Tuesday, May 1, 2012

THE RISKS RETIREES NEED TO BE AWARE OF

Are we prepared for retirement?   Recent figures from the Employee Benefit Research Institute reveal that 47% of Americans, ages 56-62, would run out of funds necessary to pay for basic retirement expenditures if they retire at age 65.  Six in ten Americans express significant concern about their retirement savings and investments.  So why are people so unprepared?  That is a good question and what do they need to be aware of for the future?
The way retirements are funded is rapidly evolving.
1)      The future of Social Security is in question.  Every day more more and more of the 78 million baby boomers approach retirement age.  The Census Bureau estimates that the ratio of people in their retirement years, 65 and older, versus those in their working years, 20 to 64, will rise from 20.6% to over 35% in 2030.  That will put a tremendous strain on the Social Security system.
2)      Pension plans are disappearing.  The traditional employer-sponsored pensions seem to be gone.  The number of defined pension plans being offered to employees has been shrinking steadily since 1980. Defined contribution plans, such as 401(k) s and 403(b) s are the new vehicles for retirement.  The problem with these plans is that these plans leave investors highly vulnerable to market volatility.  The burden of financing retirement is shifting squarely on the shoulders of individuals.  Adding to this burden are financial risks that make retirement today more challenging than ever.
3)      We are living longer.  Life expectancy has increased by more than 10 years and most experts see the trend continuing.  This means retirements could last more than 30 years or more.  Somehow we have to fund these extended years.  We will need an income source that can help maintain the quality of life we enjoy. 
4)      Rising costs are affecting our pocketbook.  Expenses in retirement will tend to keep rising.  We will have to find income to account for these increases. Specifically, there are three key cost related issues that can erode the purchasing power of retirees over time.  The first is inflation.  Most people underestimate the impact inflation can have on their standard of living in retirement.   Inflation can be a significant risk especially for retirees.  Basic necessities such as food, housing, transportation and utilities have risen at between 1% and 13% annually.  The second issue is taxes.  Federal taxes do fluctuate up and down.  According to the Tax Foundation, federal income taxes would need to double in order to close the deficit.  The last issue is healthcare.  Healthcare costs have risen 149% between 2000 and 2009-over four times greater than workers’ incomes.  Healthcare costs will likely continue to rise.
5)      Market uncertainty is posing a risk to financial security in retirement. Volatility poses one of the biggest threats to retirement savings because a downturn just before or after retirement can be devastating to an unprotected portfolio.  It could take years to recover from losses; precious time that someone entering retirement might not have.  One thing we need to do is to understand the financial challenges we have to face in retirement and address them.

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