Will your investment for retirement deliver what you need?
If you're relying on a traditional pension fund and government sponsored retirement schemes you may be in for a rude shock.
We are faced with volatile and uncertain times.
Politicians are using more and more desperate measures to convince voters that they are the solution and know what they are doing. But they are largely resorting to irrational, banana Republic economic policies and mis-information.
Countries have been, and are are being, bankrupted by their governments. To recognise this fact we only have to consider the desperate situation in many countries in Europe. Social welfare and medical schemes face massive deficits.
Governments have run out of ideas, so resort to the simple solutions of printing more money and talk of milking the rich.
Governments are run by people who are more concerned about their party 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 welfare systems it that 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 money whereas the reality is the money is all YOURS. Any shortfalls, or deficits or loans will have to be paid by YOU ... or your children or grandchildren.
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.
Based on simple calculations there will not be enough money to meet all the promises that were made.
This is a common problem with many countries around the world.
There is a simple reason why pension funds will fail … unrealistic expectations of returns. Based on very optimistic growth expectations like 5% they desperately assume that they will be able to meet their promises. But at this time pension funds can't earn 5%.
Why not? Assume that 10-year Treasury bonds earn less than 1% and the average pension fund currently has about half of its funds invested in these bonds. So to earn an 5% return the other half of the assets would have to earn 10% … 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 or your children or your grandchildren!
Healthy pension funds are critically important to the economy, as they as taxpayers, provide 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 beware…
The size of the problem is way beyond the comprehension of most people.
My best advice is: DON'T rely on any traditional pension promise without knowing exactly how it's doing. Also have a Plan B and look for other ways to fund your investment for retirement.
Retirement Financial Planning: Start working on your financial plan today