Act Now to Avoid Surprises at Retirement

With the future always clouded by uncertainty, planning for it is difficult. By understanding and preparing to deal with uncertainty, however, we can still look forward to a future where anything is possible. For example, we have to make certain assumptions when planning for retirement. What will be our living expenses? How much income will we have? What numbers should we use for inflation and investment return?

After all that, some things can and will change the most well thought-out plan.

A new study, "The Future Shock of Retirement" by Jonathan Cohen, Matthew H. Scanlon, and Matthew O'Hara of Barclay Global Investors, explores "future shocks" to the American Retirement System, and what they mean to the post-retirement living standards for Americans on the doorstep of retirement.

Social Security and Medicare: As the generation of baby boomers, those born between 1946 and 1964, enter retirement, the ratio of workers to retirees will decrease markedly. 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.

Further, by 2010, longevity will have increased by almost 15 years since 1940. Life expectancy is projected to grow by one year each decade through 2050. This will adversely impact the stability of Social Security and Medicare.

At current rates -- assuming no changes to current benefits and given expected demographics -- the present value of our fiscal imbalance is estimated at $68.5 trillion. That 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.

Currently, 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.

"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.

The authors believe that many people will have to purchase comprehensive health insurance in the future.

Home Equity: We have seen during the last year how the appreciation in your home can vanish. 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. The authors conclude that only 40 percent to 50 percent of our home equity will be available for supporting nonhousing retirement expenses.
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 the new president will have to make some unpopular but necessary decisions. Some of the assumptions you made when planning your retirement are likely to change.

Now is the time to take more control of your future ... Your dreams can come true if you prepare. Anything is possible.

Alan P. Weiss is the president of Regent Wealth Management Group in Woodbridge, Conn. He is a certified financial planner and a certified public accountant. Readers are reminded that certain investments and investment strategies may not be appropriate for them, and that all investments involve risks and uncertainties. Consult an expert of your choosing if you have questions about investments.

(c) 2008 New Haven Register. Provided by ProQuest LLC. All rights Reserved.