The Retirement Crisis: Worse Than You Think

Today is Thanksgiving, a revered holiday when families across the country gather to eat sumptuous meals and give thanks for their blessings.

So now’s an opportune time to ask: will millions of seniors one day find themselves destitute and reduced to eating cat food? Let me put it this way: America faces a full-blown retirement crisis.

A recent Federal Reserve report shows that 42% of people aged 18 to 29 have no retirement savings along with 26% of people aged between 30 and 44. As retirement gets closer, 17% of those aged between 45 to 59 have a complete lack of retirement savings. For those aged 60 and over, 13% have no financial cushion.

The following chart paints the grim picture:

The shrinking social safety net…

These unprepared folks will need Social Security the most and it probably won’t be enough. In fact, the social safety net could get even smaller. Politicians in Washington are talking about cuts to social programs, especially to Social Security, as a way to close the massive federal budget deficit caused by the 2017 tax cuts. The most discussed curtailment of Social Security involves raising the retirement dates for eligibility.

Under current law, the “early retirement” age of 62 is when you can begin collecting Social Security benefits. However, I strongly advise you to wait for “full retirement” age, if possible. If you start your retirement benefits at age 62, your monthly benefit amount is reduced by about 30%.

Your full retirement age is determined by the Social Security Administration based on when you were born. For example: If your year of birth is 1943-1954, your full retirement age is 66.

Experts estimate that benefits drop roughly 7% across the board for each year that the full retirement age is increased. Current proposals for raising the age brackets are all over the map. Another proposal under discussion is to terminate or drastically reduce cost-of-living adjustments.

To be sure, these GOP-led proposals would face a rocky reception in the Democratically controlled House of Representatives. But those who wish to slash Social Security benefits are persistent and they won’t quit trying.

According to its latest annual survey, the Transamerica Center for Retirement Studies found that 77% of respondents agree with the statement: “I am concerned that when I am ready to retire, Social Security will not be there for me,” including Generation X (84%), Millennials (80%), and Baby Boomers (65%).

Are people afraid? You bet they are. According to the Transamerica survey, 70% of Americans fear outliving their money in retirement more than death itself.

Your Four-Step Checklist

Want to make sure that pet food isn’t on your menu one day? Start by following this checklist:

1) Set a Retirement Date

It’s important to have a specific date in mind for when you plan to retire. This should be based on multiple factors.

If you enjoy your job, would you prefer to keep working (and saving) a little longer? It’s tough to get back into the working world once you’ve left it behind.

Are you slated to get a defined-benefit pension from your job? Are you fully vested? If so, you may not need to make significant changes in your investments.

When are you eligible for full Social Security benefits? As I mentioned above, if you start to collect your benefits earlier, your monthly payments will always be lower than if you had waited.

Make an assessment of your future spending needs. Will you sell your home and move to a lower-cost area? What are the tax consequences of this? After you set a specific target, you can start formulating your strategy for getting there.

2) Create a Withdrawal Plan

It’s usually best to let your wealth compound tax-free for as long as possible. The greater variety of accounts you have, the more opportunities to diversify your tax savings.

As a general rule, you should withdraw cash from taxable accounts first. Later on, focus on tax-deferred accounts such as traditional Individual Retirement Accounts (IRAs) and annuities.

Leave accounts with tax-free withdrawals for last. An example of such an account is the Roth IRA, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free.

Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all.
Early in your retirement, converting currently taxable assets to spending money makes sense because little or no additional tax likely will be due.

First, take dividend income and any mutual-fund distributions in cash instead of reinvesting them. You pay tax on these payouts even if you reinvest them, so this step won’t cost you anything.

Next, sell investments with no cost basis or the highest basis and therefore no or low taxable gain.

Assets with no cost basis include money funds and bank CDs as well as Treasury bills and various types of bonds held to maturity. Bond funds likely carry a high basis compared with your sale price, and therefore low tax liability.

Ideally, you’ll be more passive in taking long-term gains and more active in “harvesting” your tax losses.

Continuing to hold profitable, long-term investments in a regular account is a form of tax deferral. If you sell losing investments, you offset your tax liability on any gains you’ve taken with other investments.

3) Shield Inheritance

If you don’t take measures ahead of time, Uncle Sam will take a huge bite out of your inheritance via the capital gains tax.

One of the few ways to sidestep the substantial capital gains tax is to make a gift of property to a charitable organization. When you do so, you may take a deduction based on the full fair market value of the property, rather than just its cost.

The tax savings will largely depend on the amount of appreciation. In turn, you can reap greater income by investing these tax savings.

The most popular types of charitable giving plans are the annuity trust, revocable trust, pooled income fund, gift annuity, and life estate agreement. Consult your tax accountant for details, to find the plan that’s precisely right for you. But do it now.

4) Don’t Under-weight Stocks and Over-weight Bonds

Investors should get more conservative as they get older, mainly because they have fewer working years in front of them. If your portfolio takes a turn for the worse when you’re in your 40s, you still have plenty of time to bounce back.

However, if your investments take a nosedive when you’re 65, you’re in a far worse predicament. That’s why, as you get older, you should increase your portfolio’s bond weighting.

That said, it’s a common mistake to get too conservative. Keep in mind, bond yields fall as interest rates rise. In a rising interest rate environment, a large allocation to bonds may result in significant capital loss.

Allocations that currently make sense right now, generally speaking: 50% stocks, 25% hedges (such as precious metals), 15% cash, and 10% bonds.

Our team of investment experts will help you make the right investment moves, to ensure that you eat well in retirement…and that every Thanksgiving is a prosperous one.

Questions about retirement investing? Drop me a line:

John Persinos is the managing editor of Investing Daily.