Imagine a train carrying 78 million baby boomers toward retirement. On the same track, from the opposite direction, is another train carrying dangerous cargo such as under-funded pensions, shrinking Social Security benefits and rising health care costs. The coming wreck is called the American retirement crisis, and the question for advisors is: Why are so many boomers unprepared for this oncoming disaster?
Perhaps the biggest stumbling block is a fear of planning. Part of this comes from an attitude of procrastination and not wanting to face up to the task. Another part is lack of information, which leads to a lack of confidence.
I believe there are seven key obstacles that stand between your clients and a comfortable retirement. As advisors, understanding these challenges and effectively communicating them to your clients can help pique boomer interest and move the dialogue in the direction of income solutions. Longevity, pensions, Social Security, taxes, inflation, health care and investor error are the seven challenges. They are detrimental to your clients' retirement plans for the following reasons:
- The aging of America -- In the next 20 years, 43 million households will move into retirement. The latest mortality tables say more than half of American couples age 65 and over can expect to have at least one spouse live to age 90 or more. These demographic shifts are putting an unprecedented strain on fixed income retirement budgets.
- Disappearing pensions -- Each year, more than 1,000 employers voluntarily shut down their pension plans; the percentage of workers covered by a traditional pension plan has decreased from 80 percent in 1985 to 33 percent in 2003, according to federal government statistics.
- Social insecurity -- Social Security is more than $1.5 trillion in the red and without a tax increase or reduction in benefits, the program will continue toward bankruptcy. Meanwhile, according to the Social Security Administration, more than twothirds of retirees rely on Social Security for 50 percent of their income and 33 percent use it for 90 percent of their income. Without Social Security, half of American retirees would live in poverty.
- The tax axe -- For most American families, taxes are the single greatest monthly expense, accounting for 30 percent of their income. If your household earned at least $57,343 in 2005, you're in the top 25 percent of all taxpayers in America, making you subject to a heavier tax burden.
- The invisible enemy -- Inflation truly is the invisible enemy of your income, eating away at your purchasing power. Leading financial analysts estimate that if you need $50,000 a year in today's dollars, you will need $65,239 in 10 years, and $101,640 in 25 years just to maintain your same standard of living.
- The health care nightmare -- The real gorilla in the closet is health care, a problem with no clear solution. The under-funding of Medicare dwarfs that of Social Security, and the Employee Benefits Research Institute estimates that even with Medicare, the average American may need almost $300,000 in inflation-adjusted dollars to pay Medicare insurance premiums in retirement.
- Red, white and broke -- Let's face it, Americans aren't saving for retirement. In 2004, America's savings rate hit its lowest point since the Great Depression and personal bankruptcies hit an all-time high. In spite of these trends, personal spending continues.
The retirement security blankets that boomers were counting on to support them -- pension plans, Social Security and personal savings -- are not as secure as they used to be. Obviously, in recent years, more of the responsibility for retirement planning has been transferred away from companies and government and to the individual. As an advisor, that's your cue to help clients overcome the fear and emotion that may be inhibiting them from getting serious about America's retirement crisis.
Greg Salsbury, Ph.D., is an executive vice president for Jackson National Life Distributors LLC. He can be reached at firstname.lastname@example.org.