Earlier this year, I went to Washington DC to attend my wife’s aunt’s 100th birthday celebration. I do not know anyone else who has reached 100 years old, and in telling people where I had been, apparently neither do most of the people I know. However, as the picture from the party, on the left, would indicate, this may not be as uncommon as you would think. After all, there’s apparently enough of a market to justify someone manufacturing hundredth birthday balloons.
The good news is that, thanks to modern science, we can expect to live to be 100. The bad news is that, thanks to modern science, we can expect to live to be 100. Although no one wants to die, there is a real risk in living too long. On an individual level there is a great deal of concern amongst people nearing retirement age that their money will not last for their entire life. But on a larger level this is also a concern. Neither Social Security nor Medicare were designed to pay benefits to age 100 or even beyond. This will be especially problematic with an ever increasing population of seniors, who will be supported by fewer and fewer younger workers paying into the system. This phenomenon also spells big trouble for government and private pension plans whose actuarial formulas do not contemplate that kind of longevity. Currently many government and corporate pension plans are severely underfunded, even though the formulas used to calculate that underfunded liability are generally based on the participants living only into their 80s.
So what can we do? On a macro level, we need to start holding our elected officials responsible for ensuring that Social Security and Medicare, as well as other governmental pension schemes are financially sound so that they will be able to provide benefits regardless of how old the population gets. However, based on recent experience, it is unwise for us to put our faith that politicians will take the lead in making the hard choices that will need to be made. I hope I’m wrong, but the most likely scenario will be to kick the can down the road until the problem is so bad that the solution can only be achieved by large tax increases and or drastically reduced benefits.
So ultimately, we need to be responsible for own financial futures. Part of that is diligent savings during our working years in pensions, IRAs and taxable investments. In addition to saving, it is critical that each household strive to reduce the amount of debt. As I like to tell my clients, the amount you need in retirement is a much different number if your house is paid for then if you’re still carrying a mortgage. This may mean postponing retirement, or at least planning on doing some kind of part-time job to allow your retirement savings to last as long as possible. In addition, it might be time to have a very uncomfortable discussion with your children about what will happen if you’re unable to care for yourself, or if you do have the resources, will happen if you live long enough that you’ve exhausted but the kids thought would be their inheritance.
We have all seen the bumper sticker – usually on the back of an RV – saying: We’re spending our kid’s inheritance!
It may not be so far from the truth.