One of the ongoing challenges of managing a business is to be aware of various trends and the long-term implications they have for your business. One trend that is not very visible is increasing life expectancy. How long are you or your children likely to live? The Social Security Administration has a basic calculator here: https://www.ssa.gov/cgi-bin/longevity.cgi This only shows the statistical average life expectancy.
A deeper investigation of the numbers provided in The 100 Year Life by Lynda Gratton and Andrew Scott shows that since 1840 life expectancy has been increasing three months every year. This means that a child born in the US in 2007 has a 50% chance of living to be 104. If you were born in 1987 you have a 50% chance of reaching 98 to 100 and if born in 1967 you have a 50% chance of reaching 92 to 96.
This has some serious consequences for financing your retirement. Social Security (SS) in the US is a pay as you go plan where the payments into SS made by those working today are paid out tomorrow to those who have already retired. Due to increasing life expectancy, there will be only about three people paying for every person retired in 2025, and by 2050 the ratio will be 2:1.
This path is unsustainable and by 2020 SS benefit payments will exceed the taxes paid in by the those still working and by 2035 the $2.9 trillion SS reserve fund will run out unless significant changes are made. If no changes are made, SS will not disappear. SS could continue to pay out what is being collected, but benefits would have to be reduced 20 or 30 %. With elderly Americans getting, on average, 60% of their retirement income from SS and one-third getting 90%, this kind of cut would be disastrous for many.
One of the most effective changes to SS is for people to work longer. Every additional year of work is one more year of saving and investment growth and one year less of required retirement income.
An example from The 100 Year Life is a person born in 1971 with a life expectancy of 85 years who graduates from college at age 21 and retires after working 44 years at age 65 in 2036.
Assume that SS is still available, and it will provide 10% of his final year’s salary. Further assume that he desires a total pension of only 50% of his final salary and that he does not have a company funded pension plan. This means that he will have to save enough to provide 40% of his final salary for 20 years. If his savings earn 3% more than inflation, he must save 17% of his salary every year, a very difficult if not impossible task for most of us. If he worked until age 70, a 13% savings rate is needed and about 8% if he worked to age 75. If he lived to 100 and retired at 75 the savings rate required would be 20%.
This is a complex topic with many options and possibilities for you and particularly your children, who have a good chance of reaching age 100. I urge you to review this carefully with a professional planner and tax expert to develop a long-term plan that is satisfactory to you and your family.
SCORE, “Mentors to America’s Small Business” is a part of the U.S. Small Business Administration. It is an organization of volunteers who provide free unlimited confidential counseling to business owners and entrepreneurs. They have local members who have broad business experience and are available to help. If you would like a confidential review of your situation, you can schedule a meeting at www.score.org or you may call 610-376-3497 in Reading, 610-327-2673 in Pottstown or 717-397-3092 in Lancaster to speak to a volunteer.
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