Cash-Rich Retirement

PART I
YOUR RETIREMENT IS IN GRAVE DANGER!
Americans have many different, often inaccurate views about what retirement is, when they can take it, and how they must fund it. Longretired Americans take it for granted that everyone can expect a gold watch and company pension when he or she retires. Not so! Younger Americans have been raised with a do-it-yourself responsibility for retirement funding--but many believe that they have all the time in the world to begin their own savings. Also not so! And in between are people who expect to retire at age sixty-five and for whom retirement means "maybe a pension" or "maybe a 401(k)." Or maybe not.
In this section we are going to explore why retirement in the United States means so many different things to different people. Golden years. Financial security. A Florida condo. Cocktails on the lanai. An IRA. Corporate pensions. Medicare, but only partial expense coverage. Pension cutbacks. Portfolio setbacks. Spiraling medical costs. "I haven't saved enough" panic.
We need to understand all of these associations and concerns to understand the American "retirement experiment." And you need to understand the financial underpinnings of retirement--what's paid for, what's not, and how much capital you will, indeed, need for a secure, cash-rich future. Let's get started.
1
IS RETIREMENT A DYING EXPERIMENT?
Retirement is a modern experiment. It is a noble, strictly nineteenth-to-twenty-first-century "work in progress." And it is now in danger in the United States because of inadequate funding, extraordinary demographics, and generally poor financial preparedness.
Retirement is in danger in the United States because Americans like you and me are not saving enough, not investing wisely enough, and not insisting forcefully enough on safeguarding our benefits and nest eggs.
In contemporary mythology, "retirement" is the period of our lives when we stop working, relax, and enjoy the fruits of our labor. In the myth, we all enjoy "golden years" in good health and financial security.
Of course, that vision is bunkum. It is, nevertheless, a vision strongly etched in the minds of most Americans. It is the picture drummed into us after years of watching television programs like Father Knows Best, N.Y.P.D. Blue, Law and Order, and the like--programs that depicted average-Joe Americans working hard, building up their retirement savings, and giving loyalty to their employer in exchange for retirement security and "corporate care."
Not only is the myth romantic and fictional, but now retirement-thereality is under siege. For thousands of years, people normally worked until they died, became incapacitated, or were pushed off on an iceberg. There was no organized system of "retirement." So if today's ideal of "a long andhappy retirement" sounds like something too good to be true--it is! It's an experiment that some Americans will regrettably never enjoy in the coming decades and that few of our ancestors ever enjoyed to begin with.
BRIEF HISTORY
Let's take a moment to briefly survey the history of retirement. It's a fascinating saga.
In ancient Greece and Rome, people stockpiled jars of olive oil for their senior years. Olive oil stores well. So Greeks and Romans bought and stored jars of oil during their adult lives, which they eventually sold for income in old age. The ancients also bought income contracts called annua----the world's original "annuity" contracts--to guarantee old-age income. A person bought such a contract with a onetime payment, and the contract guaranteed lifetime income beginning at a later age. The very same kinds of contracts are helping retirees even today.
During the Middle Ages, workers turned to guilds for old-age and disability benefits. Guilds paid income to members who became disabled or infirm. So the first pensions were initially "help your fellow worker" income programs aimed at solidifying guild membership. For example, one guild in England promised, "If any man or woman of the fraternity becomes so enfeebled through illness or old age that he cannot work or engage in commerce, then he shall be supported, at the cost of the gild, in a manner fitting his status."1
Barring incapacity, however, guild members were meant to work until they dropped. They were, as well, only a small part of the total population. Most people who reached old age at that time--the average life span was in the thirties2--primarily relied on the largesse of their families to provide for their later-age needs.
In colonial America, elderly people sometimes wrote wills and made them public, promising their heirs an inheritance if the beneficiaries provided old-age care--lodging, meals, and a specific amount of firewood. Referring to those times, one historian noted, "There is also ...evidence that people viewed children and savings as substitute strategies for retirement planning."3 Senior care primarily came from family members. The average life span was up to thirty-five,4 but most people still worked until they could no longer do so.
Other than these rudimentary attempts to provide income or care, few societies organized "retirement" or "senior citizen" benefits on a large scale. Not, at least, until modern times.
For much of recorded history, in fact, there has long been one primary "retirement planning" technique: people have traditionally had many children to care for them in old age.
Americans never entertained the idea of "retirement" until the 1800s. Typically, our forebearers worked until they died or became disabled and had seven or eight children to care for them long term. In 1880, 78 percent of American men ages sixty-five and older were still working.5 Among men age sixty-five and older in 1880, nearly half lived with children or relatives. Today fewer than 5 percent do.6 So people at the end of the nineteenth century usually worked until they died and often lived with family members when they were older. Retirement then was quite different from what it is today. It was exceptional and "family-funded."
By the mid part of the nineteenth century, however, important changes began taking place. Pensions for U.S. Civil War veterans and railroad workers first took shape in the mid-1800s. The New York City police force set up the first public-sector retirement-income plan in 1857, and in 1875 American Express introduced for its employees the first corporate pension plan.7 This plan benefited employees who had at least twenty years of service at the age of sixty. It rewarded employee loyalty. And many companies soon followed American Express's lead.
By 1882, the Alfred Dodge Company-a builder of pianos and organs--introduced a pension plan wherein workers contributed 1 percent of their pay to earn 6 percent interest paid by the company. The Dodge plan reflected America's "pay your own way" bias as regards benefit programs, a philosophical approach that underlies most of the country's retirement systems even today.
But an even more important retirement breakthrough took place in Germany in 1889 when Kaiser Wilhelm and Chancellor Otto von Bismarck established the first-ever state pension system. In this unprecedented national program, all German citizens qualified for a "retirement pension" when they reached age seventy. It was the first attempt by any country to provide income for its senior citizens.
The original German pension system equated age with disability; it set seventy as the official retirement age; and it equated old-age pensions with "state care." In the United States, the approach to pensions and seniorbenefits would undergo substantial modification on all three counts. The United States would emphasize "individual contributions" and frown on "it sounds like socialism."
America's nationwide social insurance program--Social Security--came into being in 1935. It was a response to the Great Depression and the widespread financial hardships of the 1930s. Provided you and your employer contributed to the program, Social Security paid you a small amount of money beginning at age sixty-five. Since the average life span for an American at that time was only fifty-nine for men, Social Security payments were originally meant to be the exception rather than the rule. In fact, most early Social Security benefits were actually paid to surviving spouses--not to workers themselves.8
Medicare, the national health insurance program, was established by Congress in 1965. It was designed to pay for some--but not all--of the medical expenses of disabled Americans and people sixty-five and over. Many Americans believe that Medicare and Social Security were avantgarde programs meant to guarantee a comfortable retirement and secure golden years for all workers. That is not so. By the time Social Security was established in 1935, thirty-four other countries already had national social insurance programs up and running9--ours was nothing new. Both Social Security and Medicare were designed to make only limited contributions to a person's financial and health-care well-being. They were not designed to cover all health-care costs or income needs. The emphasis has been and continues to be on personal savings and "pay your own way" retirement funding.
Following World War II, companies vied with each other to attract and retain skilled, loyal employees, and corporate pensions and retirement benefits became commonplace. Americans came to rely on them. And by the 1950s and '60s, an era of "corporate paternalism" had set in. Most workers could look forward to retirement with a handsome company pension.
That, however, was soon to change. Longer life spans and spiraling health-care costs eventually caused U.S. companies to rethink their pension pacts. A little-heralded but blockbuster shift took place. Beginning in the 1980s, many U.S. companies began cutting back retirement benefits and halting pension programs outright. Most companies directed workers to take full responsibility themselves for retirement funding via 401(k) andsimilar plans. From "corporate care," Americans were herded into do-it-yourself retirement-funding responsibility.
RETIREMENT TODAY
Today, Americans look forward to retirement supported by a mix of different programs, benefits, and funding mechanisms: (1) traditional employer pensions or "defined benefit" plans; (2) "defined contribution" plans such as 401(k), 457(b), and similar programs; (3) IRAs or individual retirement accounts; (4) Social Security; (5) Medicare; and (6) whatever other savings you can muster. As we will see, this mix of benefits and funding mechanisms is piecemeal and is not uniformly available to all.
Many Americans take it for granted that all workers have access to pension or savings plans and still cling to the myth that retirement is "a dazzling, decades-long vacation at the end of life."10 The myth prevails, but the reality is starkly different.
Americans are retiring earlier--the average retirement age is now sixty-two. 11 Americans have also come to enjoy much longer lives. Instead of the average life span of sixty-one and a half years for both men and women when Social Security was created, today's younger Americans can now expect to live into their late eighties or nineties. Life spans are decidedly longer and growing. That means that individuals need more capital to fund their retirement at the same time that they are increasingly expected to amass that capital on their own.
So contemporary "retirement" is quite unlike that experienced by our parents or grandparents. Even as recently as 1985, eight out of ten American workers in medium-size and large private companies participated in a traditional pension plan.12 Today, only two out of ten do.13 In the 1960s and '70s, American workers could look forward to an average of ten years of retirement life supported by government payments and company pensions. 14 Today's workers have a much longer, self-funded retirement ahead.
In the past, Americans often retired--at least in the national mythology--with a farewell party and send-off gift at age sixty-five or a retirement age of their choosing. Today's Americans are often not in control of when they retire. Today, many people--more than one-third--are thrust into early retirement whether they are financially ready for it or not. Fourin ten retirees report that they retired earlier than expected due to job loss, downsizing, poor health, or some other factor.15 More than a quarter of the workers who recently retired before the age of sixty-five did so because of changes at their company "such as downsizing or closure."16 And the retirement incomes of many Americans are not at all robust. Today, about one in six Americans over the age of sixty-five lives at or near the poverty lever.17
So "retirement" is a modern, not necessarily carefree experiment. The "live happily ever after" picture of retirement in the United States is not true for many current retirees. And it is going to be much worse for people retiring in the future.
We are, in fact, in the midst of a developing crisis. We are moving from the security of traditional company pensions, which once guaranteed some retirement income, to do-it-yourself retirement savings that guarantee nothing at all. Our benefit programs, once solvent and sound, now suffer massive funding shortfalls. And many millions of Americans are about to enter their golden years with little retirement preparedness, minuscule savings, and little awareness of the precarious state of their benefit programs. You, however, can and will enjoy a financially sound and secure retirement. But to do so, you must understand what you're up against and why counting on government and corporate benefits instead of personal savings would be naive.
DEFINED BENEFIT PLANS
A "defined benefit" plan--meaning a company pension plan--is a benefit program where your employer bears the risk of generating sufficient cash to pay you retirement income and/or other retirement benefits. Such plans were once the mainstays of American retirements. They are, however, dwindling in number today, and many are bordering on failure.
At present, only 21 percent of American workers in private enterprise have access to a defined-benefit pension or retirement benefits.18 A much larger 80 percent of all government workers do.19 Even if we add publicand private-sector workers together, however, the majority of all workers do not have access to any pension. This ratio of "haves" to "have-nots" is the inverse of what it was only decades ago.
Increasingly, fewer and fewer workers have access to defined benefit plans and fewer companies offer them. The number of pension plans plummeted 70 percent between 1983 and 2000.20 Today, only one companyin ten offers a pension,21 and even that number is shrinking. Pension and benefit reductions are also becoming common. In its recent survey of retirement practices, the Employee Benefit Research Institute found that: "nearly half of workers report that recent changes to the employer pension system have made them less confident about the money they can expect to receive from a defined benefit (or "traditional") pension plan ... . Seventeen percent of workers have personally experienced a reduction in the retirement benefits offered by their employer within the past two years."22
Whatever the access and cutbacks, defined-benefit payments may not materialize for many Americans because of pervasive underfunding. The little-acknowledged fact is this: of those companies or government agencies that offer defined benefit plans today, many have immense funding shortfalls. Underfunding is the pervasive cancer undermining defined benefit retirement programs nationwide. And many Americans counting on pension benefits may be in for a rude surprise.
The most recent data available shows that the majority of the country's largest companies--the five hundred that make up the S&P 500 Index--had less than full pension funding at the close of 2005. Their pension shortfalls alone amounted to $140 billion.23 Add in the underfunding of other "postemployment benefits" such as promised medical coverage, and the total underfunding for all retirement benefits among S&P 500 companies was a whopping $461 billion.24 That's almost a half of one trillion dollars of funding shortfall just among the country's top companies alone. For smaller companies the statistics are similarly dismal.
Of course, these numbers change from time to time depending on the investment performance of corporate pension plans. Even so, the magnitude of the problem is sobering.
According to the Congressional Budget Office, the total funding shortfall for all pensions and other "defined benefits" among all U.S. companies is now over $600 billion.25 That staggering amount will not, in all likelihood, be replenished anytime soon.
The situation is just as bad, precarious, and inexcusable in the public sector. At last count, some 80 percent of the state retirement systems that report data for the Wilshire Report on State Retirement Systems are also underfunded. 26 By 2003, at least nine states had pension fund liabilities that actually exceeded their total annual budgets!27 Of the municipal and county systems that report data to Wilshire, 77 percent were underfunded at last count as well.28
That, however, is just the tip of the iceberg. Many municipalities, states, as well as corporations are funding their pensions with limited contributions expecting their pension plans will generate high investment returns. Many of their return projections are unrealistic. In other words, many direct-benefit plans are counting on money that will simply not come in! So if the underfunding of defined benefit plans today is pervasive and dangerous, the situation is likely to become even worse in the future. We're in crisis territory.
Let me offer you two independent views about the state of affairs as regards direct-benefit pensions and benefits. According to Dr. Robert Arnott, a respected investment commentator and asset manager, "The U.S. economy may well be sitting on a trillion-dollar time bomb, in the form of unrealistic pension return expectations".29 Harry Dent, author and investment-trend analyst, put it even more bluntly: "The level of payments promised to future retirees cannot possibly be paid, affecting not only private sector works but also civil servants ... . Retirement benefits systems of all types are in crisis mode."30
So where does this leave us? Many of the country's top corporations are technically bankrupt because they cannot meet their direct-benefit liabilities. Many state, municipal, and public pensions are likewise in bad shape. I believe that many corporate and public-sector pension plans will not be able to meet their defined-benefit promises. And that means that all of us have to save more and invest smarter, ourselves.
If you are counting on a pension or other direct benefits, it's time to make sure those benefits are going to materialize. Visit my Web site, www.cashrichretirement.com. Copy the Letter Concerning Pensions. Send it to your employer. Use it to request independent certification that your pension plan is adequately funded, is realistically projecting long-term investment income, and can, indeed, honor its defined benefit terms. Do that today.
DEFINED CONTRIBUTION PLANS AND IRAS
Defined contribution plans--sometimes generically lumped together and called 401(k) plans--are also important funding vehicles. They are voluntary savings plans with tax advantages. There are many different kinds. And while "defined benefit" pensions cause employers to shoulder the risk ofguaranteeing some amount of retirement income, a "defined contribution plan" has you bear the risk of saving enough and amassing enough capital to satisfy your retirement needs.
Today, many different "direct contribution" plans permit you to save money for retirement with tax advantage. The main kinds include (1) traditional 401(k) plans; (2) Roth 401(k) plans; (3) SIMPLE 401(k)s, for small businesses; (4) 403(b) plans, for employees of nonprofit organizations; (5) 457(b) plans, for state and local government employees; (6) SEPs or Simplified Employee Pensions; and (7) Thrift Savings Plans, for military personnel and civilians employed by the federal government.
There are also different IRAs or individual retirement accounts, which have similar characteristics: (1) traditional IRAs; (2) Roth IRAs; and (3) SIMPLE IRAs. Whew!
If you want more information about these programs and the maximum contributions you can make to each one, visit www.irs.gov for updated information or visit my Web site.
There are also Profit Sharing Plans, Money Purchase Plans, and Employee Stock Ownership Plans (ESOPs), with talk of a host of other plans and programs with complex acronyms. It's tax legislation gone mad.
So let's simplify things. In this section I am referring to tax-sheltered savings plans and accounts of all kinds--401(k)s, IRAs, and other plans--where you primarily fund the contributions and where you are solely responsible for the results. You should know several important things about them.
All of these different plans give you some tax advantage. You can use them to shelter your investment returns from taxes until drawdown--or, in the case of Roth accounts, forevermore once you contribute after-tax dollars. You should, therefore, use these tax-sheltered accounts to the fullest extent. They enable you to heighten the compounding of your savings. In fact, most of your retirement savings should be lodged in tax-sheltered accounts of some kind. If you have access to such plans at your place of work, use them to the maximum!
However, each of these different savings plans also has different drawdown or "distribution" requirements. For example, each has a time window during which you must draw down the proceeds or incur significant tax penalties. Be sure to read Ed Slott's The Retirement Savings Time Bomb ... and How to Defuse It to properly make IRA and 401(k) drawdowns--he'sthe expert in the field. I also urge you to seek the guidance of a professional financial planner before withdrawing any 401(k), IRA, or other tax-sheltered money. The details are too complex to survey here, but Ed's books and a planner can help you.
Bear in mind, too, that not every American worker has access to directcontribution or employer-related savings plans. According to the U.S. Department of Labor, less than half of U.S. companies now offer a 401(k) or similar plan, and only about half--54 percent--of all workers actually have access to one.31
But if access is an issue, so are participation rates and premature drawdowns. Here are several other vital facts:
• Only four out of ten American workers--43 percent--actually participate in a 401(k) or any other "direct contribution" plan at this time.32
• More than one out of five--21 percent--who could participate in such plans opt not to.33
• More than 90 percent of the workers who do participate in such plans do not contribute the maximum amount.34
• Approximately half of all workers draw down and spend their savings from 401 (k) and similar plans prematurely when they change jobs.35
• Half of all 401(k) plan participants had account balances of less than $19,400 at the close of 2005, the most recent data available.36 This included longer-term as well as newer investors. Among longer-term investors, half had less than $54,600.37
• The average 401(k) balance was higher--$58,328 for all participants and $102,014 for longer-term participants38--suggesting that a minority of well-off investors distort the "success statistics" often cited. And,
• Less than four in ten American workers report having an IRA.39
Most employees cite financial considerations as the reason they do not participate more fully or at all in such savings programs. For many, disposable income is simply not adequate. For others, the lure of consumer spending is too great or the financial burdens of paying for education, day care, medical insurance, or a house too onerous. Bottom line, these kinds of plans are not, after all, being universally used with much vigor. Many Americans are missing out on "the next best thing" after a traditional pension.
Here are the takeaways: A large percentage of Americans who are eligibleto participate in direct contribution 401(k) or similar plans do not. Of those who do participate, the vast majority do not participate to the maximum. The balance in such plans is often low. Job changes often result in people cashing out these savings. There has been, overall, numb acceptance of the "do-it-yourself" shift to funding responsibility and often mediocre results.
In my view, defined contribution or 401(k) plans are failing for many people. IRA results are little better. These programs are not mandatory. They do not guarantee results. They are unnecessary if you are rich and not doable if you are poor. These plans will not, by themselves, give most Americans sufficient income in retirement unless you supplement them with other savings, conservative investments, insurance, and annuities.
SOCIAL SECURITY
Social Security is another important pillar of American retirement. It was established, we noted, in 1935 following the Great Depression. The first monthly retirement check--$22.54--was paid to Miss Ida May Fuller of Ludlow, Vermont. Miss Fuller lived to be one hundred years old and collected $22,888.92 in total Social Security benefits.40
Today, an estimated 162 million American workers are covered by Social Security, and nearly 54 million Americans are now receiving Social Security payments.41 Social Security, it turns out, is the most important source of retirement income for a great number of Americans. The average Social Security payment for retirees in 2007 was approximately $1,048 a month.42 Today, one out of five retired couples and four out of ten unmarried individuals derive 90 percent or more of their income from Social Security.43
One common misconception--a core part of prevailing retirement myth--is that Social Security is meant to take care of us in old age. That, again, is not the case. As one expert put it, "Social Security wasn't even intended for that in the beginning. It was only to be an income supplement to your personal savings and other pensions. Under the most optimistic scenario, Social Security alone wouldn't allow you anything but genteel poverty when you could no longer earn a living."44
Another mistaken belief is that our "pay your own way" Social Security contributions are an investment in our own retirements. They are not. A team of economists who studied the system concluded that the contributions we make into Social Security are basically "transfer paymentsfrom ... workers to nonworkers."45 You are not paying for yourself. You are paying for the retiring beneficiaries drawing down before you.
That brings us to Social Security's design flaws: (1) Social Security was built with the expectation that beneficiaries would have a relatively short life span in retirement; and (2) it does not, after all, directly link the benefits that are paid out with the contributions that actually come in. Social Security has an inflow-outflow mismatch--and that is a serious defect. It means that as the surge of baby boomers nears the age to obtain benefits, Social Security will not have adequate long-term funding to pay them.
Social Security, we said, currently pays benefits to approximately 54 million American retirees, the disabled, and their dependents. That number will jump to 91.5 million in 2040.46
There is, consequently, an inflow-outflow mismatch of megaproportions taking shape. We can size up the problem as well by looking at the ratio of "funders" to "beneficiaries." In 1945 there were 41.9 workers paying into Social Security for each one beneficiary taking payments out.47 There are currently 3.3 workers paying into the system for each Social Security beneficiary.48 Within forty years, there will be only 2 workers paying in per beneficiary.49 The ratio of funders to beneficiaries is shrinking dramatically.
You are sure to hear a great deal of debate about whether Social Security is, after all, becoming insolvent and even more ruckus about how to fix it. It suffices to note here what the Trustees of the Social Security Administration, themselves, have to say:
Social Security's financing problems are long term and will not affect today retirees and near-retirees, but they are large and serious. People are living longer, the first baby boomers are nearing retirement, and the birth rate is low. The result is that the worker-tobeneficiary ratio has fallen ... to 3.3-to-1 today. Within forty years it will be 2-to-1. At this ratio, there will not be enough workers to pay scheduled benefits at current tax rates.50
Longer life spans, the surge of an unprecedented number of baby boomers into retirement, and the dwindling number of funders relative to beneficiaries are all putting increasing strain on Social Security's coffers. The pressing question today is whether Social Security can continue paying out the same stipends. And the simple answer is that, as it is structured and funded today, Social Security cannot. Social Security will nothave adequate funding to continue making the same payments beyond 2041 according to Social Security's own trustees, or beyond 2053 according to the Congressional Budget Office.51
Social Security will not be able to pay the same benefits in the future as now if it is not radically overhauled. And that's not my educated guess. It's the factual pronouncement of the people who run it.
The following question-and-answer exchange in the "Frequently Asked Questions" section of Social Security's Web site is insightful. Here's what Social Security's administrators are telling the American public:
Question: I'm 26 years old. If nothing is done to change Social Security, what can I expect to receive in retirement benefits from the program?


Answer: Unless changes are made, when you reach age 60 in 2040, benefits for all retirees could be cut by 26 percent and could continue to be reduced every year thereafter. If you lived to be 100 years old in 2080 (which will be more common then), your scheduled benefits could be reduced by 30 percent from today's scheduled levels.52
Take heed. Retirement security in the United States was once based on a much touted "three-legged stool": Social Security, pensions, and your personal savings. Today, pensions are becoming extinct, personal savings are pathetically low, and Social Security needs urgent fixing. Let me repeat: Social Security's problems are not likely to affect today's retirees or people close to retirement. In due course, however, the government will have to lower Social Security benefits, extend the retirement age, encourage people to work longer, impose heavier taxes, or do all of the above--there is no alternative. For all Americans, the Social Security picture is grim. It means that you have to take charge of funding more of your own future.
MEDICARE
If Social Security has large funding issues, Medicare has gargantuan ones. Medicare is the federal health insurance program that provides benefits todisabled workers as well as people age sixty-five and older. It is another important "pillar of American retirement." And it is beset by serious problems.
Medicare is a contributory insurance program. You are entitled to receive its benefits if you pay into the Social Security system while you are working. After you retire, you contribute to the program via taxes and premiums.
At present, Medicare consists of four parts, covering a jumbled mix of hospital, doctor, and prescription costs. There is also a program--Medicaid--for low-income families. You can visit AARP's Web site to learn what is and what is not covered by these programs. They are, simply put, a bureaucratic nightmare.
Entire books have been written on what Medicare will and will not pay. What I want to do here instead is touch on the most important facts about Medicare that impact your retirement preparations. The first is that Medicare only covers about one-half of a person's medical expenses. 53 You need supplemental insurance or deep pockets for the rest. And the second is that Medicare is also facing insolvency. It needs fixing, too.
We will look at ways of protecting you from the ravages of medical and health-care expense in a later chapter. Just make a mental note now that supplemental health-care insurance is important to have.
Medicare is also running out of funding. It has the same funding dilemma as Social Security--but on a significantly larger scale. In fact, Medicare's projected funding hole is estimated to be four times greater than Social Security's.54 The magnitude is mind-boggling.
Medicare faces a long-term projected deficit of nearly $29 trillion.55 The amount is so immense that it is often cited as a percentage of the country's gross domestic product. As the U.S. Department of Health and Human Services explains it, "Medicare trustees project that Medicare expenditures could rise from 2.7 percent of gross domestic product today to 9.6 percent in 2050 and reach 13.9 percent in 2080 ... . The Congressional Budget Office projects that Medicare and Medicaid combined could rise to 11.5 percent of gross domestic product in 2050. Expenditures of that magnitude today would represent more than half of the entire federal budget."56
So what does this mean for you? It means that health care--count on it!--is going to take a colossal bite out of your savings unless our health care system is radically overhauled. You are likely to incur increasinghealth-care and medical costs as you age. Medicare is designed to give only partial assistance and it is failing. You will need supplemental insurance and good savings to pay for it.
PERSONAL SAVINGS
Personal savings are, by far, the most important "pillar" of American retirement. Our country's benefit and national-insurance systems are meant to supplement--not supplant--personal savings. However, savings levels nationwide also show disturbing patterns.
Today, household and individual savings in the United States are pathetically low. Recent research of the Employee Benefit Research Institute reveals these chilling shortcomings:
Fact #1: Four out of ten American workers are currently not saving anything at all.57


Fact #2: One out of four adult workers--25 percent--have no savings whatsoever.58


Fact #3: Almost one-half--48 percent--of workers of all ages have total savings of less than $25,000 (excluding the value of their primary residence and any pension plan).59


Fact #4: More than one out of four--26 percent--of workers ages fifty-five and above have savings of less than $10,000 (excluding, once again, the value of their primary residence and any pension). 60
These findings are not unlike those of past studies by the Federal Reserve Board. It found that the median level of household assets in 2004 was $172,000 including the value of a primary residence--and the median home value at that time was $160,000 for those who owned a home.61 You do the math.
U.S. savings levels are dangerously low. Many Americans are not taking their "do-it-yourself" savings responsibility at all seriously. There is trouble ahead.
RETIREMENT IS IN GRAVE DANGER
Putting these facts together, the prospects for retirement in this country are not sunny and bright--at least not for about one-third of the people who are slated to retire over the next twenty years. In 1985, a full 91 percent of all full-time employees in medium and large companies in the United States participated in some kind of retirement plan--a defined benefit plan or defined contribution plan or both.62 Today, only 51 percent do.63 Retirement benefits are shrinking, short of adequate funding, and not universal. Participation in do-it-yourself plans is falling short. Most Americans are not saving enough for retirement. Our national insurance programs are in deep trouble. And many people are unaware of, indifferent to, or perhaps numbed by these facts.
Make no mistake about it. The retirements of most Americans are in grave danger.
Most Americans are likely to work until age seventy or seventy-three. Many of the country's retirement support programs will be cut. Social Security payments will have to be reduced or the taxes that fund the system increased because of the program's funding inadequacy. Health benefits may have to be cut or rationed. Many companies, government agencies, and municipalities will scale back on their "defined" pension benefit promises--in fact, it's already happening. We will see unrest and outrage, but these cutbacks are going to take place just the same. For a country that commands 59 percent of the planet's wealth, America's retirement systems and national health and social insurance programs are strictly secondclass and disappointing.
All of these facts lead me to agree with the executive director of the Pension Benefit Guaranty Corporation, the government agency that guarantees many corporate pension plans:
"The broader issue we are confronting is retirement security. We have an aging population. Have we set aside enough resources to meet our future obligations and commitments? I think it is fairly clear that the answer is 'no.' Neither as a nation nor as individuals have we begun to tackle the looming fiscal and demographic challenges ... . The retirement security mechanisms in this country--Social Security, occupational pensions, and individual savings--are inadequate to provide a secure retirement for our citizens in their elder years."64
This may sound negative and defeatist. But pessimism and self-defeat are not the reactions I want to provoke. Instead, I want you to squarely understand our retirement predicament and do something about it. I want you to take action! I want you to save more and invest differently.
America's retirement systems are in serious disarray. Fact after fact paints a pessimistic picture. But these facts should be wellsprings for action--not gloom, doom, or paralysis. They should jolt you into preparing for retirement differently and resolutely.
Is "retirement" a dying experiment? Not at all! Will you be able to retire? You bet! However, now more than ever it's up to you to take charge of funding and defending your future.
It's time to take saving and investing for retirement much more seriously--beginning right now! Whatever the shortcomings of the American retirement experiment, you can--after all--amass adequate capital for a comfortable retirement and financial security. But you have to save more, invest differently, and avoid speculation and losses at all costs.
ACTION STEPS
1. Visit AARP's Web site to learn more about Social Security and Medicare.
2. Read Ed Slott's book The Retirement Savings Time Bomb ... and How to Defuse It. Learn the appropriate ways of drawing down your 401(k) and IRA moneys.
3. If you qualify for traditional pension or retirement benefits, ask your employer for independent certification that its pension plan is adequately funded and is projecting realistic investment returns. Download the model letter, Letter Concerning Pensions, from my Web site, www.cashrichretirement.com.
4. Locate your latest Social Security statement or request a new one. Ascertain the dates and amounts of your Social Security entitlement.


CASH-RICH RETIREMENT. Copyright © 2008 by Jim Schlagheck.