By Tim Hawkins / Guest Editorial
Decades ago, workers could count on a company pension, Social Security and Medicare to carry them through retirement. Today’s retirees may need to rely more on personal savings.
There’s something both powerful and serene about seeing hot-air balloons rising in the morning stillness, their burners propelling colorful shapes into the atmosphere. Retirement is a lot like untethered flight; life’s possibilities are limited only by your imagination and where the wind takes you. At one time you could count on the three “balloons” of a pension, Social Security and Medicare benefits, but you will likely need to rely more on your personal savings to fund your dreams once you retire.
The reason has partly to do with the shift from company-sponsored pensions to employee-directed retirement plans. But Social Security and Medicare are also likely to experience headwinds. Here’s why.
Personal savings
Fifty seven percent of Americans report having less than $25,000 in household savings and investments (excluding homes and defined benefit pensions, which mostly apply to public employees such as teachers and public safety workers), according to the Retirement Confidence Survey conducted by the Employee Benefit Research Institute. This puts the odds of attaining retirement security at serious risk for most Americans.
The majority of workers can no longer rely on guaranteed lifetime retirement income from a private pension plan. Such plans cover fewer people each year. In 2012, only 18 percent of eligible private-sector workers could count on a pension, down from 35 percent in the early 1990s, according to the U.S. Bureau of Labor Statistics.
Living within your means and saving more money, ideally in a tax-advantaged way, are tactics that will help your retirement lift off. That means reducing spending, increasing income or both. For most people, reducing spending is probably the most practical approach. Before cutting expenses, you’ve got to have some idea of where your money is going. Look through your bank statements and credit card bills. Note where the big spending items are concentrated: dining out, shopping, paying taxes and everything else. After you’ve gathered this information, you can cut the nonessentials and start adding to your retirement plan.
Social Security
Originally envisioned as an economic safety net, Social Security was never meant to be a primary source of retirement income. Today, Social Security provides a diminishing source of income for the average American retiree, from a high of 42 percent of total retirement income in 1994 to 37 percent of total retirement income in 2010.
Although no one knows how Social Security will evolve, it’s likely that you’ll draw less from it to fund your retirement. The rest will have to come from investment income, earnings and personal savings in your retirement plan.
Medicare
Health-care expenses are increasing for a simple reason: America’s population is aging, and older people tend to consume more health care. Medicare today is generally regarded as solvent but, due to vast increases in numbers of retirees likely to enter the system over the next 10-20 years, it will likely need to be reformed. And, contrary to what some believe, Medicare is not free and does not cover all healthcare costs. You may want to explore alternatives, such as contributing more to your retirement plan or opening an Roth IRA or Health Savings Account, to help pay for increased healthcare costs.
It’s possible that changes to government programs could lead to a reduction in future benefits. One of your best defenses against this may be to boost your savings and help your retirement take flight.
Tim Hawkins is founder and CEO of Hawkins Wealth Management, 2771 Oakdale Blvd., Ste. 1, Coralville. He can be reached at (319) 626-3580, (888) 338-9726 or timh@hawkinswealth.com.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this education material.
