Investment for Retirement – The Traditional Option To Avoid

If you're relying on a traditional pension fund you may be in for a rude shock.

We are faced with volatile and uncertain times.

Using desperate measures to convince the voters that they have a solution and are in control more and more governments are resorting to irrational, banana Republic economic policies and mis-information.

Countries have been, and are are being, bankrupted by their governments. Social welfare and medical schemes face massive potential deficits. Governments have run out of ideas, so resort to the simple solutions of printing more money and milking the rich.

Governments are run by people who are more concerned about their partisan positions and winning the next election than the long term economic future of the country.

One advantage of living in a country, like South Africa, with primitive (non existent!) social security and social welfare systems makes you very conscious of looking after your investment for retirement yourself. One soon realises that governments will do anything to pander to the too trusting, poorly informed, voters.

Governments try to convince everyone that “they” have the money whereas the reality is the money is all YOURS. Any shortfalls, or deficits or loans will have to be paid by YOU.

It has been reported that pension funds in the US are underfunded by at least $1 trillion. This is understated by at least a factor of 3 – the real shortfall is over $3 trillion. There will not be enough money to meet all the promises that were made. This is a common problem with most of the rest of the world.

There is a simple reasons why pension funds will fail … unrealistic expectations. Based on a very optimistic growth expectation on 8% they desperately assume that they will be able to meet their promises. But at this time pension funds can't earn 8%

Why not? Assume that 10-year Treasury bonds earn about 3% and the average pension fund currently has about half of its funds invested in these bonds. So to earn an 8% return the other half of the assets would have to earn 13% … very unlikely!

So to pay out these pension benefits will require increasing taxes or taking on more debt.

The size of the problem is mind boggling. And guess who will have to take the pain … YOU.

Healthy pension funds are critically important to the citizens, as they as taxpayers, provide the funds for both public and private pension funds.

In the US over 20 million employees, 7 million retirees, and roughly 90 percent of public sector workers are covered by over 200 state defined benefit pension plans. If they can only make a return of 4% how many will be able to meet their obligations?

But the shortfall in funding will then “land in the laps” of the taxpayers. Pension plans are massive and taxpayers will have to finance trillions of dollars. It has been calculated by Novy-Marx that currently each citizen has a pension obligation of about $10,000.

So if you're under fifty be aware…

1) Social Security doesn't have the money for your investment for retirement.

2) Other pension funds are also a poor choice as they are also massively underfunded.

3) You, as a taxpayer, will have to pay for the already-promised pension benefits when these pension plans run out of money.

The size of the problem is beyond the comprehension of most people. My best advice is: DON'T rely on any traditional pension scheme and find other ways to fund your investment for retirement.

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