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Social Security


Coming ‘Of Age’ – ‘Retirement Age’ That Is…As more and more of our ‘baby boomers’ come of age and near the time for applying for social security benefits, I thought it might be appropriate to review a little bit about our social security benefit program as it applies to everyone.

It is extremely important to understand what our social security options are before we make a potentially irrevocable decision about taking and receiving our benefits as the dollar amounts received over our lifetimes could be meaningfully more!

Taxes – Funding Benefit and Receiving Benefit
Social security benefits are funded by contributions made through payroll taxes that are half paid by the employer and half paid by the employee with self-employeds effectively paying both halves. When we receive social security benefits they are income tax free unless you ‘make too much money’.

So managing income recognition and managing the character or type of income (cash flow) received when we are drawing social security benefits can be extremely important in maximizing what we keep of this otherwise income tax free benefit!

Social Security Benefits Started Before Full Retirement Age (FRA)
If you start your social security benefits before FRA you will receive a reduced benefit of about 75% at age 62, about 80% at age 63, about 87% at age 64 and age 65 about 93%. Another complication of drawing social security before the year in which you turn FRA is that if you keep working you will have to give back some of your social security earnings.

In 2013 that $1 of ‘giveback’ for every $2 of earned income starts when you make more than $15,120. In the year you reach FRA the ‘giveback’ becomes $1 for every $3 of earnings above $40,080 (2013 amount).

Social Security Benefits Started At Full Retirement Age (FRA)
Social security benefits are calculated based on a minimum of 40 credits (quarters of covered work) to be eligible for benefits. Depending on your birth date, your age of retirement, FRA, will vary between 65 and 67 years of age (if you were born after 1960).

The Social Security Benefits Administration has a calculator for you to run some what-ifs about choosing a retirement date. They also have other calculators that can run estimated benefits, offset effects (see discussion below), etc., etc. Besides the when to take retirement question, there are other strategies to consider in maximizing the social security benefits to be received.

One such strategy is called ‘file-and-suspend’ which may allow a qualifying recipient to suspend payments while the spouse files for spousal benefits.

Another strategy comes available to us when we have been married to another for at least 10 years. In those cases, you may qualify for benefits based upon the former spouses earnings. If you wait until your FRA, you can file on your former spouses earnings for a spousal benefit and delay taking your retirement until age 70. This strategy will not work if you apply for the spousal benefit before FRA!

Social Security Benefits Started At Age 70 (Post-FRA)
By waiting until age 70 to draw upon our social security benefits a person born after 1943 would have their FRA benefit increase 8% per year by waiting until age 70! Very compelling, indeed!

Social Security Benefits Post the Windsor Supreme Court Decision
As a result of the US Supreme Court decision on same sex marriages the Social Security administration is no longer prohibited from recognizing same-sex marriages for purposes of determining benefit claims filed after June 26, 2013. The decision and its social security benefits impact are being discussed by the Administration and exact details on same-sex marriage benefits will be forthcoming.

Medicare Starts At Age 65
Social security is one matter, Medicare is another! If you do not sign up for Medicare at age 65, your Medicare coverage may be delayed and cost more!

‘Other Pension’ Offsets to Social Security Benefits Received
Two issues that could impact your benefit received are the following.

  • Government Pension Offset. If you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes, your Social Security spouse’s or widow’s or widower’s benefits may be reduced.
  • Windfall Elimination Provision. The Windfall Elimination Provision primarily affects you if you earned a pension in any job where you did not pay Social Security taxes and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security benefit than you otherwise would receive.

Survivors Benefits and Benefits for Children
Benefits can be made available to others based on our benefit should we die or become disabled. Two of those are survivor benefits (spouse) and benefits for children.

  • Survivor Benefits. Your widow or widower may be able to receive full benefits at full retirement age. Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and younger than age 16 or disabled.
  • Benefits for Children. Children of disabled, retired or deceased parents may be entitled to a benefit. Your child can get benefits if he or she is your biological child, adopted child or dependent stepchild. (In some cases, your child also could be eligible for benefits on his or her grandparents’ earnings.)

To get benefits, a child must have:

  • A parent(s) who is disabled or retired and entitled to Social Security benefits; or
  • A parent who died after having worked long enough in a job where he or she paid Social Security taxes.
  • The child also must be:
    • Unmarried;
    • Younger than age 18;
    • 18-19 years old and a full-time student (no higher than grade 12); or
    • 18 or older and disabled. (The disability must have started before age 22.)

Concluding Thoughts.
Social security benefits have been providing a ‘safety net’ to our citizens since the program came into existence.

Pre-retirement benefit programs like ‘Benefits for Children’ and ‘Surviving Spouses’ provide support to those qualifying families who have lost a breadwinner.

Retirement benefit program options are diverse and not readily understood by many. For some households social security retirement benefits comprise as much as 85% of household income so ensuring that one receives as much as is legally possible of the benefits that they have earned the right to, is so important! Consult with your advisor before you make any decisions. You may well be bound to them for your lifetime!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Thinking Out Loud About Long Term Care


A recent study released by Mutual of Omaha quotes the following statistics regarding Long Term …

  1. 75% of people over age 65 eventually need long term care
  2.  The average nursing home stay is 3 years
  3. 50% of people entering a care situation are penniless within one year
  4. 1 in 5 households provide long term care to someone over age 18
  5. The average cost of nursing home care is $80,650

With respect to those that purchased long term care policies the study found that …

  1. 55.1% of long term care policies were purchased by those between the ages of 55 to 64
  2. 88.3% of purchase decisions were motivated by planning for retirement or retiring

Some of the motivating factors the study found that led to the purchase decision were …

  1. Protect assets
  2. Avoid burdening family
  3. Ensure they receive care in a quality facility
  4. Ensure that they have options for care
  5. To Maintain personal dignity and independence
  6. Peace of mind …

IN reading through some of the study’s findings I hope that our blog readers might be able to gain some perspective for their own thinking on financially protecting themselves from a potential long term care need.

When thinking about where we might find coverage for that potential long term care need (expense), we should be reminded that Medicare does not provide for Long Term Care. Medicare pays only for medically necessary skilled nursing facility or home health care however you must meet certain conditions for Medicare to pay for these types of services. Generally, Medicare pays the full cost of care for NF services for up to 20 days per benefit period and partial costs for the remainder of 100 days when the client meets Medicare requirements.

TYPES OF POLICIES TO COVER LONG TERM CARE EXPENSES
Policies (insurance plans) that do cover long term care expenses come in all colors and flavors. There are:

  •  tax-qualified plans,
  • non-tax-qualified,
  • partnership plans, and
  • non-partnership plans.

There are also traditional life insurance and annuity policies being issued now from insurance companies that have Long Term Care riders. Additionally, existing life insurance may be used as a means of funding a long term care need. Choices and options for long term care coverage are plentiful and there are significant cost and benefit tradeoffs to any alternatives you may compare so do your homework so that you can make the optimum decision for you and your family.

TYPES OF CARE OR LEVELS OF CARE DEFINED FOR LONG TERM CARE
There are varying types of care depending on what kind of care you need, where you get the care, and where you live. There are policies that pay benefits out of a ‘pool’ of funds that pay you until that ‘pool of funds’ runs out of money irrespective of the years of benefit you had purchased.

TYPES OF BENEFIT PROVISIONS REGARDING PAYMENT FOR LONG TERM CARE EXPENSES
There are policies that start paying you (the elimination period) based on days you actually had ‘service care provided’ versus the calendar days that you are eligible for policy benefits (activities of daily living limited). This could potentially extend the elimination period way beyond the stated days of elimination you thought you had to wait for so you might want to consider the calendar day policy. There are reimbursement plans that pay the long term care expense, up to the daily limit, when the service is given. Conversely an indemnity plan pays the daily benefit whether or not a long term care expense is incurred that day or not. So you will pay more for an indemnity plan than the reimbursement plan. But some folks, maybe with faulty thinking, like the feature as a sort of ‘premium repayment’ benefit. I have to say, you always need to run the numbers but usually the old adage – ‘there’s no free lunch’ applies and in most cases I find it to be an expensive lunch!

CONCLUDING COMMENTS …
So needless to say there is a lot to consider regarding the long term care need and how to pay for it should it arise. A good reference site to begin educating yourself on Long Term Care can be found at the Medicare.gov website. Another government site is the Department of Health and Human Services National Clearinghouse for LTC information.

Individual long term care policy design is very versatile but you need to know what you are getting and what you are giving up in benefits and costs when tailoring a policy purchase for your family. Remember, too, that the long term care decision isn’t just about us, it is about those around us and the loved ones that care for us and making things as easy as possible for them should a long term care event arise.

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Falling Off the Cliff


I am reminded of Douglas Adams’ quote “It’s not the fall that kills you; it’s the sudden stop at the end.” The U.S. Government, as a way to help the economy out of the financial crisis, implemented financial measures designed to boost the economy through lower taxes, employee payroll tax reductions and unemployment compensation among others. While the U.S. economy was saved, the recovery has been tepid at best. The pressing issue facing the U.S. is that most of the measures that have provided financial life support are all due to expire at the end of 2012.

Ben Bernanke, Chairman of the Federal Reserve, dubbed the expiring stimulus measures a “fiscal cliff.” Chairman Bernanke urged Congress to put government debt on a long-term sustainable path, but should not do so at the expense of short-term growth. There is fear that Congress will be engaged in grid lock due to the upcoming elections and that the financial measures will expire at year-end. Should the U.S. economy fall over the fiscal cliff, the pain won’t be felt until the economy comes to a sudden stop.

The programs set to expire are the Bush Tax Cuts from 2001, 2003 and the more recent 2009, 2010 stimulus measures that created the Employee Payroll Tax Reduction and Emergency Unemployment Compensation programs. The estimate by Ned Davis Research on fiscal drag ranges from $72 billion to $388 billion in lost output. Should the loss be toward the higher end of the range, the sudden stop may come sooner than many of the pundits are predicting.

Congress may decide to “punt” like they did last year and extend the financial measures. The risk of this tactic is that while it may spare short-term growth, the long-term debt burden may become unbearable. The Congressional Budget Office projects that the ratio of government debt to Gross Domestic Product would increase to 93%. A larger debt burden may slow the economy by requiring the government to spend more on interest payments on the debt instead of spending on Social Security, Medicare, defense and other important areas. Over half of the interest payments could be going overseas as foreign investors currently hold more than half the U.S. debt.

The U.S. Government will also face increased funding pressures from the near depletion of the Social Security and Medicare Trust Funds. The 2012 Trustees report showed the Social Security Trust fund will be depleted in 2033, three years sooner than last year’s estimate. After 2033, the Trust will only be able to support 75% of benefits promised. Medicare is projected to face the same fate in 2024 with revenues sufficient to cover only 87% of costs.

Social Security and Medicare outlays currently account for a combined 34.5% of government spending, the largest combined spending of any other government program. These entitlements are going to become more burdensome as the Congressional Budget Office estimates that Social Security and Medicare will account for 43% of all U.S. government expenditures in just ten short years.

The burden of these programs will also be felt as entitlements become a larger percentage of the United State’s Gross Domestic Product (GDP). In 1970, Social Security and Medicare were approximately 3.9% of GDP where today it is nearly 9% of GDP. In 2022 the Social Security Administration estimates that the two programs will be nearly 10% of GDP and upwards of 12% in 2033. While these appear to be small incremental gains in terms of percentages, perspective must be kept on the sheer dollar size of the U.S. GDP.

Gross domestic product (GDP) refers to the market value of all officially recognized final goods and services produced within a country in a given period. The U.S. Nominal Gross Domestic Product as of March 31, 2012 was nearly $15.5 trillion dollars. Over a 20-year period, the rise in Social Security and Medicare spending as a percent of GDP will equate to approximately $465 billion dollars. The ability for the United State to avoid a “Greek Tragedy” is to keep our debts and entitlements to a manageable percentage of GDP. As the percentages continue their unabated rise, our Nation’s capacity to shoulder these burdens becomes more and more strained.

There is a definite “fiscal cliff” ahead. The challenge is we don’t know if it is 12 months or 12 years in front of us. The job of the Federal Reserve and our elected officials is to minimize the height of the fall from the top of the cliff. We can sustain a slow down, not a sudden stop.

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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Coming ‘Of Age’ – ‘Retirement Age’ That Is…


As our baby boomer population starts contemplating the day they will leave the workplace, they begin to realize that there are a lot of decisions to be made regarding workplace and government provided benefits. Decisions regarding pension payouts may be mind-numbing – (a) single life, (b) joint life -100% benefit, (c) joint life – 50% benefit, (d) lump sum etc., etc. The same might be said for social security benefits – (a) take it at age 62, (b) take it at ‘full retirement age’, or (c) take it at age 70, what is the right decision for you? Further complicating the social security election decision could be the ability to draw on benefits of former spouses to whom you were married for more than 10 years. Needless to say there are a lot of decisions ‘of a lifetime’ that need to be made when you ‘come of age’.

Number-crunching a pension plan payout election or number-crunching a 401(k) ‘payout sustainability’ amount are calculations that need to be tailored to the needs of the individual and their comfort level regarding the assumptions used in analyzing the decision options so we won’t explore those calculations here. 

Other coming of age decisions, like Social Security and Medicare can be more generically discussed.

Medicare eligibility begins at age 65. If you enroll to receive social security benefits at, or before, you turn age 65, you will be automatically enrolled in Medicare. If you are not receiving social security benefits when you turn age 65, you can, 3 months before your 65th birthdate or up to 3 months after (to ensure no delay in your Part B benefits), apply for Medicare. Failing to timely file can cause your Part B premiums to jump 10% for each full 12-month period that a retiree did not sign up. Don’t worry if you are still working and have health benefits. The government and your employer plan will coordinate the primary payor issue. Alternatively, if you are still working, you can enroll later without penalty for up to eight months following retirement. Always check with Medicare at age 65 to learn about your options and any penalties that could come into play.

Traditional Fee for Service Medicare or Medicare Advantage. You will have a choice between traditional fee for service Medicare or Medicare Advantage. Traditional Medicare has gaps in coverage so many seniors chose to purchase a ‘Medigap’ policy to help cover those expenses in the gaps. Very important to remember is that a Medigap insurer cannot use medical underwriting in the 6 month window of opportunity (Medigap Open Enrollment Period) which begins on the first day of the month in which you’re both 65, or older, and enrolled in Medicare part B! Prescription drug coverage may be available with a Medicare Advantage Plan as might be vision, dental. Medigap policies sold after January 1, 2006 are not allowed to include prescription drug.

Social Security – Age 62, Age 65 or Age 70About 50% of Americans file for social security at age 62 despite the fact they then will have an approximate permanent 25% reduction of their annual benefit. If, alternatively, we can wait until full retirement age (‘FRA’ – depends on birth year) and beyond, we can increase our FRA benefit by 8% for each year we wait. If we take Social Security before FRA and continue to work making more than $14,640, we will have to repay $1 of social security benefit for every $2 we earn over that threshold. After FRA, there is no earnings problem with having to repay social security benefits paid to you. If you receive a pension or retirement benefit from work in another country, it may have an effect on your Social Security benefits under the Windfall Elimination Provision. If you were married to a person for more than 10 years you may be able to file for benefits based on their earnings history. This can create an invaluable planning opportunity. If we draw Social Security benefits at FRA on the former spouse’s earnings and postpone taking Social Security benefits based on our earnings history, we can take advantage of that 8% per year benefit payout increase effectively increasing our lifetime payout by as much as $100,000 to $200,000!

Needless to say, there are a lot of critical planning decisions to be made when we ‘come of age’. Don’t miss out on deadlines and make your choices wisely. Your decisions will most often be irrevocable so seek counsel from a learned advisor and the Social Security Administration so that costly mistakes do not occur. It’s been your lifetime of work, now that you’ve Come of Age, it’s time to enjoy the all of the fruits of your labor!

David Bergmann, CFP®, EA, CLU, ChFC
Managing Principal
The David Bergmann Group
Marina Del Ray, CA


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Medicare Open Enrollment Changes for 2011


As we approach the final quarter of 2011, folks enrolled in Medicare prescription drug plans ought to be prepared for some changes to the open enrollment period.

First and foremost, the period in which you are allowed to change plans has moved up to the period beginning October 15, 2011 and ending December 7, 2011. In previous years, this period ran from November 15 through December 31. The last application you submit in 2011 before the December 7 deadline will be the plan that becomes active on January 1, 2012. In other words, if you submit an application on November 30, but change your mind the following week, you may still submit another application before December 7. The second application will trump the first.

Unfortunately, marketing activities from Medicare providers can not begin until October 1, leaving a shorter window of time to evaluate options and make decisions in 2012. This not only means that companies can not begin marketing their products to you until October 1, but also means that agents and advisors are not made aware of plan changes and new offerings until the marketing period begins.

One of the more controversial issues surrounding Medicare and prescription drug plan involves the so-called “donut hole”. This gap in coverage has changed slightly in 2012 and will begin after you and the insurer have paid $2,930 for covered drugs and continues until you have spent $4,700. In 2012, there will be some continued relief in the form of discounts in that gap. Brand name drugs will become available at a 50% discount, while generics will receive a 14% discount.

As you are considering your options, there are several factors you want to ensure that you are paying attention to:
– Your current formulary, including the tiers your drugs are placed in
– Co-pays for brand names and prescription drugs
– Deductibles
– Make sure that your pharmacy is an in-network provider
– Alternative options, such as mail-order, that may reduce your costs
– Pay particular attention to your total out-of-pocket costs rather than focusing on premiums

With an earlier enrollment period beginning in just over a month, it is important to begin planning and organizing your information now to ensure you can make a smart decision in the weeks ahead.

Joe PitzlJoe Pitzl, CFP®
Director of Financial Planning
Intelligent Financial Strategies, LLC
Edina, MN


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My Future Health Care Costs


In my blog on July 12, 2011, “What The Federal Budget Dilemma Means to You”, I identified 5 things that you could do to deal with what your future retirement would be like. The second of those items dealt with what the future cost of health care would be in 20 years when we are ready to retire. This blog will deal with some of the issues we may face in the future, including between now and when we retire.

When we think of retirement and our health care, we often think about being eligible for Medicare to be our health care insurer. Sometimes when I meet with a client, the date of retirement and the date of Medicare coverage do not always coincide. In the future, those dates may even be further apart then they are today.

For instance, the other day I met with a client who wants to “retire” in about four years when she will be 62. In her mind that meant starting Social Security and having Medicare to cover her health care costs. There were several issues to get corrected in what she was thinking. The first issue was that Medicare does not start covering her until she is 65 under the rules today. Given her current age, the Medicare program probably will not change this for her, but for those who have 20 years until they retire may find that the age of Medicare coverage may increase to 67 or some higher age.

The second issue we discussed was whether she would really want to start taking her Social Security benefits at age 62 or whether she should wait until her full retirement age (FRA) of 66 to start this benefit when the monthly benefit would be about $550 (30% higher) more than what it would be at age 62.

As we discussed these issues further, it was clear to me that the desire to “retire” at age 62 was due to the stresses of her current job working full time. She was already talking about working part-time now so that she would continue to have her health care coverage through her employer versus “retiring” now. In her mind the primary issue was being able to have the health care coverage until she “retired” as her reason for even working now.

So we discussed what the impact would be if she was not working now as it relates to her health care coverage. She knew that the full cost of her health care insurance today was about $6,000 per year which is what her coverage premiums would be under the COBRA provisions if she left her job. I indicated to her that amount would be increasing by probably 15% per year going forward and that she would be looking at paying this premium for up to 7 years until she was 65.

The client, Nancy, was rather unhappy to think she might have to work until age 65 just so she could have the health coverage from her employer rather than having to use $6,000 to $12,000 per year to buy the coverage if she was not working. These amounts would be in addition to the deductible and co-pays that she would have when she needed to get health care. Fortunately Nancy is a healthy woman with no current significant health issues that require frequent visits to the doctor, pharmacy, or hospital.

These issues have caused Nancy to rethink her plans for when she will retire or at least having to continue to work part time for the next 7 years. This discussion also impacted her thoughts about when she would be starting to receive her Social Security benefits, probably waiting until age 66 to start her benefits.

Now, for those of you who are thinking that you will retire before age 65 in about 20 years. The above example will provide you with some ideas to think about related to how you will be insured if you are not working for an employer during those years between when you “retire” and when you are covered under whatever Medicare program exists at that time.

If you wanted to retire 5 years before Medicare coverage took effect and you had to pay for the insurance coverage yourself, what would you be looking at in terms of premiums? We know that health care costs are going up faster than inflation (about 3% annually). Would it be reasonable to have them go up at 6% annually or 9% or 15%? No one really knows but let’s assume the worst. Nancy’s premiums for single coverage of $6,000 would grow to $18,154 at 6% and to $85,391 at 15% annually in the twentieth year from today. If you were going to insure two lives (you and your spouse), then double these amounts. If you were going to “retire” five years before Medicare coverage was going to be in effect, then multiply these numbers by 5 to get the full amount you would need to cover this one expense.

As you plan today for your future “retirement” and you want to do it sooner than when the federal programs will be covering you, then you need to be saving an additional amount each year in order to provide the amount you need to pay for this coverage.

Based on the above numbers, if you saved an additional $3,000 per year for 20 years and earned a 6% annual return on the invested amounts, you would have enough saved to cover 5 years of health care premiums for a single person if the cost of health increased at 8% annually. Saving $7,000 more each year for that same 20 years would cover the cost of the premiums if they increased at the rate of 15% per year.

Not covered in these numbers would be your cost for Medicare coverage in 20 years. Today, a Medicare covered beneficiary has to pay about $100 per month for the Part B coverage (for physician and outpatient services) and between $96 and $169 per month for the Part D drug coverage and the supplemental coverage plus the cost of co-pay amounts for each prescription and for physician office visits. What you will have to pay for this coverage in 20 years after whatever changes are made to this program in the coming years would be pretty hard to estimate at this time. But it would be important for you to be sure to save an amount each year that you have designated as the cost of your health care going from the age of “retirement” until your demise. This would be above and beyond what you want as your lifestyle costs in retirement.

FrancisStOnge

Francis St. Onge, CFP®
President
Total Financial Planning, LLC
Brighton, MI


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Of Medicare and Medicaid…and a Bit of Social Security, Too


I was not surprised to see how widely Representative Paul Ryan’s budget proposal has been applauded. I have to admire his attempt. Few politicians have been willing to tackle such thorny measures. And the measures are thorny. Three in particular make those who are impacted downright bristly: Medicare, Medicaid and Social Security (MM&S).

The Problem with Entitlements

According to the Congressional Budget Office and others, entitlements – such as MM&S – along with interest payments on the debt, will totally consume the federal budget by about 2025.

Here’s the problem. I cannot find anyone who wants their Social Security benefits cut, nor can I find folks who prefer to increase their health care costs in retirement. In fact, the opposite is true. Many people nearing, or in retirement, are worried about running out of money. For better or worse, most people today include a heavy dose of Social Security and Medicare benefits as part of their retirement funding scenario.

No matter how you look at it, too many people are nearing retirement significantly underfunded. When you add the anticipated cost of health care, the outlook is not pretty.

Representative Ryan’s budget proposal has a major focus of cutting entitlements, and he’s right in saying that something has to be done with these huge drains on federal budget resources. However, his privatization proposal can be translated as saying, “You will get fewer federally-funded benefits and you will sustain greater health care costs”.

What to do

I will be the first to admit that I do not have a fool-proof solution to the budgetary problems facing our nation. A good start would be to open up all the books and really eliminate wasteful spending…but that’s just not likely to happen. I agree with those who are saying that cuts must be made, and that some of those cuts will likely be painful.

So if I’m not going to present a solution to our budget problems, why am I writing this? Reasonable question, and here’s why. I don’t hold out much hope of the government actually addressing our fiscal issues effectively and efficiently. As a result, we have some personal financial planning to do.

One way or the other, it seems likely that at least some MM&S benefits will be diminished. If this is true, and we do not want to live in retirement that much closer to the poverty-line, we need to increase our personal funding objectives. I am suggesting that we save more money. Actually, quite a bit more (and yes, I do understand how difficult that can be given the current state of our personal, and our nation’s, economy).

Currently, Social Security provides an average monthly benefit of around $1,200. Let’s assume that those benefits remain the same. The average retirement-age person has saved $100,000 or less. Assuming a 20-year life expectancy and average inflation and investment return, that will add around $500 or so to monthly income. Now we’re up to about $1,700 per month. However, we have not addressed health care expenses.

For the moment, let’s stay with the latest assumptions showing roughly $250,000 anticipated out-of-pocket health care expenses for the average retired couple. Using the same 20-year life expectancy (which really is too low, given current longevity statistics), these expenses would add about $12,500 to your annual budget. So you will be living on $1,700 per month, with about $1,000 of it going to fund health care expenses…and remember, these will almost certainly increase if some version of the current budget recommendations are enacted.

I cannot think of anyone who will be happy with the type of retirement this scenario offers. So we have a choice, increase savings now (which likely means adjusting our personal spending habits) or have a non-health care retirement budget of $700 per month or so.

For every $1,000 you can save by retirement, you can increase your monthly income by about $6. If you want an additional $60 per month, save $10,000 more. Want $600/mo. – save $100k. (Disclaimer: these calculations are most likely optimistic and understate the likely reality.)

Hard, but most likely true. Especially if the government is going to cut back on entitlement benefits, each of us will be even more responsible for our retirement security. The best way to accomplish this is to start now to do as much as we can for our own future.

Michael Snowdon Michael Snowdon, CFP®
President
WealthRidge
Greenwood Village, CO