
The "primary insurance amount" (PIA) is the benefit (before rounding
down to next lower whole dollar) a person would receive if he or she elects to
begin receiving retirement benefits at their normal retirement age. At this
age, the benefit is neither reduced for early retirement nor increased for
delayed retirement.
PIA formula bend points
The PIA is the sum of three separate percentages of portions of average indexed monthly earnings. The portions depend on the year in which a worker attains age 62, becomes disabled before age 62, or dies before attaining age 62.
For 2023 these portions are the first $1,115, the amount between $1,115 and $6,721, and the amount over $6,721. These dollar amounts are the "bend points" of the 2023 PIA formula. A table shows bend points, for years beginning with 1979, for both the PIA and maximum family benefit formulas.
PIA formula
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2023, or who dies in 2023 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $1,115 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $1,115 and through $6,721, plus
(c) 15 percent of his/her average indexed monthly earnings over $6,721.
We round this amount to the next lower multiple of $0.10 if it is not already a multiple of that.
|
Determination of the PIA bend points for 2023 |
||||||||||||||
|
Amounts in |
|
|
||||||||||||
|
Computation of bend points for 2023 |
First bend point: |
Second bend point: |
||||||||||||
Benefit Based on PIA and Age
The amount of retirement benefits paid depends on a person's age when he or she begins receiving benefits. Social Security reduces benefits taken prior to the normal or full retirement age and increases benefits taken after normal or full retirement age.
Average Indexed Monthly Earnings
To compute an insured worker's benefit, first adjust or index his or her earnings to reflect the change in general wage levels that occurred during the worker's years of employment. Such indexation ensures that the worker's future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.
Up to 35 years of earnings are needed to compute the average indexed monthly earnings. After determining the number of earning years, Social Security chooses those years with the highest indexed earnings, adds up the indexed earnings, and divides the total amount by the total number of months in those years. This figure is then rounded to the resulting average amount (down to the next lower dollar amount). The result is the average indexed monthly earnings.
An insured worker becomes eligible for retirement benefits when he or she reaches age 62. If 2023 were the year of eligibility, for example, divide the national average wage index for 2021 by the national average wage index for each year prior to that in which the worker had earnings and multiply each such ratio by the worker's earnings. This would give the indexed earnings for each year prior to 2021. Any earnings would be considered for 2021 or after at face value, without indexing. Next the average indexed monthly earnings are computed using the average amount in computing the worker's primary insurance amount for 2021.
As we know, Social Security is the largest retirement program in the United States. Unfortunately, most people have no idea how to calculate what they should receive each month, so they do not know if they are getting the amount of retirement that they should.
PIA or the primary insurance amount, is the number that, along with age at the time of application, determines the initial Social Security benefit. As we said, the formula uses the 35 highest years of earning to determine AIME.
While there are formulas applied to AIME, few people wish to deal with them, unless it is part of their job description. Most people want something easier to understand. One thing we do understand is that delaying retirement, and retirement benefits, typically means more income is receive once retirement does occur. Following is a graph showing this.
Effect of Early or Delayed
Retirement on Retirement Benefits
|
|
Benefit, as a percentage of Primary Insurance Amount (PIA), payable at ages 62-67 and age 70 |
|||||||||
|
Year |
Normal |
Credit for each year of delayed retirement after NRA (percent) |
Benefit, as a percentage of PIA, beginning at age-- |
||||||
|
62 |
63 |
64 |
65 |
66 |
67 |
70 |
|||
|
1924 |
65 |
3 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
103 |
106 |
115 |
|
1925-26 |
65 |
3 1⁄2 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
103 1⁄2 |
107 |
117 1⁄2 |
|
1927-28 |
65 |
4 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
104 |
108 |
120 |
|
1929-30 |
65 |
4 1⁄2 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
104 1⁄2 |
109 |
122 1⁄2 |
|
1931-32 |
65 |
5 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
105 |
110 |
125 |
|
1933-34 |
65 |
5 1⁄2 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
105 1⁄2 |
111 |
127 1⁄2 |
|
1935-36 |
65 |
6 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
106 |
112 |
130 |
|
1937 |
65 |
6 1⁄2 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
106 1⁄2 |
113 |
132 1⁄2 |
|
1938 |
65, 2 mo. |
6 1⁄2 |
79 1⁄6 |
85 5⁄9 |
92 2⁄9 |
98 8⁄9 |
105 5⁄12 |
111 11⁄12 |
131 5⁄12 |
|
1939 |
65, 4 mo. |
7 |
78 1⁄3 |
84 4⁄9 |
91 1⁄9 |
97 7⁄9 |
104 2⁄3 |
111 2⁄3 |
132 2⁄3 |
|
1940 |
65, 6 mo. |
7 |
77 1⁄2 |
83 1⁄3 |
90 |
96 2⁄3 |
103 1⁄2 |
110 1⁄2 |
131 1⁄2 |
|
1941 |
65, 8 mo. |
7 1⁄2 |
76 2⁄3 |
82 2⁄9 |
88 8⁄9 |
95 5⁄9 |
102 1⁄2 |
110 |
132 1⁄2 |
|
1942 |
65, 10 mo. |
7 1⁄2 |
75 5⁄6 |
81 1⁄9 |
87 7⁄9 |
94 4⁄9 |
101 1⁄4 |
108 3⁄4 |
131 1⁄4 |
|
1943-54 |
66 |
8 |
75 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
108 |
132 |
|
1955 |
66, 2 mo. |
8 |
74 1⁄6 |
79 1⁄6 |
85 5⁄9 |
92 2⁄9 |
98 8⁄9 |
106 2⁄3 |
130 2⁄3 |
|
1956 |
66, 4 mo. |
8 |
73 1⁄3 |
78 1⁄3 |
84 4⁄9 |
91 1⁄9 |
97 7⁄9 |
105 1⁄3 |
129 1⁄3 |
|
1957 |
66, 6 mo. |
8 |
72 1⁄2 |
77 1⁄2 |
83 1⁄3 |
90 |
96 2⁄3 |
104 |
128 |
|
1958 |
66, 8 mo. |
8 |
71 2⁄3 |
76 2⁄3 |
82 2⁄9 |
88 8⁄9 |
95 5⁄9 |
102 2⁄3 |
126 2⁄3 |
|
1959 |
66, 10 mo. |
8 |
70 5⁄6 |
75 5⁄6 |
81 1⁄9 |
87 7⁄9 |
94 4⁄9 |
101 1⁄3 |
125 1⁄3 |
|
1960 & later |
67 |
8 |
70 |
75 |
80 |
86 2⁄3 |
93 1⁄3 |
100 |
124 |
|
Note: Persons born on January 1 of any year should refer to the previous year of birth. |
|||||||||
Summary
Social Security benefits are typically computed using "average indexed monthly earnings." This average summarizes up to 35 years of the worker's earnings. Social Security applies a formula to this average to compute the primary insurance amount (PIA). The PIA is the basis for the benefits that are paid by Social Security to the individual.
The formula used to compute the Primary Insurance Amount, called the PIA formula, reflects changes in general wage levels, as measured by the national average wage index.
Monthly Benefit Amounts
Monthly retirement benefits derived from the PIA may be higher or lower than the PIA. Social Security pays reduced benefits to an individual who retires before his or her normal retirement age. A person cannot collect retirement benefits prior to age 62 unless payments are due to a qualified disability. In the case of a person retiring at exactly age 62 in 2022, for example, the benefit would be 30 percent less than the person's PIA since he or she retired before their full retirement age. [5]
Benefits can be higher than the PIA if the worker retires after his or her normal or full retirement age. The credit given for delayed retirement will gradually reach 8 percent per year for those born after 1942.
In addition to retirement benefits, Social Security pays several other types of benefits. For example, Social Security pays benefits to disabled workers who meet medical and insured requirements. Benefits paid to disabled workers and their families may be reduced for receipt of certain public disability benefits (such as Workers' Compensation). In such cases, disability benefits are re-determined triennially.
Benefits to family members may be limited by a family maximum.
Old Computing Methods
Two other methods for computing retirement benefits were common in the past, but today have very limited applicability.
The Average Indexed Monthly Earnings (AIME) is used in the United States’ Social Security system to calculate the primary insurance amount, which decides the value of benefits paid under Title II of the Social Security Act under the 1978 New Start Method. Specifically, Average Indexed Monthly Earnings is an average of monthly income received by a beneficiary during his or her work life, adjusted for inflation.
Each calendar year, each covered worker’s wages up to the Social Security Wage Base (SSWB) is recorded by the Social Security Administration in Baltimore, Maryland. If a worker has 35 or fewer years of earnings, then the Average Indexed Monthly Earnings is the numerical average of those 35 years of covered wages; with zeros thrown into the average for the number of years less than 35.
For workers with more than 35 years of covered wages, the Average Indexed Monthly Earnings will only take the average of the 35 highest years of indexed covered wages. This figure is then divided by 12 to get a monthly rate. Thus, the self-describing name "Average Indexed Monthly Earnings".
Indexing Yearly Income
Earnings in all years prior to two years before the current year are indexed for inflation. This is done by multiplying the amount credited to the Social Security earnings record in any given year by an indexing factor. The indexing factor is the ratio of the Wage Index two years before the current year to the Wage Index during the earnings year.
Computation
The following steps are used to determine the Average Indexed Monthly Earnings:
Essentially, the more an individual earns the more he or she needs to provide for his or her own retirement needs. Individuals can determine their expected Social Security benefits by accessing the Social Security Administration website at http://www.ssa.gov/ and submitting a request for Form SSA-7004. Once this form is submitted, the individual will receive a detailed statement listing all of their earnings and expected benefits.[6]
Employer Pension Benefits
There was a time when the average worker expected their employer to provide for them in retirement. Besides a guaranteed monthly income, medical benefits might also be expected. Today this is much less likely to be true. Medical benefits in retirement became so costly that companies have mostly discontinued them. Employer pension benefits have also changed putting much of the responsibility for retirement income on the employee rather than the employer.
Some employers may have established a retirement plan that will pay retired workers a monthly amount over their retirement life or over the worker plus their spouse's joint life expectancy. There are many different types of pension plans. A typical plan is based on a stated percentage multiplied by the worker’s years of service with the employer and rate of compensation. For example, assume a retirement plan provides a retirement benefit equal to 1.5% times the number of years of service times the average of three of the highest years of consecutive compensation. If the individual worked for the employer for 30 years and the average of his or her highest three years of consecutive compensation was $50,000, then the annual retirement benefit would be $22,500 (1.5% X 30 X $50,000) or $1,875 per month. Retirement plans vary in design so it is important to understand how each plan’s particular benefits are calculated when determining the exact retirement income amount.
Retirement plans promising to pay a specific dollar benefit during retirement are known as defined benefit plans because the retirement benefit is defined. The employer is typically responsible for the investment and actuarial funding of these retirement plans. Other plans place the responsibility for retirement income on the employee. It is not surprising that companies are increasingly favoring this avenue since it removes their responsibility for supporting their retired employees. The employer only specifies the amount that is to be contributed to the retirement plan; the employee must do the contributing, although there may be matching company funds. These plans are known as defined contribution plans because the contributions (not the retirement benefits) are defined. The source of income during retirement depends on the employer contributions, if any, and the tax deferred earnings on the balance in the investment account. A defined contribution plan offers no guarantee as to the balance in the employee's account. Inadequate funding, bad investing or poor earnings performance may have detrimental effects on the amount available at retirement.
Tax Deferred Retirement Benefits (IRA's, 401(k)’s, 403(b)’s)
Individuals can fund their own retirement through a variety of tax deferred retirement plans. Some are funded by contributions or salary reductions. Employers may also offer employees a 401(k) plan, also known as a CODA (Cash or Deferred Arrangement). Employees can contribute more to a 401(k) plan than to a traditional IRA and employers will sometimes match employee contributions up to a certain percentage. Contributions to a 401(k) plan are tax deferred and any investment earnings are tax deferred. Certainly, this is generally an advantage over personal after-tax savings. Employees are responsible for selecting the investment vehicle and there is no guarantee as to the savings accumulation in the account. Certain tax-exempt private organizations, public schools, and colleges may offer a variation of the 401(k), known as a 403(b). These types of plans are similar in concept to the 401(k) plan.
IRA’s are generally available to individuals who are not participants in an employer sponsored plan. The amounts individuals can contribute to an IRA is lower than vehicles such as a 401(k) plan.
Individual Savings
Not all retirement plans provide tax advantages. Saving in any form for any goal is beneficial. Individual savings is generally a more difficult way to accumulate retirement funds since there is no tax deduction or tax deferral on earnings but the bigger obstacle to saving for retirement is the tendency to spend all take home pay rather than saving a portion of it for retirement. However, if the individual has the dedication to “pay himself first” (i.e. transfer money to savings before spending it) then this could be a significant source of retirement income.
Managing Income in Retirement
Managing our income is always important, but it becomes even more critical during retirement. At this point there is typically only savings – not wages. Financial mistakes made while one is earning wages may be disappointing, but the same mistakes made with savings during retirement can be financially catastrophic. Because sources of retirement income are limited, careless spending may be the difference between comfort and poverty in the final retirement years. The retiree must ensure their retirement (savings) income lasts through their total retirement years – not just the first ten years, for example. This means determining income needs in the years leading up to retirement and once retired, efficiently managing retirement assets so they last as long as the retired individual does. For many, this means resting their income sources in financial vehicles that will preserve their assets throughout their lifetime, such as lifetime annuities.
Pre-Retirement Income
The prudent worker will save throughout their working career for
their retirement, but realistically most people do not begin saving for
retirement until they reach age 40 (making the savings goal far more difficult
to achieve). Consequently, as retirement nears there is always the chance
that too little was saved to finance their retirement years. Besides simply
saving too little, other factors may contribute to the retirement shortfall
including higher cost-of-living prior to retirement (so not enough was saved to
make up the difference) and lower-than-projected returns on investments. To
increase the chances of having a financially secure retirement it is necessary
to make frequent reassessments during the 10 years prior to retirement and make
adjustments as necessary.
Workers often complain that it is increasingly difficult to save sufficiently for retirement when current costs of living eat up what they would have otherwise saved. There is no doubt that it can be difficult to save enough for thirty years of retirement. Of course, that is why the prudent worker begins as soon as he or she acquires a full-time job – usually in their twenties. Beginning so early allows the worker to save a smaller quantity of their income each month. Having said that, the worker who waits until age 40 to begin saving for their retirement must simply be prepared to make sacrifices if he or she is to have sufficient retirement income. Since most of us will not have a rich uncle or win the lottery there is no other choice. We either save enough to live comfortably during retirement or we do without in our final years. State and federal budgets are strained already and there is no reason to believe it will get any better. That equates into the government doing less for their retired citizens – not more.
The performance of the stock market in the last fifteen years has
required many people nearing retirement to make changes in their retirement
planning. Those who relied on the continued boon of the early 90s for their
retirement income found their optimism crushed. Of course, the market
downturn resulted in a significant reduction in retirement assets for those
both facing retirement and currently in retirement. Some were forced to
postpone their originally anticipated retirement date while many people in
retirement found it necessary to return to work. Returning to work makes sense
if the retirement nest-egg will be depleted too quickly. The younger the
retiree is the easier it is to return to work; older retirees may find it
medically impossible or there may be no job available for them, especially in
some industries that change rapidly making their skills obsolete.
Retirement Shortfalls
It is always better to have saved too much for retirement than not
enough. Additionally, some people are more content than others, meaning
some people are satisfied reading a good library book while others are
determined to travel. These retirement expectations must be considered
prior to retirement, saving accordingly. If a reassessment of the
retirement portfolio and current cost-of-living reveals a shortfall in savings,
it may be necessary to continue working beyond the anticipated retirement date.
If the worker decides to work longer he or she must be cognizant of how the
additional income could affect the amount received from social security if
under the full retirement age as determined by the Social Security
Administration. There are maximum amounts that can be earned without
losing social security benefits. If income exceeds these amounts, Social
Security benefits are reduced by $1 for each $2 earned. Once full
retirement age is reached, income will not affect social security benefits.
At one time, full retirement age was 65. However, beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959. The following chart shows the steps in which the age will increase:
|
Year of Birth |
Full Retirement Age |
|
1937 or earlier |
65 |
|
1938 |
65 and 2 months |
|
1939 |
65 and 4 months |
|
1940 |
65 and 6 months |
|
1941 |
65 and 8 months |
|
1942 |
65 and 10 months |
|
1943-1954 |
66 |
|
1955 |
66 and 2 months |
|
1956 |
66 and 4 months |
|
1957 |
66 and 6 months |
|
1958 |
66 and 8 months |
|
1959 |
66 and 10 months |
|
1960 or later |
67 |
Note: Persons born on January 1 of any year should refer to the full retirement age for the previous year.
When Social Security was just getting started back in 1935, the average American's life expectancy was just under age 60. Today it is more than 25 percent longer; the average life expectancy is now approximately 77 years old. That means workers have more time for retirement, and more time to collect Social Security benefits. As a result, Social Security's retirement age is gradually changing to keep pace with increases in longevity and expected benefits collected. Workers born before January 2, 1938 can collect full benefits at age 65. For those born after that date, the age to collect full benefits is gradually being raised to age 67. [7]
Social Security income was never designed to fully support an individual or couple during their retirement years. Social Security is intended to supplement whatever the person did for themselves, whether that happens to be a company-sponsored pension or private savings. When Social Security was first developed many Americans did believe it would fully support them but we now know it is not enough to live on.
If a worker discovers he or she cannot financially retire as early as
planned and must continue to work, the individual will likely also need to
increase the amount saved for retirement. Increasing retirement savings
late in one’s working career is not always easy but it is often necessary.
Many of the steps advised are similar to prudent financial planning at
all ages. For example, most financial planners recommend that credit
cards and other loans be paid off prior to retirement. This is actually
good advice for all ages, not just retirees. Even so, it especially
applies to those entering retirement. If the individual goes into
retirement without debt he or she does not have the burden of paying for
purchases made during employment (when wages were being earned). If the
home is also paid off, the retiree has no debt, freeing their funds for other
activities. Only costs for such things as food, gas, insurance,
utilities, property taxes and clothing remains.
If a mortgage remains at retirement it is unlikely that it can be paid off so that must be factored in with living costs. If the retiree cannot make the mortgage payment and still have enough to live on comfortably he or she may want to consider selling their home and either buying a smaller home if there is sufficient equity to do so, or perhaps move to a less expensive apartment (paying rent).
Reverse mortgages are often considered at some point as a means of funding retirement. HUD’s Federal Housing Administration (FHA) created one of the first reverse mortgages available. The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program that makes home equity available. Many retirees use the HECM to supplement their Social Security and savings, especially if unexpected medical bills exist.
Specifically, a reverse mortgage is a type of home loan that allows the homeowner to convert a portion of their equity into available cash. Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer uses the home as their principal residence. Repayment is not due until the home is no longer the principal residence, but when that occurs repayment will be required. If the home is sold, either the homeowner or the estate will repay the cash that was received from the reverse mortgage (plus interest and other fees) to the lender. Any remaining equity will go to the homeowner or the heirs, if the homeowner is deceased.
As long as the homeowner lives in the residence (and keeps the taxes and insurance paid) repayment is not necessary. The homeowner may never borrow more than the value of the home. The amount borrowed depends on the borrower’s age, the current interest rate, and the appraised value of the home. Sometimes there may be FHA mortgage limits for the area where the home is located. Generally, the more valuable the home is, the older the borrower is, and the lower the interest rate, the more equity there will be to borrow.
Getting a Return on Savings
Prior to retirement individuals will be wise to make spending changes
that reduces or eliminates luxury items and unnecessary spending. This
might include buying a less expensive car, eliminating some activities that are
costly, or selling items that incur extra costs (such as memberships or
vacation property). While it may seem to the worker that he or she is
giving up some aspects of their lifestyle it will eliminate many stresses that
would otherwise exist in retirement.
Experienced financial planners always suggest making our money work for us, but many consumers do not understand just what that means. Obviously, this advice applies to both our working years and our retirement years. Generally, this means making our assets work in our favor by producing a return on whatever investments we may have. It might be an IRA or an annuity for example, that provides additional income or assets in the form of tax-favored returns.
Safety of retirement assets is very important. During our working
career we can take chances with our investments in hopes of earning higher
returns. If the investment loses value instead of gaining value we have
time to recoup our losses because we are still earning wages. During
retirement we no longer have wages (continued income) so it is important to
seek safety for our savings. This might equate into a shift from risk
vehicles to those that produce a guaranteed rate of return, such as fixed rate
annuities. The actual allocation depends on the number of years the
individual plans to stay in retirement. Some individuals may have saved
so meagerly for retirement that they feel they must use aggressive investing
even during their retirement years in order to have enough funds throughout
retirement. There is certainly danger in this since a poor choice in
investments can potentially wipe out all retirement savings.
When reallocating investment funds for retirement safety it is important
to consider the level of liquidity. Older Americans probably do not want
to enter into a long-term investment unless there is the ability to access
funds if necessary. Some types of investments require more than a year to
liquidate. Reallocating assets without attention to liquidity may leave
the retiree without necessary cash for day-to-day expenses. It is not
just the daily expenses that might be affected by placing assets in difficult-to-liquidate
accounts. There have been cases of individuals not meeting their required
minimum distribution requirements, for example, because assets could not be
liquidated in time.
If the retiree looks objectively at the length of time they will be
retired he or she must develop some formula to make their funds last to the end
of his or her life. This will be based upon the combination of the
current cost-of-living with increases in costs considered, the amount they
managed to save, and the amount of years projected in retirement.
Obviously, the retiree should not spend their entire retirement nest-egg too
soon since that would leave their final years with nothing but Social Security
income. To balance income with expenses, the retiree might consider doing
the following:
The last two factors combined determine how much monthly income the retiree can access each month to make their savings last to the end of their life. Consider the amount saved versus the number of years expected in retirement. Assuming the retiree will live in retirement for 20 years and he or she has saved $500,000, the monthly allocation would be approximately $2,100. Add this amount to the amount the retiree will receive from Social Security. That provides the amount of income available to cover monthly expenses, including health care costs that may develop with increasing age. To estimate income from social security, use the benefit calculators at the Social Security Administration’s website or request a written report from Social Security. During each year of retirement it is necessary to look at current expenses and spending habits to determine if adjustments must be made. The golfing that seemed affordable in the first years of retirement may no longer be affordable five years later. Such sacrifices are essential to enable the retiree to meet necessary expenses throughout their retirement years. It is far better to be able to afford prescriptions later in life than golfing in the early retirement years.
Women must especially plan for their retirement years. Single women make up the majority of impoverished retirees. They are less likely than men to have a sufficient retirement fund. Women are less likely to have company pension plans since they take time off work to raise children and may also leave jobs to follow their husband’s career or take care of elderly parents. Because women earn less, their other retirement incomes, including Social Security, also tends to be less than adequate.
Receiving Income from Investment Vehicles
It is not surprising that the amount of income received in
retirement will depend upon the amount of money saved during one’s working
years. How one saved will depend upon the individual’s selected financial
vehicles (annuities, stocks, bonds, and so forth). Most financial
planners recommend that several types of financial vehicles be utilized to
cushion against the ups and downs of the financial markets. Usually, we
refer to this as not “putting all our eggs in one basket.” When we
utilize multiple baskets, if one basket falls breaking the eggs it holds, we
still have other baskets and eggs remaining.
Once in retirement, individuals should consider withdrawing no more from retirement accounts than necessary or required each year by IRS regulations. This allows remaining amounts to continue growing tax-deferred, or tax-free in the case of Roth IRAs. This also helps to reduce the amount the retiree must include in his or her income, thereby reducing the amount of taxes possibly owed for the year. There is another reason to withdraw only what is necessary for expenditures: if excess cash is withdrawn it is likely it will also be spent. By resisting the urge to withdraw more than actually necessary it may prevent excessive spending.
It is always important to follow required distribution requirements for
qualified financial vehicles. If the amount withdrawn from retirement
accounts for the year is less than the required minimum distribution (RMD), the
IRS may impose a penalty of 50% of the shortfall, referred to as an excess-accumulation
penalty. Establishing scheduled distributions (versus occasional
distributions) helps ensure not only that the RMD is distributed on a timely
basis, but also that payments will be received without having to contact the
financial institution each month or each time a withdrawal is desired.
Taxation
When determining annual expenses and income, it is important to
remember that the retiree might be responsible for paying income taxes on
amounts withdrawn from tax-deferred retirement accounts, such as annuities and
some types of Individual Retirement Accounts. These amounts will be
treated as ordinary income for tax purposes. The retiree may want to
consult with a tax attorney or accountant to minimize taxation. An agent
should never attempt to provide tax advice unless he or she is qualified by experience
or education to do so.
Taxation is not just about state and federal income taxes. Many types of taxes continue into retirement, including real estate taxes. Paying off the primary home mortgage does not mean that there are no homeowner expenses; real estate taxes must be paid every year and this expense is unlikely to go away. There are programs that in some states and counties that allow elderly homeowners to defer paying property taxes. However, in many cases they must still be paid when the home is sold. In other words, the property taxes are not forgiven but merely delayed. Each county can be different, so it is important to know the rules in the location where the retiree lives.
There will also be homeowner’s insurance that is needed past paying of the mortgage. Even though there is no lender ‘requiring’ that homeowner insurance be in place once the mortgage has been satisfied, it is still important to have coverage. House fires, tornadoes, and hurricanes do not just happen to houses owned by banks; they happen to everyone.
Withdrawals Prior to Age 59½
Some types of retirement saving vehicles have age restrictions on
withdrawals. Since the goal is retirement, penalties are placed on
withdrawals made prior to age 59½, since it is assumed that is prior to
retirement. Generally, the penalty is 10% and may be called an excise
tax. Penalties may be waived if the investor meets one of the exceptions
allowed by IRS regulations. This penalty or excise tax is charged in
addition to any income taxes owed on the amount. It is also in addition
to any early withdrawal penalties levied by the issuing institution (an
insurance company in the case of annuities). If the retiree must
distribute amounts from his or her retirement account prior to age 59½ he or
she should talk with their accountant, financial planner, or tax attorney about
strategies to avoid or minimize the IRS penalty.
It is important to understand the rules associated with owning an IRA. Not knowing the rules can be costly. Some types of IRAs are complicated and it is relatively easy for the average IRA account owner, and their financial adviser for that matter, to make simple, but very costly mistakes.
IRA account owners need to be aware of all the different time elements that are part of this type of vehicle. These include:
The Age-55 Penalty Exception
Generally speaking, unless an exception applies, IRA owners must wait until they are age 59½ to withdraw IRA funds without causing a penalty (10%). This age rule is based on the IRA owner's actual age, not the year in which he or she actually turns 59½.
However, there is the exception called "the age-55 exception." Participants in workplace retirement plans who separate from service in the year in which they turn 55 or older can take a distribution from their company retirement plan without having to pay the 10% early withdrawal penalty. They must pay income tax on the distribution, but they do not owe the 10% additional tax that the Internal Revenue Code imposes on most withdrawals before age 59½.
Under this rule, the applicable year is a calendar year in which the person turns 55 years old, not 365 days. Of note, this age-55 exception only applies to company retirement plans and not to IRAs, even if plan funds that would have otherwise met the age-55 exception are rolled over to an IRA. Therefore, to avoid the 10% penalty, the money must be taken before rolling it into an IRA.
It is very important to get clarification before trying to take advantage of any exception. For example, in a recent court case, a judge ruled against an IRA account owner who quit his job, rolled the money from his company retirement plan into an IRA, and then took a distribution from the IRA without paying the 10% penalty. The IRA account owner argued that he didn't owe the 10% penalty, but the judge ruled otherwise. Exceptions must follow the law exactly.
The Five-Year Rule for 72(t) Payments
72(t) payments, also known as SEPPs or SOSEPPs for "series of substantially equal periodic payments, are distributions from an IRA that allow owners under age 59½ to access money penalty free. With a 72(t), an individual takes equal distributions from his or her IRA for five or more years or until reaching age 59½.
However, the 72(t) schedules can be doubly confusing since there are two separate time frames to keep track of. In order to successfully complete a 72(t) payment schedule and avoid back penalties and interest, the schedule must continue for the longer of five years or until the IRA account owner reaches age 59½. For this rule, the age 59½ requirement is the IRA account owner's actual birthday. The five-year requirement is a full five years from the time the first 72(t) payment is distributed.
Managing retirement income requires careful and thoughtful planning. Waiting to plan until retirement actually arrives is foolish since many of the strategies that would otherwise have been available may not be used at that late date. Financial plans should be reassessed during pre-retirement years to minimize damage from changes, such as higher than anticipated living costs, or reduced asset growth. Talk with a financial planner to determine specific goals or needs and to maintain a realistic approach to reaching retirement financial goals. Retirement will come whether the worker saves for those years or not. It is not a question of whether or not retirement age will arrive; it is a question of whether or not retirement will be golden.
End of Chapter 1
[1] Lawrence H. White is the F. A. Hayek Professor of Economic History at the University of Missouri, St. Louis.
[2] SSA.gov
[4] SSA.gov
[5] https://www.ssa.gov/benefits/retirement/planner/agereduction.html#:~:text=You%20can%20start%20receiving%20your,your%20benefit%20amount%20will%20increase.
[6] Social Security website
[7] Social Security website