Financial Literacy

For many decades, the conventional retirement plan was called, “A 3-Legged Stool.” The legs of the traditional stool consisted of:

1. Your company pension (but these have disappeared), government employee pensions (but these are being reduced).
2. Social security income (but the whole program needs to be restructured, it is losing +$80 billion a year and the Baby-Boomer generation has barely begun to retire).
3. The last remaining leg is your own personal savings. How is yours going so far?

The retirement stool, in general, is now wobbly and falling over. Certainly our government leaders are going to do something about it, right?

What exactly are our political leaders doing about these programs?

• Social Security Retirement – financially unsustainable
• Social Security Disability – financially unsustainable
• State and local government pensions – many are financially unsustainable

Not much unfortunately, because they refuse to admit there is any financial problem.

Since personal savings for retirement are underfunded or nonexistent for many people, a large number of people are financially forced to work past their preferred retirement age. But if you do work after you starting to draw social security benefits, be aware that the government has two tax traps waiting for you:

1. If you earn more than $33,000 in retirement then 55% of your social security income is taxed at regular rates.
2. If you earn more than $44,000 in retirement then 85% of your social security income is taxed at regular rates.

Being taxed on social security is a penalty clawback on your retirement income that most people are unaware of until they actually incur them. Since few people know about these extra taxes, they do not plan for them and face even more financial struggle when they are least able to do something about it.

As I write this today, President Obama is speaking at the White House, claiming that “Medicare and Social Security are not in crisis.” However, the arithmetic highlights that they are in catastrophic shape:

• Using generally accepted accounting rules, Medicare is unfunded today by $27.5 trillion.
• Social security is unfunded today by $14.1 trillion.
• As a comparison, all of the annual wages and business profits for the U.S. economy is only $17.8 trillion per year.
• In addition, the U.S. federal debt is still growing much faster than the economy is growing – which is an unsustainable situation for any country.

The critical financial lesson for everyone today is:

1. The federal government cannot be trusted to fully pay promised social security payments.
2. Pension plans are increasingly reduced or eliminated.
3. So the only leg of the retirement stool that you can count on is your own personal savings. Make sure that you are properly supporting your retirement accounts.