Retirement Planning

Will You Be Able to Retire? Your reaction to that question is probably, “First things first! I’m worried about getting a job, not about retiring!” However, understanding the retirement situation can help you land a job because (1) this is an important issue today, (2) employers like to hire people who know what’s happening in the real world, and (3) professors often test on the time value of money with problems related to saving for future purposes (including retirement). For an interesting website that looks at global savings rates, refer to http://www.gfmag.com/tools/global-database/economic-data/12065-household-savings-rates.html#axzz20fpvnu2g A recent study by the Employee Benefit Research Institute suggests that many U.S. workers are not doing enough to prepare for retirement. The survey found that 57% of workers had less than $25,000 in savings and investments (not including the value of their homes). Equally concerning, 28% of those surveyed said they had “no confidence” that they would be able to retire comfortably. This is the highest percentage recorded since the survey was established 23 years ago.1 Unfortunately, there is no easy solution. In order to reach their retirement goals, many current workers will need to work longer, spend less and save more, and hopefully earn higher returns on their current savings. Historically, many Americans have relied on Social Security as an important source of their retirement income. However, given current demographics, it is likely that this important program will need to be restructured down the road in order to maintain its viability. While the average personal savings rate in the United States had edged up in recent years, it still stands at a fairly low level of 4%.2 In addition, the ratio of U.S. workers to retirees has steadily declined over the past half century. In 1955, there were 8.6 workers supporting each retiree, but by 1975, that number had declined to 3.2 workers for every one retiree. From 1975 through 2009, the ratio remained between 3.0 and 3.4 workers for every retiree. Current projections show this ratio significantly declining in the years ahead—the forecast is for 2.0 workers per retiree in 2035 and 1.9 workers per retiree in 2085.3 With so few people paying into the Social Security system and so many drawing funds out, Social Security is going to be in serious trouble. In fact, for the first time since its inception, in 2010 (and 7 years ahead of schedule), Social Security was in the red—paying out more in benefits than it received in tax revenues. Considering these facts, many people may have trouble maintaining a reasonable standard of living after they retire, and many of today’s college students will have to support their parents. This is an important issue for millions of Americans, but many don’t know how to deal with it. Most Americans have been ignoring what is most certainly going to be a huge personal and social problem. However, if you study this chapter carefully, you can use the tools and techniques presented here to avoid the trap that has caught, and is likely to catch, so many people. Questions: 1) Are you part of the 57% of workers with less than $25,000 in savings and investments (not including the value of your homes? Why or why not? 2) Are you part of the 28% of those surveyed that say they had “no confidence” that they would be able to retire comfortably? Why or why not? 3) What do you see as the biggest reason many are not saving for retirement? 4) Do you believe people can maintain a reasonable standard of living after retiring if they depend on only Social Security? Why or why not? 5) How do you feel about privatizing Social Security?