[REN #726] The Growing Retirement Crisis (And How to Avoid It)

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Picture of a Man in Front of the Ocean for Real Estate News for Investors Podcast Episode #726

There’s a growing retirement crisis in this country. A new report on how well Americans have prepared for retirement shows that many Baby Boomers are in bad shape. Many don’t have any savings or a private pension to rely on. There’s also a risk to basic entitlements, like Social Security and Medicare. Without a major overhaul, retirees may face Social Security cuts, and bigger co-pays for health care, in the not-too-distant future.

April is National Financial Literacy Month, so it’s a good time to review your retirement plans, especially if you’ve just made it through your first tax return under the new tax laws. That should give you a better idea about the money available for saving. It’s easy to procrastinate on this task, but addressing it sooner than later could make a big difference.

Knowing exactly how much you might need and how much you need to put away while you’re working is crucial. A new report claims that many Baby Boomers haven’t done this and are now facing a retirement crisis.

Retirement Reality Check

The Insured Retirement Institute’s annual report is called “Boomer Expectations for Retirement.” The Institute represents the annuities industry, so much of this report focuses on that. But it also highlights issues that will haunt Baby Boomers trying to retire. There are three of main issues, including a lack of savings, higher-than-expected health costs, and misconceptions about how much money is actually needed for retirement.

The report focuses on Baby Boomers because they are the generation in the midst of retirement right now. They are born between the years 1946 and 1964 and are currently between 55 and 73 years old. The report implies that Boomers need a reality check. It says they are largely unprepared for retirement because they are unrealistic in their expectations and haven’t saved enough. “In fact,” it says, “45% have no retirement savings at all.” That’s a scary number since 47% of them have already retired.

Where’s the Money Coming From?

Let’s take a look at their income options. As reported by CNBC, financial preparedness is a stool with three legs that represent Social Security, private pensions, and savings accounts. (1) Unfortunately, none of these options are providing much security for Boomers. CNBC reports that the average Social Security check adds up to $14,000 a year. Just 38% of older boomers are expecting or getting a pension while less than 25% of younger Boomers are expecting one. As for the savings leg, 45% of Boomers have not saved anything at all for retirement.

It seems that many Baby Boomers don’t really know how much money they’re really going to need. CNBC reports that retired Americans spend an average of $55,000 a year but that many Baby Boomers think they’ll need much less. The Insured Retirement Institute found that 44% of those surveyed feel they’ll need less than $35,000 a year and a total of 60% will need less than the average amount. (2)

The Institute also asked people what they’ll do if they run out of money. 58% said will rely on Social Security. Another 37% said they will return to work, at least part time. About a third of Boomers have already postponed retirement. Another 6% said they will ask their children for help.

High-Income Earners Also in Trouble

Another report found that a majority of people wish they had saved more and had started saving much earlier. According to CNBC, an analysis by the Schwartz Center for Economic Policy reveals that it isn’t just low and middle-income earners who aren’t saving enough. Researchers at The New School for Social Research found that high-income workers are also spending too much and saving too little. (3)

Researchers looked at the amount of money people ages 51 to 56 were saving for retirement. They found a big disparity in preparedness levels within the top earnings tier. They say 30% of the people in that age group who earn more than $80,000 a year have less than $200,000 in their savings retirement accounts. Only 15% have saved more than $700,000, and just 3% have hit the $1 million market recommended by many financial experts.

Researcher Siavash Radpour says, “Even top earners don’t have as much as you’d expect them to have.” And the situation is dire for low-income workers. The report shows that half of all retirement wealth is held by those in the top tier while those who earn less than $25,000 a year have only 1%.

Social Security, Medicare at Risk

Social Security is also facing an uncertain future, along with Medicare. The latest update on the health of those two entitlement programs shows that Medicare will run out of money in 2026, and that Social Security is not far behind. (4) It is expected to become insolvent in 2035. That’s one year later than a previous forecast, but the new number still doesn’t provide much comfort to people depending on that income.

Arkansas Representative Steve Womack said of the news, “The programs that millions of Americans pay into and expect to have in the future are going broke — driving up federal spending, growing our deficits, and crowding out other priorities in the process. We cannot afford to ignore this reality any longer.”

If the programs can’t cover a hundred percent of their obligations, the benefits would have to be cut. For people already counting their Social Security pennies, that could be devastating.

The best course of action is to start preparing as soon as you can, by saving money and being realistic about how much money you’ll need in the future.

But savings alone will likely not be enough. Inflation will eat up that savings. You should expect that each year your money is worth about 3-4% less than it was. And if inflation runs rampant, it could be much, much worse than that.

The key to building a healthy retirement is investing that money wisely, and more importantly, using leverage.

One example is buying your own home. If you buy a home for $300,000, you might think you’ll need a 20% down payment. But if it’s your primary residence, there are loans that only require a 3% down payment. 3% of $300,000 is only $9,000. The payment on that home may be around $1,800 including taxes and insurance. If that sounds high, cut it in half. An $150,000 home would be a $4,500 down payment and about a $1,000 monthly payment that includes taxes and insurance, depending on the interest rate and local property tax rates.

For many people, this wouldn’t be much different than local rent levels. The big difference is that over time, specifically in 30 years, that home would be paid off.

But let’s say that after 2 years, you rent it out and move into another home. You can get a good loan on that primary residence, but you won’t have to refinance the original home that is now a rental. At that point, you have two assets that may very well be paid off by the time you retire.

If you bought 3 to 5 properties, you’d have that million dollars experts recommend by the time you retire. There are ways to accelerate the pay off. By making an extra payment every year you may be able to pay off the property in 15 years or less. And often times that can be done by just using the cash flow from the property.

Savings won’t do that for you.

Another option is to buy a rental property in an area where prices are still depressed. In Detroit, for example, people can still buy property for under $60,000. That’s just a $12,000 down payment for a rental property.

And if this country experiences inflation, the value of the property tends to rise too, as well as rents, which is why owning leveraged property is a great hedge against inflation.

This is also why real estate has been proven to be the #1 wealth builder. You can learn more by reading my book, Retire Rich with Rentals. Or go to our website, where you’ll find an enormous amount of free education on how and where to invest.


(1) CNBC Article 1

(2) IRI Expectations

(3) CNBC Article 2

(4) CNBC Article 3

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