- Fiscal Cliff
- Unprecedented National Debt
While these issues are alarming, they create cycles that we have no choice but to get through. Think back to the Oil Crisis of 1973, Tech Bubble in 1999, Credit Crisis of 2008, bursting of US Housing Bubble in 2008, and now an unprecedented National debt. Looking at our current crisis, there is disarray among all of us Americans that we can’t we come up with a solution and fix our country before we go broke! I do not believe the end of the world is coming or that the next financial crisis will doom us all. I also believe that for every negative, there is a positive.
The thing that you can do is to make sure you are prepared for the worst outcome and hope for the best. The other alternative is not to plan, but to just hope for the best while keeping your fingers crossed. Doing nothing can be dangerous and harmful, but preparedness can help you survive and thrive.
What does this mean to you? You must be prepared and make sure that you have your financial house in order. Many of you can survive on your pension, and Social Security benefits to meet your fixed expenses, at least for the earlier years in retirement. But how are you going to afford the lifestyle that you have planned for in this phase of your life within the current “low” or “no” interest rate environment, without exposing your retirement assets to risk. Inflation destroys purchasing power. It is sneaky because you don’t realize it is causing damage until it’s too late. Having a retirement income strategy that takes into account the impact of inflation is necessary and should be a priority.
The average equity Americans’ have in their homes has fallen since 2006, from $200,000 to $78,000. The average Americans’ net worth has declined since 2006, from $126,000 to $76,000. (www.aoa.gov) Imagine what would happen if they lose the remaining $76,000. Is it possible to recover? What would you recover with? Your personal planning should include a strategy to keep money safe, as well as being able to take advantage of future opportunities.
Personal planning is key. Start by estimating your cash flow and expected expenses in retirement, which is sometimes the most difficult task of this process. Next, look at your income sources such as your pension and Social Security. Most of us will have a gap, which we will need to supplement from our personal savings (TSP, 401k, IRA, etc). Even if initially there is not a need to take withdrawals from your savings, don’t assume that everything is peachy! You will want to make sure you are including inflation as part of that income need. And, If your pension and Social Security COLA’s are not keeping up with inflation you will need to take larger withdrawals from your savings. Now include a realistic rate of return to this scenario to determine if your savings are sustainable to meet your income needs. This is how you can arrive at your savings goal specific to your personal income strategy. If you are falling short, what should your savings goal be? Finally, does your current savings and investment plan allow you to reach this goal? If not, are you willing to increase your savings before retirement, have a more prudent investment strategy, work longer than originally planned, reduce your income goals, or a combination of the above. The underlying reality is that this is not your employer’s responsibility or the government’s, but your own. And it’s up to you to create the retirement you so richly deserve.