Financial Planning as defined by Investopedia is “A comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans”.
There are firms dedicated to this practice, designations designed solely to studying and implementing this method and even an industry built on the very foundations of it, but if we are to look at some of the concrete truths that are a part of our very fabric of our life it would appear, for the most part, that the methods that are being used today are not even in the same hemisphere of what will be experienced tomorrow.
The first truth is simply our demographics.
We know that today, the majority of our retirees are from what is commonly referred to as the “Greatest Generation” and they make up the roughly 38 million people currently in retirement who happen to be using the entitlements of both Medicare and Social Security.
What we also know today is that these 38 million retirees, or the Greatest Generation, have started to deplete the resources of both Medicare and Social Security.
Social Security is reporting that the trust fund it maintains to payout benefits will be exhausted by 2033, just 4 years after the last Baby Boomer retires, while Medicare is, also, reporting that it too will be empty by 2026 (Though the fund itself will be depleted the Centers on Budget & Policy Priorities is reporting that Medicare, through payroll taxes, will be able to cover roughly 87% of all Part B costs).
It should be noted that Congress, along with many past and current politicians, has also played a role in exhausting these programs by “borrowing” money from them over the years and never replacing it.
The reason why this becomes such a monumental issue is due to the fact that these two programs have been funded for the past 30 years by a group better known as the Baby Boomers, who happen to be close to double the size of the Greatest Generation.
Ultimately, today’s retirees have had the luxury of having these so dearly needed entitlements being funded by a workforce and a group that is much larger than them and unfortunately, the next in line to use them, the Baby Boomers, won’t be so lucky.
In fact, demographics, again, show us, why financial planning is flawed. The next generation that will replace these Boomers, Generation X, who happen to inherit the responsibility to fund their entitlements, which are close to insolvency now, are nowhere near double the size of the Boomers.
The hard reality, according to the Bureau of Labor, is Generation X is much smaller than the Boomers as a whole. The stark reality of where we may be headed is all due to the truth that the Gen Xers are only about 58 to 62 million in size.
Instead of the Boomers having the luxury of the next generation providing the capital to fund their Social Security and Medicare the reality is there won’t be enough people generating the much need revenue through income taxes to even just maintain the status quo.
How can today’s financial planning take the “known variables” of yesteryear and apply to them a plan that is expected to solve the upcoming issue retirees will face in the future, especially when it is also known that the rules of retirement have changed as well?
The other hard truth is the simple fact that over the course of two decades the federal government has made, not so discreet, changes to the retirement process and these changes have been very specific to Medicare and Social Security.
Survey after survey concludes that one of the biggest concerns Baby Boomers have is the ability to be able to fund their health costs in retirement and by looking at the numbers they should concerned, very concerned.
But, again, when we look at the hard truth it can be found that the financial planning process may have a flaw in it as the this expense has yet to be addressed properly or if at all. In fact, Sun Life Financial reported, in its Flying Blind survey, that over 92% of those polled had never planned for any health costs in any financial plan.
The reason why this becomes such a problem is the very changes that have been made by the federal government have all been encompassed around this very subject.
Since 1993, due to a change in the Program Operations Manual System of Social Security, in order to collect any Social Security benefits a person must accept Medicare when eligible.
This means every single person who wants to collect their Social Security must also have health costs or they will forfeit all current, future and even past benefits.
The simple question that should arise from Boomers may just be: if the government doesn’t mandate that they have to have a mortgage, or a car payment or that that they have to take a vacation, but it does state that they will be penalized if they don’t have health costs, then why is this expense not addressed in most financial plans, why is not standardized in every plan?
This becomes a much large issue as well all due to a 2003 ruling by Congress, the Medicare Modernization Act, that created a rule where Medicare is also means tested as well. Meaning that the government is going to look at how much retirees are earning and if it’s too much then the cost of their healthcare premiums will increase.
The problem is even further compounded thanks to a 2007 change in the definition of what is income.According to Social Security, income is defined as the “adjusted gross income PLUS any tax exempt income or everything on lines 37 and 8b or the IRS form 1040”.
This definition practically includes everything that the Baby Boomers have saved in their financial plan with the exceptions of just a few items like Roth accounts, specific Annuities and Life Insurance and how many people are incorporating these items?
According to a recent Wall Street Journal article, only about 46% of all employer sponsored retirement plans contain a Roth provision while only, according to Fidelity, 6% of all participants are utilizing them.
As for Life Insurance and those specific Annuities they, too, are not even in near the point of where Boomers and even Gen Xers should have. In fact there are financial entertainers eschewing them on a daily basis in favor of the very same investments that will strip retirees of their income while increasing their health costs.
What is going to happen in retirement is anyone’s guess, but to use the approach of looking at history to predict the future is definitely not one that should be embraced, especially, when the two concrete truths of demographics and government regulations become say otherwise.