The other day I ordered online a library book published in 2013, which I thought was entitled 65 Things to do When You Retire. But once it arrived and I started to leaf through the pages, I realized with some disappointment that this particular edition of what was evidently a series was dedicated solely to travel, as you can see in the prominently featured word in red on the cover image to the right.
Now I know travel is regarded as one of the bedrock activities of retirement, if not the holy grail itself — provided you’re physically and mentally healthy, financially equipped to bear the costs, and young enough to enjoy it.
A curmudgeon’s view: Travel is expensive and over-rated
Based on a survey released this year by the TransAmerica Center for Retirement Studies, it appears that the majority of Millennials and Gen Xers believe Social Security will no longer exist by the time they are ready to retire. It’s time to set the record straight about what Americans can realistically expect from Social Security in the coming decades and what they can do to secure their own financial future.
The Truth about Social Security
The truth is Social Security is in need of a fix. Social Security trustees believe the program will still be financially solvent through to 2019. However, if no changes are introduced by 2033, the trust fund will be exhausted. Based on the latest Social Security Trustees’ report, money generated from current payroll taxes at that point are estimated to be enough to support only 77% of promised benefits until the year 2088.
Changes to the Social Security program are required at a congressional level and with the current stalemate in Congress over other political agendas, Social Security has apparently taken a backseat. Congress hasn’t passed any significant ratification to the program since the last reform of 1983.
A public opinion poll sponsored by Voice of the People in February 2014 suggests Americans are willing to make some tough concessions. A representative majority of the public supports measures such as raising the payroll tax rate and the annual cap on income, reducing benefits for top income earners and increasing the full retirement age to 68 or more.
Count Social Security as a Bonus
It’s important to note Social Security was never intended to serve as a full pension but rather as a supplemental retirement and disability insurance program. The reality is that many Americans rely solely on Social Security payments during the course of their retirement years. Suffice it to say, extreme financial hardships along with poor financial planning are often cited as reasons why some retirees end up with little to no personal savings and investments.
Even though many Americans overwhelmingly disapprove of any potential cuts to Social Security, according to recent Gallop polls, over 69% of those surveyed don’t expect to rely heavily or at all on Social Security payments. These findings mirror my own view in that my plans and calculations for achieving financial independence do not consider Social Security payouts as part of the equation.
As taxpayers, Americans have the right to expect their fair share from Social Security during their golden years but considering that the average Social Security monthly payment is $1,192.21, this amount is likely far from being enough for the vast majority.
Achieve Financial Independence without Social Security
Whether the intent is to leave the workforce earlier than 55 or continue to work well into your golden years for the sheer joy of it, focusing on achieving financial independence is truly a wise option. By saving and investing as much as possible, ideally well above the suggested rate of 10% to 15% of earned income, keeping consumer debt out of the picture while paying off any mortgage debt, spending consciously and living frugally, financial independence is well within reach.
In striving for financial freedom, your future and financial security will never be limited by how much Social Security can afford to pay you. In the event Social Security reforms are enacted and in place by the time you’re eligible to file, you could easily decide to defer filing your claim until 70 years of age, in order to reap even higher benefits.
As the saying goes “Never keep all your [financial] eggs in one basket.”
Kassandra Dasent is a freelance writer, business consultant, wife and step-mom. She is the founder of More Than Just Money, where she discusses a variety of topics and personal experiences that intersect with money. Her articles have been featured on several sites, including US News & World Report, The Globe & Mail and Brighter Life.
Dealing with Longevity Risk is a “hot topic,” according to someone who’s an expert on the topic. Read this “as told to” interview with Moshe Milevsky, the prolific financial author and finance professor at the Schulich School of Business.
The risk is that as people go from savers (Wealth Accumulation) to relying on retirement income (Decumulation), there’s always the danger of running out of money before you run out of life.
There is of course a solution called annuities but for some reason both investors and their advisors aren’t yet flocking to them. This may be because it involves losing control over your capital to an insurance company and is an irrevocable decision, at least for the portion of your capital being annuitized. Another reason is it often means that capital won’t be available to one’s heirs, depending on the options chosen.
Interest rates low, but mortality credits on annuities become important as you age
Even so, Milevsky tells the site that “single premium income annuities are often under-rated as a retirement planning tool.” Yes, interest rates are low but Milevsky argues that as you get older, mortality credits become relatively more important. In the end, it’s all about peace of mind.
In any case, no one ever said you have to annuitize ALL your capital. Read Milevsky’s piece and you may conclude that at least some of your capital might be annuitized at some point.
Is the little birdie kicked out of the nest truly “Findependent?”
My latest MoneySense blog posted today carries the curious headline that most Millennials expect to achieve “financial independence” by age 27. I put “air quotes” around the phrase financial independence because of course it’s nonsense that merely leaving the nest and putting fewer demands on the Bank of Mum and Dad constitutes true financial independence.
Keep in mind that the research firm cited in the piece seems to use quite a different definition of Financial Independence than the one used at this site or as formally defined at Wikipedia. For research firm yconic, it seems financial independence means merely leaving the nest and landing a job that pays at least the monthly rent: they are merely “financially independent” of mum and dad.
Even with that loose definition, only 56% of older millennials (aged 30 to 33) say they have “achieved financial independence.”
With these savings rates, true Findependence for many millennials is a pipe dream
It’s just as well they’re using such a loose definition because the way the younger generation spends, it’s going to be a long long time before they achieve the kind of financial independence this blog describes.
To sum up the difference, I’d say “our kind” of Financial Independence is being able to stay afloat financially without the traditional source of single income known as “a job” or full-time employment. It’s quite a leap to go from moving out of the parental nest to being able to survive with neither parents nor an employer to keep those regular financial injections flowing into your bank account.
Far from being findependent, almost half the millennials surveyed (46%) admitted “saving money is a struggle” even if they are able to afford to pay the bills. A third say they are living paycheque to paycheque and are barely making ends meet. Fully 43% still rely on their parents for financial assistance, including 37% who look for help paying their student loans off. Does that sound like “our” kind of financial independence?
Non-saving millennials should find a Government job with a DB pension and stay there
I hate to break it to the non-savers but if they don’t start saving soon, they’ll never be able to achieve true financial independence. They had better be prepared to work until age 67 and be able to live on Social Security (in the US) or on the Canada Pension Plan, Old Age Security and possibly the Guaranteed Income Supplement (GIS), or find a good Defined Benefit pension plan somewhere and hang on to the job for three or four decades. (may as well try the Government first: their DB plans are most likely indexed to inflation and ultimately backstopped by taxpayers).
If there’s hope for them, it’s in the finding that most millennials hope to buy a home at some point. I like that because I always say the foundation of financial independence (our kind, that is) is a paid-for home. But even among those who already own a home, 32% got parental help rustling up the down payment. Among those who don’t, a quarter of them (24%) expect their parents to help them with the down payment.
Parents who have yet to kick the little birdies out of the nest might consider giving them a hint about what true Financial Independence entails by investing US$2.99 or C$3.37 in either of these e-books featured elsewhere on this site. Might make a great stocking stuffer! (Just gift the e-book via Amazon and maybe insert in the stocking a card telling them to check their Kindle).
Two of my seven eternal chestnuts of personal finance (from a MoneySense blog in August) is never to turn down “free money” from either Government or your employer.
In a piece in the Financial Post Wednesday Barbara Shecter reports on a Sun Life Financial finding that employees are not taking advantage of up to $3 billion in corporate pension plans and programs whereby employers “match” contributions.
Defined Contribution (DC) pensions can match top-ups that amount to between 3% and 6% of total earnings. Roughly a million are in DC pensions.
Remember, if your employer offers a company pension plan — especially if they will “match” your contributions — take them up on the offer!
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By Jonathan Chevreau
