By Peter Dougherty
PEOPLE tend to live longer lives than ever before.
Many of us would agree that is a good thing. Financial planners, though, recognise the other effects.
The question of how we manage those extra years is interesting: more time in Spain or more time in the US or UK?
But because I’m a financial planner, I think about the financial implications as well – longer lives mean we need to save more for retirement.
You may be asking: “But won’t I continue to collect Social Security no matter what age I live to?”
Although the reassuring answer to that question is ‘yes,’ additional questions about Social Security continue to lurk behind the scenes.
Chancellor Otto von Bismarck of Germany introduced the first modern Social Security pension system in 1881.
Life expectancy for those born in 1881 was 39 years. The retirement age in his system was set at 70, however, and only later reduced to 65.
Either way, it meant that very few people lived long enough to enjoy state-sponsored retirement.
To put this in today’s terms: if in 2026 we could set the retirement age based on the likelihood of reaching 65 in 1881, it would be 88 years. Eighty-eight years!
That shows us retirement wasn’t thought of as a social safety net for the masses, but instead as an idealised concept that few would access and even fewer would enjoy for more than a brief period.
When the US Social Security Act was passed in 1935, its retirement age was set at 65. At that time less than 60% of American adults lived that long.
As other countries adopted their own social security systems, the retirement age was often fixed at 65.
When these early social security systems were started, no one would have predicted that life expectancy would jump so dramatically, that far more people would receive social security payments and do so for far longer than contemplated.
Yet the most significant response from the pension systems themselves has been to raise the age of retirement – not to 88, but to 66 or 67.
The result is social security systems have become significant government expenditures in most countries.
In Spain, social security related spending is approximately 18.3% of the Gross Domestic Product (GDP) of the country.
That’s significant. That’s also risky. Not simply because it dwarfs spending on programs such as education, which accounts for only 4.5% of GDP in Spain, but because it’s difficult to go up from such heights.
From a financial planning perspective, this tells us we should try to avoid over-relying on Social Security to fund our retirement.
Put another way: it can be a foundation, but it shouldn’t be the whole house. Some practical ways to reduce our reliance on Social Security include:
· Build independent capital – and put this capital to work by investing for growth via a diversified portfolio. Cash won’t keep pace with inflation over years.
· Delay claiming Social Security if possible – In the U.S., claiming at 62 permanently reduces benefits whereas delaying until 70 greatly increases payments.
· Generate alternative income streams such as rental property, business ownership, dividends. Even modest side income can dramatically reduce withdrawal pressure on your portfolio.
· Work a few years longer than anticipated – this improves long-term sustainability by increasing savings and reducing withdrawal years.
If, like me, you enjoy metaphors, here is the one I’ll leave you with: let Social Security be your backup singer, if possible – not the lead vocalist.
Peter Dougherty is a Financial Planner at BISSAN Wealth Management in Spain. He holds an MBA in finance from Columbia University in New York and an MS in Spanish Taxation (Máster en Fiscalidad y Tributación) from Nebrija University in Spain. He is a European Financial Planner (EFP) in Spain and is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Retirement Planning Counselor® in the United States.
For more information: https://www.financial-planning-in-spain.com
Peter Dougherty
MBA in finance
MS in Spanish taxation
BS in Economics
European Financial Planner in Spain
Chartered Retirement Planning Counselor® in U.S.
Author of two financial planning books
Certified Financial Planner™ in U.S.
Click here to read more Business & Finance News from The Olive Press.