Time to
Get Real
by Penelope Wang
November 9,
2007
[Continued,
page 2]
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MYTH |
| |
Social
Security won't be there when you need it |
Social
Security isn't going the way of the LP record soon. Sure, the
headlines are alarming. In just 10 years the cost of Social Security
benefits will outstrip the amount that workers pay into the system,
according to government studies. And by 2041 the Social Security
trust fund reserves will run out, unless Washington gets around
to addressing the problem. But that doesn't mean Social Security
will shut down. Enough new money will continue to flow into the
program from payroll taxes to fund 70% to 75% of scheduled benefits
until 2081. And with a few reforms, Social Security could continue
to pay full benefits. "Compared with the other issues we
face, such as financing health care, fixing Social Security is
child's play," says Alicia Munnell, head of the Center for
Retirement Research at Boston College. "You could raise the
payroll tax by just one percentage point for both employers and
employees, and you would be able to fund full benefits for the
next 75 years." So it's a good bet that you can count on
something close to what retirees collect today.
The
real issue is how big even a full benefit will be. "Most
Americans think that Social Security will replace more of their
income than it really does," says Dallas Salisbury, president
of EBRI. For the average retiree, Social Security currently covers
only 39% of pre-retirement income; and if you earn more than the
maximum taxable amount ($97,500 this year), Social Security will
replace just 26%, on average, of the income you earned on the
job. And those percentages will drop over the next 20 years to
33% and 20%, respectively. That's largely because Medicare Part
B premiums, which are deducted from your Social Security check,
are increasing at a faster rate than your benefit's annual cost-of-living
adjustments.
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MYTH |
| |
Retiring baby boomers will crash the stock market when
they start pulling money out |
Cross
a stock market Armageddon off your list of fears. No question,
the retirement of tens of millions of boomers in the coming decades
will have a major impact on everything from health care (count
on surging demand) to real estate (good-bye, suburbs, hello, beach
house). And, the thinking goes, the generation that loaded up
on stocks as they saved for retirement will crash the market once
they sell those shares to pay for retirement.
Here's
why that's not true. Stock ownership is extremely concentrated
among the very highest income brackets—those in the top
10% hold 68% of financial assets, according to a 2006 study by
the Government Accountability Office. These wealthy investors
are unlikely to be so strapped for cash that they have to sell
their shares in a hurry. Instead, says George Walper, co-author
of Get Rich, Stay Rich, Pass It On, most affluent families
intend to preserve assets for their heirs. Moreover, many baby
boomers plan to stay in the work force longer than an earlier
generation did, even into retirement, which would further reduce
the need to sell shares abruptly.
| |
MYTH |
| |
Now
that 401(k)s are your only retirement plan, you're bound to
really screw things up |
It's
true that if you set out to make a colossal mess of your 401(k),
no one is going to stop you. You can cash out when you quit or
borrow once too often. And now there's no longer a pension sponsor
taking responsibility for paying you a certain benefit no matter
what; all the investment risk falls to you. But you're about to
get a lot more help if you want it. Last year's Pension Protection
Act gave employers the green light to take more responsibility
for their workers' retirement savings. Now an increasing number
of plans will give you investment advice or even account management.
And when you start a job, your plan sponsor may automatically
enroll you in the 401(k), raise your contribution level each year
and direct your money into diversified investments, such as life-cycle
or target-date funds, unless you opt out. All of which means that
even if you never make an independent investing decision, you
can nevertheless wind up with a decent portfolio.
Still,
you can probably do better with just a little effort. For starters,
you should try to save the max ($15,500 this year) rather than
the 6% or so of salary that many plans set as a default level.
And while target funds work well, it's not hard to design a customized
mix that suits your goals and risk tolerance; for help, use the
asset-allocation tool at cnnmoney.com.
WHO
SAYS EVERYONE RETIRES WITH DEBT?
MARY AND MARTIN PEARSALL, 57 AND 61
•
Mary and Martin Pearsall have lived frugally, saved regularly
and invested wisely in their 30 years of marriage. They've
also managed to avoid the kind of crippling debt that can
spoil the best-laid retirement plans. They steered clear
of credit cards by living within their means, and they've
dutifully paid the mortgage on their $250,000 Colorado Springs
house. They now owe just $64,000. "We've been careful
without being draconian," Martin says. "We would
never accumulate debt we couldn't handle."
Martin
worked as an Episcopal priest until last year, and Mary
has been a personal trainer and a business consultant. Now,
with the help of a sizable inheritance from Martin's mother,
they have a portfolio worth over $1 million. With no major
debt to hold them back, the Pearsalls plan to scale back
their work lives soon and travel, as they've been hoping
to do for ages. "I want to be disencumbered from having
to be somewhere," says Mary.
—ASA FITCH
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