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The perfect storm

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Posted: May 23, 2008 3:28 p.m.
Updated: July 24, 2008 5:02 a.m.
I recently attended an investment seminar and received the following information which is taken from a paper written about personal finance by two professors of finance and insurance, David Babbel and Craig
Merrill of the Wharton Financial Institutions Center.

"The Perfect Storm" addresses retirees taking strategic action in the deployment of their accumulated savings and funds as they begin retirement. Five forces are converging upon Americans in what some have called "The Perfect Storm" that is about to engulf us from all sides. The best we can do is to organize our own finances in such a way that we can provide for ourselves because there isn't anything we can do to stop these converging forces.

Excerpts of the five forces are:
* The decreasing levels and importance of Social Security benefits: Relative to the benefits provided to our parents, people currently in their working years will receive a much lower return on their Social Security contributions. Why? Because those who had the lowest earnings are projected to receive a rate of return seven times higher than returns projected for those whose earnings were taxed at the maximum levels. However, the rates of return for both groups are very low.

* The demise of defined benefit (DB) pensions: Over the last 15 years, there has been only one new pension program of any size initiated in the U.S. The number of pension plans in the U.S. peaked at 175,000 in 1983, and has since declined to less than 25,000. About 30 percent of the remaining pension programs plan to close within the coming two years.

Many of those that still remain are insolvent or otherwise underfunded, and the government's Pension Benefit Guarantee Corporations (PBGC) is reeling under a load it cannot sustain. During the same time period, 401(k) defined contribution (DC) plans increased from around 17,000 to over 450,000. When all defined contribution type plans are included, there are over 650,000 today. While there are various reasons for the change, economic factors and government initiatives will change the way we cope with retirement income needs. Over time, the problem is bound to get worse. 

* The aging of the baby boom generation: Beginning in 2006, the first members of the largest generation in American history turned 60, leaving their jobs and entering the retirement force. The "boomers," as this generation is known (born from 1946 to 1964), will continue to exit the workforce for at least another 20 years. Currently representing more than 27 percent of the U.S. population and 47 percent of all households, they will become dependent upon Social Security, retirement plans and any accumulated assets.

* The emergence of post boomers: Generation X (born between 1965 and 1979) and Y (born between 1980 and 2001) will be burdened not only with the responsibility of providing for their own future retirement and health needs, but also with supporting the Social Security and Medicare costs of the boomers. The net effect of this is that there will soon be many more people draining funds from the Social Security system, with far fewer people contributing to it.

In 2006, there were 7.2 persons between the ages of 18 and 65 for each person over 65. Within the next
23 years, this ratio is projected to drop to 3.7, according to the Census Bureau. (It doesn't take a genus to figure out the less numbers contributing will have to pay a lot more to take care of those drawing
from the system).

* The increasing longevity of the American population: We are all aware that life expectancy has increased over the past century. Since Social Security began in 1940, the number of months we can expect to receive
benefits for those who reach age 65 has increased by roughly 50 percent for men and women. When Social Security was instituted, the average person did not live to age 65. Increased longevity has placed a
tremendous burden upon the retirement system. Note statistics mentioned in previous articles, a couple age 62 who are non smokers, one is expected to live to age 92.

So, now you see the dilemma. The decreasing rates of return on our Social Security contributions, the accelerating demise of defined benefit pensions, combined with the advent of America's largest
generation in history now approaching retirement, with their longer expected lifetimes, and the smaller number of people expected to support their unfunded benefits, taken together we have all the ingredients
necessary with a few extra thrown in for bad measure, for the perfect storm. So, what do you do about it?

First, don't depend on the government to support your future. Second, make your own plan, work with
a financial advisor, and stick with the plan that will work for you to meet your goals. Third, pay attention to what your legislators are doing, how they are spending your tax dollars and make your feelings

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment. His column represents his own views and not necessarily those of The Signal.


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