A financial expert is latest to sound the alarm on this country’s retirement savings crisis.
When it comes to retirement savings, Eric Brotman says the nation is in trouble. Brotman, president and managing principal of Baltimore-based Brotman Financial Group and author of Retire Wealthy, says half of the country couldn’t come up with $1,000 if you asked people to do so.
Too much debt, too much spending and a lack of savings is going to make retirement difficult for many Americans, Brotman says. One of the solutions likely in the future—and he doesn’t like it—is a shift of money from those with higher incomes to those who are barely scraping by on their Social Security.
“I think there’s an entire generation that’s unprepared,” Brotman says. “I don’t think the boomers are in terrible shape, but their kids are in real trouble. The real challenge folks have is they have no idea how expensive it’s going to be. For example, if you have amassed a half million dollars, which already puts you in elite company, you can only expect that to create between $20,000 and $25,000 a year for you in retirement. That suddenly don’t sound like a whole lot of money, especially if it’s taxable.”
The problem is Social Security, which was designed for very elderly people and meant to be a safety net is now being relied upon because employers aren’t doing a lot to take care of retirees any more, Brotman says. Calling himself an eternal optimist, he says the nation will find a way and described how the solution is for people to take personal responsibility for their retirement. Coaching generations to think about retirement is best for the country, but Brotman says he’s still concerned about what’s going to happen next.
“My fear is that there is becoming a disincentive to save if you can’t get there on your own,“ Brotman says. “Half of the country couldn’t rub together a $1,000 and that’s really horrifying,” Brotman says. “What’s going to happen is more governmental redistribution through Social Security. You will see it means tested at some point meaning it will go to the folks who don’t have anything instead of the folks who do. I expect the age of retirement to be raised at some point out of necessity though it may not happen until the boomers get through the pipeline because they’re an incredibly powerful voting block. Lastly, I think we’re going to see Social Security have the wage base eliminated or dramatically raised. “
Currently, people contribute Social Security taxes on the first $117,000 they make, which Brotman says is logical because that’s all they get credit for. The federal government charges those who earn more than $200,000 a Medicare surcharge of 0.9 percent and 3.8 percent tax on some or all of your investment income.
“I think you’ll find folks with higher income paying Social Security taxes even though they’re not raising their benefit,” Brotman says. “I don’t like it, but I won’t be shocked if that happens. It’s too easy to do politically. The people who get the most money out of Social Security are the ones who don’t need it. The folks who get the least money out of it are the folks who are living on it. They have paid the least into it. I’m not suggesting that’s an unfair thing, but it’s politically inexpedient.”
If Social Security gets mean tested, Brotman says that would result in a lot of financial maneuvering to get assets out of grandma’s name so there’s no dividend income accruing to her. Look for asset shifting, gifting and use of trusts and other tools that sophisticated estate and financial planners do, which are legal, but which not necessarily intended by Congress when something gets enacted, Brotman says.
Brotman, who also wrote Debt Free For Life, says people can no longer put off their retirement planning and must act immediately. Starting at 50 is “tough, but doable,” but if you’re waiting until you’re in your 60s to start retirement planning, it’s “nearly impossible,” Brotman says.
“You have to have positive cash flow,” Brotman says. “You have to have either no or modest debt. I’m not worried necessarily about a mortgage on a home unless you’re upside down in it. I’m more concerned about credit card or consumer debt or student loans. That can be a killer.”
Typically, if you’re younger than 50, you might only have to put away 15 percent. If you’re starting in you’re 50s, it could be 25 or 30 percent, Brotman says. Taking advantage of an employer match on a 401(k) lessens that percentage and should be utilized, he says. But it’s also vital to start living on less than 100 percent of what you make, he says.
“Start living on a little bit less so they don’t wind up in an earth shattering situation where you have to live on a lot less or not be able to do it later,” Brotman says. “If your expenses are centered around children and your children are emancipated, it becomes doable pretty quickly. The money you were spending on tuition or stuff on your kids and that goes away, you can redirect that into your own home so to speak. Again, it’s hard, but doable.”
If it’s available, people should work as long as possible. The exception is if someone has a terminal condition or his or her life expectancy has been comprised, Brotman says. Working longer builds that retirement.
“I’d tell yourself to pay yourself first,” Brotman says. “ I tell folks to make sure the first check you write every month is for your saving or investing. Live on the rest because what too many people do is spend everything they have to spend and whatever is left over is saved by default. It’s almost an accident. What you find if you only allow yourself 80 percent of what you make, that’s what budget is. If you allow yourself 100 percent and hope you have something left over, most of the time you won’t.”
Brotman, past president and chairman of the board of the Financial Planning Association of Maryland, encourages people to diversify from tax standpoint and not have every dollar of retirement subject to taxes they can’t control. He says the country is broke and it’s only a matter of time before tax rates are higher with fewer deductions. Many states tax pensions, 401(k) s and IRAs as ordinary income as well, he says.
“Start looking at income solutions and not capital appreciation solutions,” Brotman says. “You get to that age and you want to start look at some type of annuity or some type of CD or some type of alternative asset that has an income component to it. That’s going to become a lot more popular. We’ll see a lot more of that with baby boomers.”