The future is always uncertain and planning for it is difficult. But understanding and preparing for uncertainty, can make us look forward to a bright future and retirement – a situation where we can make anything possible. Basic questions we should ask ourselves, for example, what will be our living expenses when we retire? How much income will we have? What numbers should we use for inflation and investment return? Things and situation can and will change the most well thought-out plan. But we should, as always, be prepared for it.
In the book, "The Future Shock of Retirement" by Jonathan Cohen, Matthew H. Scanlon, and Matthew O'Hara of Barclay Global Investors, it explored the "future shocks" to the American Retirement System, and what they mean to the post-retirement living standards for Americans close to retirement.
Social Security and Medicare
In terms of Social Security and Medicare: those born between 1946 and 1964 (the baby boomers generation), enter retirement, the ratio of workers to retirees will decrease markedly which would impact government budgets for elderly particularly government budget allotment for Social Security and Medicare. The U.S. Congressional Research Service expects that during the 75-year period ending in 2025, the percentage of retirement age individuals will more than double from 8.1 percent to 18.2 percent. This change will reduce the ratio of potential workers to retirees by more than 50 percent, from 7-to-1 to 3-to-1.
More, by 2010, longevity will have increased by almost 15 years since 1940. Life expectancy and span is projected to grow by one year each decade through 2050. This will adversely impact the stability of Social Security and Medicare. With more retirees and elderly population sharing the pie, the less Social Security and Medicare each one of us would get.
The economic situation could change, it could be better, or could get worse, but assuming no changes to current benefits and given expected demographics -- the present value of our fiscal imbalance is estimated at $68.5 trillion. This number will continue to rise in the years ahead. U.S. fiscal policy has yet to respond to these demographic changes, placing Social Security and Medicare in jeopardy. Let us just hope the Obama administration and the Democrats majorities in both Houses of Congress would do something about it.
Today, more or less, 6.9 percent of federal income taxes go toward these two programs. By 2020, as much as 26.6 percent of all federal income taxes will be required to sustain current Social Security and Medicare benefits for the greatly expanded retirement population. So? "The simplest thing that has to happen next year is to raise taxes," says Cohen. "While this will increase assets, you also have to reduce liabilities. The only way to reduce liabilities is to reduce benefits ... there is no other way to do it," he adds.
Home Equity
Whenever I think about this, I think of subprime. We have seen during the last few months how the appreciation in our home can vanish, and how it can go negative in value, given the economic crises. The study indicates that most mechanisms for capitalizing on part of one's housing equity, such as reverse mortgages, are fraught with waste due to structural inefficiencies. So what should you be doing now to prepare for such changes? Scanlon offers practical advice:
"First, if you have revolving debt ... get rid of it as soon as possible. Second, if you are not saving fully in a 401(k) retirement plan, do so immediately ... it is never too late to start saving. Make sure that you are not in risk-adverse types of investments. Third, it is almost certain that capital gains rates will not be lower in the future and probably will be higher. Whatever investment you're in, make sure it is tax efficient," he adds.
The facts are clear: This country has a huge and growing deficit, and Barack Obama will have to make some unpopular but necessary decisions. Some of the assumptions you made when planning your retirement are likely to change.
You have to prepare, and now is the time to take more control of your future ...
In the book, "The Future Shock of Retirement" by Jonathan Cohen, Matthew H. Scanlon, and Matthew O'Hara of Barclay Global Investors, it explored the "future shocks" to the American Retirement System, and what they mean to the post-retirement living standards for Americans close to retirement.
Social Security and Medicare
In terms of Social Security and Medicare: those born between 1946 and 1964 (the baby boomers generation), enter retirement, the ratio of workers to retirees will decrease markedly which would impact government budgets for elderly particularly government budget allotment for Social Security and Medicare. The U.S. Congressional Research Service expects that during the 75-year period ending in 2025, the percentage of retirement age individuals will more than double from 8.1 percent to 18.2 percent. This change will reduce the ratio of potential workers to retirees by more than 50 percent, from 7-to-1 to 3-to-1.
More, by 2010, longevity will have increased by almost 15 years since 1940. Life expectancy and span is projected to grow by one year each decade through 2050. This will adversely impact the stability of Social Security and Medicare. With more retirees and elderly population sharing the pie, the less Social Security and Medicare each one of us would get.
The economic situation could change, it could be better, or could get worse, but assuming no changes to current benefits and given expected demographics -- the present value of our fiscal imbalance is estimated at $68.5 trillion. This number will continue to rise in the years ahead. U.S. fiscal policy has yet to respond to these demographic changes, placing Social Security and Medicare in jeopardy. Let us just hope the Obama administration and the Democrats majorities in both Houses of Congress would do something about it.
Today, more or less, 6.9 percent of federal income taxes go toward these two programs. By 2020, as much as 26.6 percent of all federal income taxes will be required to sustain current Social Security and Medicare benefits for the greatly expanded retirement population. So? "The simplest thing that has to happen next year is to raise taxes," says Cohen. "While this will increase assets, you also have to reduce liabilities. The only way to reduce liabilities is to reduce benefits ... there is no other way to do it," he adds.
Home Equity
Whenever I think about this, I think of subprime. We have seen during the last few months how the appreciation in our home can vanish, and how it can go negative in value, given the economic crises. The study indicates that most mechanisms for capitalizing on part of one's housing equity, such as reverse mortgages, are fraught with waste due to structural inefficiencies. So what should you be doing now to prepare for such changes? Scanlon offers practical advice:
"First, if you have revolving debt ... get rid of it as soon as possible. Second, if you are not saving fully in a 401(k) retirement plan, do so immediately ... it is never too late to start saving. Make sure that you are not in risk-adverse types of investments. Third, it is almost certain that capital gains rates will not be lower in the future and probably will be higher. Whatever investment you're in, make sure it is tax efficient," he adds.
The facts are clear: This country has a huge and growing deficit, and Barack Obama will have to make some unpopular but necessary decisions. Some of the assumptions you made when planning your retirement are likely to change.
You have to prepare, and now is the time to take more control of your future ...
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