Sunday, September 21, 2008

Retirement Crisis In America

What are the chances that the average American will have adequate funds at retirement?

According to the National Retirement Risk Index (NRRI), nearly 45 percent of Americans will be at risk of not being able to maintain their current standard of living after retirement.

For Americans who have a major or extended health crisis, financial ruin or bankruptcy is the most likely outcome. Studies demonstrate that over 80% of bankruptcies filed are due to major medical emergencies. (This is true even for individuals and families who have taken their financial advisor's advice, purchased long term health care insurance, life insurance and have saved frugally for their entire working life). Trust me, one major medical crisis can destroy everything you have done to provide your family a decent retirement.

I ought to know, I've been through it with my mother, who had 12 strokes in 2 years before she died. Unless you have millions stashed away in a bank, you will not be able to survive a major medical crisis. Your assets can be seized by the state, and if you don't sell something fast enough, the state will sue you.

Did you think that you were immune? That only deadbeats, waitresses and taxi cab drivers are forced to live brutal, impoverished retirements? Think again. It could happen to anyone.

If you really want to scare yourself - pull out the file that holds all of your insurance paperwork and start reading the fine print. For instance, the language in your long-term disability insurance policy that states you must re-pay the insurance company a portion of the funds they sent you if it is determined that you are permanently disabled and forced to go on social security. (If you don't repay them, social security will not pay you benefits). Yes, I know someone that happened to.

Or, the language in your life insurance policy that excludes payment of benefits for the medical condition that you or a family member have just been diagnosed with.

With the 2005 revisions in bankruptcy law, many Americans will be doomed to a retirement plagued by poverty, malnutrition, and a lack of proper medication and health care. Since women tend to out live men, elderly women will be the ones who suffer the most - and will be in most cases, the spouse left to pay off the bankruptcy in community property states.

Without access to affordable health care, (an annual exam for a woman - mammogram and pap smear - costs $700 in Bellingham) many serious medical conditions will remain undiagnosed until a man or woman is so seriously ill that they are hospitalized. Who pays for the under-insured or uninsured? We do.

The only place an uninsured individual can seek medical care is an emergency room. In 2005, the U.S. Census reported that 46.6 million Americans are without medical insurance. That number is growing.

So, who should we blame for the impending crisis? The Democrats? The Republicans?

How about Ourselves?

Americans have a right (if not a duty) to petition government to draft legislation that will provide citizens in the private sector with portable retirement plans and affordable medical coverage.

Or, at the minimum, demand that the federal Social Security Insurance program is overhauled so it can provide adequate funds for workers at retirement. (This means that Congress will be required to keep it's hands off our Social Security funds in the future).

Are you one of those die hard conservative types who wants to scream, that's not my job, you whiny, liberal, socialist, ninny! This is America and those "people" are supposed to take care of themselves!

Well, here's the reality of the situation, my friend. Pay now, or pay later. It's your choice. (One way or the other, you will pay). Taking a few, carefully thought out steps to ensure that everyone has adequate retirement and medical care will save frugal taxpayers (like yourselves) billions, if not trillions of dollars in the future. In fact, the "future you save" may be your own!

Interested in learning more about this issue? A blog called "Decision Street" posted a thoughtful article back in July of 2007. Here's an excerpt by author KAH for your review:

"The Center for
Retirement Research at Boston College is the torch bearer for thoughtful and thorough analysis of what’s going on with retirement in America. If you’re interested in the topic, you should regularly check out their site.

Here’s the lead on their most recent briefing, entitled:
Is There Really a Retirement Savings Crisis? An NRRI Analysis . . .

"The National Retirement Risk Index (NRRI) has shown that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, nearly 45 percent will be at risk of being unable to maintain their standard of living in retirement..."

The key to understanding this piece is the NRRI. The National Retirement Risk Index provides a measure of the percent of working-age American households who are at risk of being financially unprepared to retire. As you might expect, this varies by age group (or cohort). The differences in how the NRRI is calculated and recent scholarly work attempting to define the concept of “optimally saving” for retirement has led to some amount of confusion and pointless debate among people with an axe to grind. If you want to get into the math, read the article, but if you don’t, I’ll summarize the summary . . ."

"When to reconcile the math between the various approaches,they all point to the same conclusion: Plan on working longer and saving more. The younger you are, the more likely you are to run short of money . . .assuming you don't have a major and extended health crisis in which case you are guaranteed to run out of money."

The entire article can be read here: Is there really a retirement
savings crisis?

For more information, check out this study: Do We Have a Retirement Crisis in America?Douglas Fore, TIAA-CREF
InstituteSeptember 1, 2003 Issue #77
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This article summarizes findings on the state of the retirement
income security of Americans. Trends in pension coverage and participation
are documented, as well as the saving rate and net worth of American
households. In addition, the composition of federal government expenditures is discussed, and future trends in social insurance programs are detailed.

What can we do to protect ourselves from this crisis? Here are two expert's recommendations for your review and consideration.

1) First, a paper by Henry H. Drummonds, The Aging of the Boomers and the Coming Crisis in Americas Changing Retirement and Elder Care Systems, 11 Lewis & Clark Law Review 267 (2007)

There's a summary of the paper posted on Boley Blogs, the legal research blogs for Lewis and Clark's law school:

An aging population, coupled with a trend toward shifting risk from employers to individual employees, has created a variety of issues within America's retirement system. In searching for a solution to the coming crisis, this Article steps back to analyze the retirement system as a whole. Instead of examining each type of retirement plan individually, the author argues for fundamental change within the entire retirement framework.

Because the policy behind ERISA” creating tax benefits to reward long-term employment” has changed, America needs a new comprehensive retirement policy that accounts for the crisis facing the current pension system. The author contends that rather than fashioning individual solutions for each problem, the situation requires a broad solution governed by an overarching theme.

Professor Drummonds calls for a “new ERISA,” integrating all of the disparate parts of America’s emerging retirement system. He argues the social security system should be maintained as a social, not retirement program, guaranteeing every worker some subsistence level income against the vicissitudes of life. He calls for the conversion and phasing out of defined benefit plans in the private and public sector toward the defined contribution/individual account model as fairer to the children and grandchildren of the Boomer generation.

2) Here's what the New America Foundation recommended for the state of California:

Every day, six million Californians, or roughly 43 percent of workers in the state, go to work for an employer that does not provide any type of retirement pension or savings plan. This lack of retirement savings opportunities puts California working families at risk.

On Wednesday, May 21, Mark Iwry of the Brookings Institution presented on the current retirement savings crisis in America -- its causes and the continuing effect it will have on the financial security of working families as well as the state and national economy. Mr. Iwry also discussed state and national policy options to significantly encourage retirement savings and the accumulation of assets by lower- and middle-income workers.

Mark Iwry is former benefits tax counsel for the Treasury Department. He is an expert on employee benefits, pensions, retirement, savings, and health care, and frequently advises and testifies before Congress on these issues. At Treasury, where he oversaw national policy on tax-qualified pension and 401(k) plans, as well as other employee benefits, Mr. Iwry played a key role in developing many important reforms to the nation's pension system. Mr. Iwry is one of the originators of the concept of state portable retirement savings account for private sector workers.

Mark Iwry's Powerpoint Presentation (PDF, 24 pp.)

From the terrible winepress of financial ruin will come terrible wrath. (for those readers who have not read the Grapes of Wrath, I suggest you do so).

55, and haven't saved a dime? Here is Liz Pullman's savings chart to get you off to the right start.

Someone who earns $40,000 a year would need to put aside 27% of her income to retire at 65.
Someone who earns $60,000 should contribute nearly 33%.
Someone who earns $80,000 would have to save nearly 37%.
Someone who makes $100,000 would have to shovel in 40%.
Clearly, few people will be able to pull off savings rates anywhere close to those levels.
But not all is lost.

You can use the MSN Money Retirement Planner to fiddle with some of the assumptions that can make a big difference in how much you need to save. Working longer, for example, can make a big difference, as can living on less money in retirement (more on that in a moment). Speaking of which... for full article, click here:

Later in the week, Latte will attempt to tackle the medical insurance crisis.

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