In case you haven’t noticed, it’s already 2021. It feels like just yesterday the coronavirus tanked the global markets.
Following on the heels of the pandemic, this year is likely to feel like a financial rollercoaster for most savers. On top of that, the problems with Social Security that desperately need solutions haven’t been resolved.
For example, the official trustees report still hasn’t accounted for COVID-19 impacts. Here are three projected outcomes revealed in the most recent version:
- You can expect a 24% reduction in benefit payment starting in 2035, unless the program’s finances are shored up.
- That reduction in benefits could change dramatically for the worse once the pandemic is factored into the equation.
- Medicare Part A will only be able to pay 90% of their scheduled benefits starting five years from now.
The conclusion of the trustees report reads like an ominous warning:
Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.
According to a Kiplinger piece, the Social Security “shortfall train” is leaving the station already. This is because starting this year the program’s annual costs “exceed its income from employee and employer payroll taxes and interest earnings.”
When costs exceed income, it’s only a matter of time before capital reserves are drawn down and the program is bankrupt. It’s an urgent situation, and politicians are feeling the pressure to act quickly.
The solutions offered by lawmakers seem to fall into two general categories: Increase taxes paid into the program or increase the wage threshold subject to payroll taxes. So people pay more taxes, or lawmakers make more people pay into the program.
The Biden administration has also proposed requiring wealthier people with incomes of $400,000 or more to pay into the program at 12.4%.
But none of the solutions proposed thus far seem very appealing. Nor are they guaranteed to make up the shortfall since higher taxes often have the unintended consequence of reducing tax revenue that’s actually collected.
Unfortunately, Social Security isn’t the only retirement challenge that savers will have to face in 2021.
4 Retirement Challenges Experts Aren’t Factoring In
Improvements in medicine and technology have increased longevity, especially in wealthy countries like the U.S., where the average lifespan is just over 78 years. For savers that means retirement will last longer, cost more and raises the risk of outliving your savings.
One of those increased costs is healthcare. According to a piece on Yahoo! Finance:
Many procedures aren’t covered by Medicare, including dental, hearing, vision and long-term care in an assisted-living or nursing facility. Many retirees also face unexpectedly high deductibles and copays.
And that’s likely to get even worse… According to the U.S. Health Resources & Services Administration, medical care costs increased 638% over the four decades preceding 2019. Regular inflation over the same period was bad enough at only 376%.
Fidelity reports that someone who retired in 2019 at 65 would spend $285,000 on healthcare over the course of their 13-year retirement. That number will only go up. Not good for someone looking to enjoy their golden years. Even worse, Social Security benefits are pegged to CPI, which drastically underestimates the healthcare costs retirees are likely to face.
On top of that, some will have their plans derailed if they’re among the 79% providing financial support for their adult children, according to Merrill Lynch. “Sandwich-generation” savers who must care for an aging parent face a similar challenge.
Finally, rising inflation can either eat away at your nest egg, or take a huge chunk of it if 1980s-style inflation returns in 2021. Worse, in today’s near-zero interest rate environment, most of the “safe” assets many savers have relied on for decades (like annuities, bonds, CDs, and even the humble savings account) lose purchasing power over time as inflation corrodes their value.
If Social Security is “not a complicated program,” like Alicia Munnell from Boston College thinks, it still looks like we’re far from solving any underlying problems. (Especially by the 2034 deadline, which is just over one decade away.) The long-term outlook seems dire. The extra challenges for retirement savers outlined above can seem like they will just keep adding up, pushing your must-have retirement balance higher and making your situation, and your future, look worse.
Yes, there are many challenges ahead. The good news is you can still take steps to protect your own future.
You Have Options (But Time is Running Out)
It’s time to hedge your bets while you still can. Ensure your retirement savings are well-diversified There’s a good reason for this. Nobel Prize-winning economist and inventor of Modern Portfolio Theory Harry Markowitz called diversification:
The only free lunch in investing.
When your savings are diversified across asset types, you’re safer from any one crash or bubble. Consider retirement plans that are known for preserving savings through inflation, through times of economic crisis and over time. Physical precious metals like gold and silver may be an ideal addition to your retirement savings.
You may not be able to rely on government’s long-term solutions or programs when you retire. The road ahead looks rough. Today you can make a plan that can help you sleep more soundly tonight, regardless of tomorrow’s challenges.
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