Get
Ready
to Retire!
Think
Social Security will provide you a comfortable living when
you retire?
Think again.
The Social Security Administration
(SSA) has begun an aggressive campaign designed to educate
would-be recipients on the expected future value of their
benefits. Beginning in October 1999, the SSA began mailing
out annual benefits statements to workers over the age of
25. Among other things, these statements provide a preliminary
estimate of the monthly benefit a worker can expect to receive
at retirement.
Most would agree that these statements
are long overdue. For years the magnitude of potential benefits
and the methodology underlying their calculation has been
mostly a matter of conjecture and speculation. Little concrete
information was easily available to the general public. Most
workers took it on blind faith that they would get their fair
share - and that it would somehow be sufficient to meet their
basic needs.
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Unfortunately, the statements that
are being circulated by the SSA paint a very different picture.
According to the American Savings Education Council, the average
Social Security retirement benefit paid out in 2000 was just
over $800 per month, or about $9600 per year - not enough
to provide a comfortable living by a long shot.
In fairness to the SSA and to the
system, however, the Social Security benefit was never intended
to sustain an individual or a couple into retirement. It was
designed to supplement other forms of retirement income. Unfortunately,
due to the lack of information on potential benefits, most
workers put little effort into retirement planning until they
are knocking at retirement's door. Of course by that time
it is too late. The most effective time for retirement planning
is early on in a career.
If you're serious about living comfortably
into retirement you should start right now to plan for the
future. But as you plan, consider the following points which
will shape benefit discussions and Social Security legislation
through the rest of this century.
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Planning Considerations.
- People are living longer. Since
the inception of the Social Security program, the average
life expectancy in the United States has increased by nearly
10% - from around 77 years to almost 83 years - and it continues
to climb.
- Retirement is expensive. Most
financial experts recommend planning for a target retirement
income that is about 70% of your pre-retirement income -
a number that surprises most people.
- Social Security can generally
be counted on to replace less than 40% of pre-retirement
income. This leaves the balance to be funded through other
means. For more information on your future Social Security
benefits you can request a free statement from the Social
Security Administration at 1-800-772-1213. Note:
the SS Adminitration automatically mails these statements
each year - you may have already received yours.
- Inflation will continue to increase
average living expenses into the future. While inflation
has been comparatively tame in recent years, its cumulative
effects are still felt very strongly by individuals on a
modest fixed income.
- Health care expenses will consume
an inordinate portion of total income in retirement years.
Even as life-spans are increasing, the cost of quality healthcare
is rising at a more rapid rate than inflation and will likely
continue to do so in the future.
- Demographic changes will continue
to put pressure on the Social Security system. As life-spans
increase, the aged population will continue to swell as
a percentage of the total population. At the same time,
birthrates have been declining in developed countries (including
the USA) for years. This is resulting in a unique demographic
phenomenon where, over time, there are fewer and fewer active
workers toiling to support an ever-expanding and needier
population of retirees. This problem will be magnified in
the United States due to the imminent retirement of the
"baby-boom" generation in the first half of this century.
When the Social Security system was put into place there
were, on average, 3.3 workers contributing to the support
of each retiree. Most of us will see that ratio drop to
about 2 workers per retiree in our lifetime. As the "boomers"
begin to retire en-masse, the long-term solvency of the
Social Security system will be tested as never before. Unfortunately,
if the system gets out of kilter, there are really only
a handful of ways to restore it to solvency. These include:
- Workers could be required to
work longer before qualifying for benefits
- Benefits could be diminished
- Payroll taxes could be increased
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So What Can You Do?
- Begin planning now - regardless
of your age or circumstances.  The earlier you begin
to plan, the more likely you will be to retire when you
want and with the lifestyle that you desire. Most financial
planning experts agree that you should not count on Social
Security for more than about a third of your total retirement
income. This means that two thirds of your retirement income
must come from other sources.
- Save religiously.  Even if
you do not feel that you can save a lot, save something
from every paycheck. Make it a habit.
- Set up a separate retirement
account.  And then don't touch that money.
- Take advantage of tax-deferred
programs and company matching programs to maximize contributions
to your retirement accounts. You would be well advised to
contribute the maximum amount of money that can be matched
by your employer. Matching funds are an excellent and painless
way to bolster your nest egg - and the employer contributions
are generally tax-deferred.
- Take advantage of company pension
plans, 401K programs, IRA's and other formal and structured
programs that force you to set money aside each month. If
your company does not currently offer a plan, ask about
the possibility of establishing one. If your company does
have a pension plan, ask your Manager or Human Resources
representative to provide you with information on the program
requirements and benefits. Most companies automatically
send out a statement of benefits to employees once a year.
If your company does not, it is not improper to ask for
a summary of your plan. Pay careful attention to vesting
requirements and rollover provisions. These things will
be important if you choose to leave the company. If your
spouse works, check to see what your benefits are under
his or her plan.
- Don't be afraid to take modest
and calculated risks to achieve higher returns on your nest
egg particularly in the early years. Take the time to become
familiar with the stock market and mutual fund investments.
These investment vehicles generally tend to be more aggressive
than many of the alternative investment options. Of course
they also come with more risk. However, most experts agree
that in the long run you will be better served by having
at least a portion of your investment portfolio in equities
(stocks).
- Work on paying off your home.
 Avoid 2nd mortgages which continue to add layers of
debt and years of payments to your home. If you buy a home
early and pay it down consistently you will have a good
chance of having a free and clear home when you retire.
Even if you decide to sell it and move into something smaller,
the equity will be there to allow that freedom.
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