RETIREMENT PLANNING – A SWOT ANALYSIS — PART 3 (NEXT WEEK, OPPORTUNITIES)

Weaknesses:

Here, unfortunately, I get to bring to light some disturbing trends that have been seen and felt locally, domestically and globally. The last two decades have brought us cultural shifts and the miracle of increased communication through speed and reach, but with this many other things have followed through that same doorway of opportunity.

  1. We have seen through the proliferation of easy credit an epidemic in debt that can be seen individually, state wide, domestically and globally. The commerce culture, which has driven our economy with the push towards materialism, coupled with easy credit and relaxed interest rates, has resulted in an average household savings of only $18,000. Total consumer credit debt in 2009 exceeded $2,437,000,000. Foreclosures are rampant at 1 in 200 households with every three months bringing ~250,000 more homes into the process. This can be expanded, like a mosaic puzzle, to describe state and local debt burden which reached over 2.4 trillion in 2009. As reported in November of 2009, 10 States face immediate bankruptcy and perhaps a few more are to follow. As discussed in US News and World Report in January of this year, municipal bonds are being questioned for their assumed place in a risk managed portfolio. Domestically, the federal debt clock as tracked by the websitewww.brillig.com/debt_clock was reporting the present debt load as I am writing this piece as $14,202,583,969,233.63. Mind boggling. And who owns this debt? Foreign countries. China presently owns approximately 894.8 billion dollars in US debt with total debt foreign owned close to 3.690 billion.
  2. Unemployment has certainly been a hot topic for some time with the present rate reported at ~9.7% in 2010. Comparatively, France, the United Kingdom, France and Germany had rates of ~9.5, ~7.5 and ~7.1% respectively.
  3. It is no secret that longevity has been bestowed to developed nations. Several gifts come with this extended life line:
  • The need to work longer or fund a longer retirement – When Social Security was enacted the average life expectancy was 60. Today it is 77 for males and 79 for females domestically. A 65 yr old female has a one in four chance to live to 94; 65 yr old male to age 92.
  • A wellspring of chronic illness that degrade the overall quality of our last years and burdens each family and community with medical costs – An average couple can expect almost $250,000 in medical costs over their lifetime not covered by insurance.
  • The responsibility of taking care of our elders as they pass into their “frail” years – According to a 2003 study, 13% of employees have turned down job advancements due to eldercare issues. Harder to discuss statistically, but equally valid, is the structure of our governmental process, which discourages real change in tax code, address frivolous litigation, or entitlement policy, among other costly budget issues, due to the desire of the hired politicians to keep their positions by not offending their constituents.

The Burden of Entitlement programs – the Five Deadly horseman of our Budget:

  • Social Security – in the next 75 years, the Social Security Trust Fund will owe $79 trillion more than it will receive in payroll if no changes are made soon. In December of 2009 42.8 million people received OASI benefits
  • Medicare – 46.3 million were covered under Medicare in 2009. The Hospital Insurance (HI) Trust Fund is now expected to remain solvent only until 2029
  • Medicaid –in 2009, total health expenditures reached $2.5 trillion, which translates to $8,086 per person or 17.6 percent of the nation’s Gross Domestic Product
  • Disability – In 2009, 9.7 million received DI benefits. The Disability Insurance (DI) Trust Fund, however, is now projected to become completely exhausted in 2018
  • Pensions – Every month, the PBGC pays$467 million for pensions for 801,000 retirees. PBGC is also responsible for future payments toalmost 700,000 who have not yet retired. During FY 2010, the PBGC assumed responsibility for 109,000additional workers and retirees in 172 failed plans. During FY 2010, the PBGC paid about $5.6 billion in benefits owed to retirees and their surviving beneficiaries, because their pension plans could not.

What about the 12.1 trillion in retirement assets mentioned above in strengths? That seems like a lot of money… in 2010, fully 27% of workers surveyed have $1000 or less saved for retirement in 2007, out of every 100 people who reached retirement age at age 65:

  • 62 retire with less than $25,000 in assets and depend on Social Security and family
  • 35 retire with less than $100,000 in assets in a pension. With Social Security, they are just making it. If either Social Security or their pension was compromised, they too would be dependent on family or state
  • 2 of the 3 remaining retirees have an adequate pension or retirement savings account and could actually survive without Social Security and maintain current lifestyle.
  • The last one of these retirees is truly financially independent. Their assets approach or exceed $1,000,000 and Social Security is totally un-needed.

Add to that, workers have been shifted into a self help benefits world of defined contribution plans, from a more generous defined benefit environment. In 1980, about 40% of all private wage and salary workers participated in a defined-benefit plan, 19% were in some type of defined-contribution plan, and 11 percent participated in both kinds of plans. By 2004, the Bureau of Labor Statistics reports, 21% of all workers in private industry were participating in a defined-benefit plan, 42% were participating in defined-contribution plans, and 13% were participating in both. At the same time, the traditional funding vehicles of defined benefit plans, typically insured products, shifted in the eighties to market based investments. The results have been disastrous. Defined Benefit plans are estimated to be underfunded by $600 billion – $450 billion for single-employer plans and $150 billion for multiemployer plans.

The last straw. The speed of information delivery, not just to analysts, but to average folk and the plethora of advice and media available have made investing an overwhelming and fast paced sport. The speed does not allow for measured responses to data. We have become hypersensitive and our twitchy fingers buy and sell on a whim’s notice whether we are average Joe’s or high end traders to institutions. This hair trigger approach to investing, following micro trends and vast amounts of information available has actually hurt all investors with greater market volatility and information overload.

 

RETIREMENT PLANNING – A SWOT ANALYSIS – PART 2

Strengths:

  • Although 2007 significantly reduced retirement assets overall domestically, in June of 2010 over 12.1 trillion in assets were held in Corporate DB, DC and Federal, State and local retirement plans. In fact, 2010 saw and average return of 17% in stock mutual funds

  • Approximately 280,000,000 are presently employed (full or part time) in the US workforce. In fact, in 2008, 35% of people ages 65 to 69, 21% of those aged 70 to 74 and 13% of those aged 75 to 79 were still actively represented in the workforce. This represents a large portion of the population and portends to the strength of the economy.

  • The present tax environment is also significantly friendly, viewed historically or globally, in regards to the tax payer. The highest marginal tax rate is only 35% as you all know. In 1963 we had a top marginal tax rate of 93%. Additionally we have favorable taxes on capital gains, long and short term (10 to 25%), and taxation on dividends (between 5 and 15%). High end wage earners also had the ability in 2010 and now in 2011 to trade in traditional non-taxed IRA assets to Roth, regardless of stated income. In this favorable marginal tax environment this is a boon to the savvy earner who converts to block out future taxation. This can also reap huge benefits in gifting un needed IRA assets as Roth accounts are treated taxable more favorably in gifting at death than traditional IRA’s. Estate taxation, recently changed, has become a generous $5,000,000 federal exclusion, as has the lifetime gift tax exclusion. Better yet, the $5,000,000 credit can be passed on, if not used, to your citizen spouse, assuming you are also a citizen through the filing of estate tax returns. A little planning can easily avoid the individual state death tax limits, which are typically much lower and can cause stress at probate time if not addressed while alive and kicking. I would argue that these tax reference numbers have hardly, if ever, been more favorable to the general public in our history.

  • Another brief point – Our inflation rate between 2000 and 2007 was half the rate of the 1980’s and nearly a third of the 1970’s.

  • Additionally borrowing money is cheap – cheap beyond belief. I remember my parents discussing 25 years ago whether or not to purchase our apartment and bandying about rates of 17.9%… Today, with a good credit score above 720 and a reasonable down payment, one can easily reasonably expect not to pay more than 5.5% for a fixed mortgage loan.

  • Lastly, as we are all here in New York City area, we have been substantially cushioned from the economic deterioration that much of the other states have seen. New York and the surrounding states have not seen the foreclosure rates, business failures and significant job deterioration that can be seen, felt and experienced in many areas of the country. Just travel outside of the Tri-state area to verify how lucky and insulated we all are.

References:

  • www.workforce.com/section/news/articles/gains-appear-us-corporate-retirement-plan

  • http://latimesblogs.latimes.com/money_co/2010/12/stock-market-2010-dow-index-gold-record-high.html

  • www.bls.gov/news.release/empsit.nr0.htm

  • www.ebri.org/pdf/notespdf/EBRI_Notes_Jan-10.Tenure.pdf

  • http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

  • http://www.irs.gov/publications/p590/ch02.html

  • http://www.irs.gov/businesses/small/article/0,,id=224519,00.html

  • http://www.inflationdata.com/inflation/Inflation/DecadeInflation.asp

Authored by: Jeanne Brutman

Jeanne Brutman is a fully independent Financial Planner in the New York area who advises people on how to grow their personal net worth through Easy, Step by Step Education and Decisions that build their wealth and security over the short and long term. Jeanne can be emailed at jeanne@jeannebrutman.com or visit her at her website www.askjeannebrutman.com for useful tools and tips.

Jeanne's Podcast Link: Setting financial goals (etc.) for the new year.

*All investment advice given by Jeanne Brutman is just opinion. Please consult with your financial professional for a more thorough discussion of what is appropriate for you

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