Avoid the looming retirement crisis by saving more and starting earlier
The World Economic Forum, a not-for-profit foundation headquartered in Davos, Switzerland, recently issued a report. It predicts the worldwide retirement savings shortfall could reach $400 trillion by 2050. This was calculated by assuming each worker would need 70 percent of his or her yearly working average. This is a very significant amount, because it is almost five times the global economy.
There are a number of factors creating this situation.
People worldwide are living longer. This means each person will consume more over their lifetime. Life expectancy is increasing about a year for every five for about 60 years. At this rate, babies born in the United States and Canada may live to be 104.
Public retirement assets such as Social Security are underfunded. This is a problem in most countries, and is not limited to federal programs. State and local government pension programs may have even worse funding. There has not been enough money saved to cover all of the pension obligations. This problem also extends to private pensions from corporations. There is a recurring issue at all levels.
Adding to this problem is that most people use more health care as they age. The number one reason that a couple in their 60s cannot retire is because of the cost of health insurance. A study by Fidelity Investments predicts that a couple could spend $260,000 on health care in retirement not including an outlay for long-term care.
Another big factor fueling this crisis, according to the World Economic Forum, is disappointing investment returns. Many pensions have used unrealistic return projections. Many individuals in their IRAs and 401(k)s either have too much risk or too much safety. I have seen some 70-year-olds with all of their money at stock market risk and others who have everything invested is in low earning certificates of deposit. People need balance to protect against both sequential and inflation risk.
Some of these issues would benefit from another suggestion of the World Forum – improving financial literacy so that people can make better investment decisions. People also need to save more and start saving sooner. Also in the future, we will probably see more people working part time during their retirement. Governments are likely to raise normal retirement age to better reflect longer life expectancies.
The shift from defined benefit plans to defined contribution plans such as 401(k)s is not going to be reversed. This means that there will be more individual responsibility for your own retirement. Investigate all of the options including investment vehicles that guarantee lifetime income. This could have the same effect as creating your own pension.
Be proactive and plan for your family to get the best results.
People don’t plan to fail, they fail to plan.
Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, contact business editor Michael Bradwell at mbradwell@observer-reporter.com.