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America's retirement crisis: How did we get here?Article added by Paul Wilson on October 1, 2011
Paul Wilson

Paul Wilson

Denver, CO

Joined: May 30, 2007

My Company

Despite the many challenges, this atmosphere of fear and uncertainty offers an unprecedented opportunity for advisors who are willing to put in the extra work.

It’s been a rough few years financially for many Americans, and most signs point to an even rockier future. The country very well could be on the brink of a retirement catastrophe unlike anything it has previously experienced. A series of events have taken shape that are battering Americans’ best laid retirement plans — for those who even have a plan in place — and could eventually bring some of the pillars of our retirement system crashing down.

As advisors scramble to plug the numerous holes in their clients’ retirement plans, they face a variety of serious obstacles. A steady dose of scandals, crises and unflattering headlines have eroded American's trust in the financial services industry. Meanwhile, many clients and prospects are intimidated by the constant fluctuations in the market, while others fear that it’s already too late to make a difference anyway.

Despite the many challenges, this atmosphere of fear and uncertainty offers an unprecedented opportunity for advisors who are willing to put in the extra work.

The Silver Tsunami

Beginning in 2011, each new dawn sees nearly 10,000 baby boomers turn 65. But many are entering their “golden years” drastically unprepared and in full-blown panic mode.

A Harris poll released earlier this year found that 34 percent of Americans have no retirement savings, while 1 in 7 boomers have no pension or retirement accounts.

According to Catherine Weatherford, president and CEO of the Insured Retirement Institute, “This is that watershed moment in our country’s history. This year we are inaugurating an 18-year long march into retirement by 79 million baby boomers, many of whom are not fully prepared for retirement. The crisis is, how do we help these people save more as they get closer to retirement? How do we help them protect those savings so that they will last throughout their lifetime?”

A recent Associated poll found that 44 percent of boomers born between 1946 and 1965 are not confident that they will be able to live comfortably in retirement. And while many may have dreamed about spending their retirement in a cabin by the lake or touring the countryside in a motor home, 1 in 4 now believe they will never retire.

The fact is that countless Americans live paycheck to paycheck, and the percentage has only gone up in recent years as nest eggs have diminished, real estate values have plummeted and personal investments have fared poorly.

But those planning to rely on government plans for assistance may be in for a rude surprise: It turns out the U.S. is busy dealing with some pretty serious financial issues of its own.
A new reality

In many ways, boomers and those who follow them will face a retirement unlike anything experienced by previous generations.

“There has been a great wake-up call among baby boomers as we get older and you get a little bit more in touch with your own mortality,” says Weatherford. “ I think we have also awakened to the fact that we will probably live several decades in retirement, as opposed to what we saw with our parents and our grandparents because of the increased life expectancy. I think that becomes something that people fear more as they become older, that they could outlive their savings. “

Death of the pension plan

For most Americans, the stability of an employer-sponsored pension plan is a dream of the past. Due to a combination of cost factors, regulation and unpredictable funding, pensions are no longer an option for the majority of us.

Beginning in the 1980s, 401(k)s began to replace pensions as the new standard for employer-based retirement accounts. But while 401(k)s were launched amidst a roaring bull market and much pomp, a series of downturns, including the bursting of the dot-com bubble and more recently, the effects of the Lehman Brothers bankruptcy and the financial bailout, have severely shaken many Americans’ confidence in retirement planning. And just a few years before their scheduled retirements, boomers have watched their 401(k)s take an unprecedented beating, with most accounts just now returning to pre-recession levels. While things could have been worse, the recession provided a frightening reminder of the vulnerability of Americans’ most popular retirement investments.

Social Security

Another staple in the retirement plans of previous generations was Social Security, which helped supplement retirement savings and provide a sense of comfort to aging Americans. But with each passing year, trustees from the Social Security Board lower the date on which Social Security trust are expected to run out. (The latest estimate for total depletion is 2036.) The recession only battered the struggling program further, depleting revenue and increasing spending at an alarming rate. In 2010, the program ran a deficit for the first time since 1983, and is now expected to run deficits on an annual basis. According to current estimates, Social Security would be able to pay only three-quarters of promised benefits through 2086.

The Social Security Disability Insurance program is faring even more poorly, scheduled to run out before 2018.

Yet despite these grim predictions, two-thirds of boomers and three-quarters of Americans age 18 or older expect to rely heavily on Social Security during retirement. In fact, the vast majority don’t believe that Social Security is even in crisis.

Something doesn’t add up.

A recent survey found that 75 percent of Americans have no plan to pay for health care costs in retirement. Just 18 percent over age 50 have an employer-provided retiree health plan, while only 13 percent have long term care insurance and 6 percent have savings specifically set aside for large health care costs.

Unfortunately, the government’s news on this subject is even worse than on Social Security. Medicare’s trust fund will be exhausted by 2024, five years early than predicted just last year. The program pays out more each year than it takes in from taxes, and if one excluded the billions of dollars in projected savings included in last year’s health care reform law, the Medicare trust fund would be projected to run out in just five years.

Additionally, as states grapple with severe budget shortfalls and the federal government turns over every stone in search of strategies to curtail the ballooning national debt, Medicare and Medicaid are clearly in the crosshairs.

President Obama's recent deficit reduction proposal includes a $248 billion cut to Medicare and a reduction of $72 billion to Medicaid over the next decade, part of an overall strategy to reduce the national deficit by more than $3 trillion over the next 10 years.

“Every day, 10,000 more baby boomers turn 65. Every day, the budget deficit gets worse,” says Chris Orestis, president and CEO of Life Care Funding Group, a company that assist people in need of funds to cover the costs of senior housing and long term care. “Panels are working in Washington, D.C. on how to solve the budget crisis, this nation’s deficit crisis. Medicare and Medicaid are on the chopping block, and it’s going to be in the hands of the consumers to figure out how to take care of themselves.”

If and when changes are made, how soon would consumers begin to see the effects? A lot sooner than you might think, according to Jesse Slome, executive director and founder of the American Association for Long-Term Care Insurance.

“Medicaid will be hardest hit because the states are not able to print money and sooner or later federal bailouts just won't be forthcoming. We won't have to wait for boomers to reach their 80s, because states are already broke and are facing choices like paying for nursing home residents or schools and police,” says Slome. “At the present trend, it's easy to predict that you'll have government-supported facilities and private-pay facilities for those who have the ability to cover costs or access to insurance coverage to pay. And trust me, you won't find many (if any) former elected officials in the government-paid facilities.”
What’s next?

It seems like every headline supplies new reasons for despair and negativity.

As the storm clouds continue to gather, many Americans are consumed with fear, frustration and confusion. Meanwhile, advisors are often at a loss, overwhelmed by the seeming inevitability of it all. But according to Catherine Weatherford, there’s reason for optimism amidst all the doom and gloom.

“Everywhere you look, there is public awareness around the need to save for retirement, the need to build your retirement plan. People are looking for financial advice. We’re going to see financial advice grow as a profession. More people are going to want to partner with a financial professional to help them do it well. Despite everything, many Americans remain dedicated to the idea of retirement planning. They’re doing their best, but need help.”

If that isn’t a motivator for financial services professionals, I don’t know what is.
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