By Peter Dougherty<\/p>\n
PEOPLE tend to live longer lives than ever before.<\/p>\n
Many of us would agree that is a good thing. Financial planners, though, recognise the other effects.<\/p>\n
The question of how we manage those extra years is interesting: more time in Spain or more time in the US or UK?<\/p>\n
But because I\u2019m a financial planner, I think about the financial implications as well \u2013 longer lives mean we need to save more for retirement.<\/p>\n
You may be asking: \u201cBut won\u2019t I continue to collect Social Security no matter what age I live to?\u201d<\/p>\n
Although the reassuring answer to that question is \u2018yes,\u2019 additional questions about Social Security continue to lurk behind the scenes.<\/p>\n
Chancellor Otto von Bismarck of Germany introduced the first modern Social Security pension system in 1881.<\/p>\n
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.<\/p>\n
Either way, it meant that very few people lived long enough to enjoy state-sponsored retirement.<\/p>\n
To put this in today\u2019s 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!<\/p>\n
That shows us retirement wasn\u2019t 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.<\/p>\n
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.<\/p>\n
As other countries adopted their own social security systems, the retirement age was often fixed at 65.<\/p>\n
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.<\/p>\n
Yet the most significant response from the pension systems themselves has been to raise the age of retirement \u2013 not to 88, but to 66 or 67.\u00a0\u00a0<\/p>\n
The result is social security systems have become significant government expenditures in most countries.<\/p>\n
In Spain, social security related spending is approximately 18.3% of the Gross Domestic Product (GDP) of the country.<\/p>\n
That\u2019s significant. That\u2019s 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\u2019s difficult to go up from such heights.\u00a0\u00a0\u00a0<\/p>\n
From a financial planning perspective, this tells us we should try to avoid over-relying on Social Security to fund our retirement.<\/p>\n
Put another way: it can be a foundation, but it shouldn\u2019t be the whole house. Some practical ways to reduce our reliance on Social Security include:<\/p>\n
\u00b7 \u00a0 \u00a0 \u00a0 Build independent capital \u2013 and put this capital to work by investing for growth via a diversified portfolio. Cash won\u2019t keep pace with inflation over years.<\/p>\n
\u00b7 \u00a0 \u00a0 \u00a0 Delay claiming Social Security if possible \u2013 In the U.S., claiming at 62 permanently reduces benefits whereas delaying until 70 greatly increases payments.<\/p>\n
\u00b7 \u00a0 \u00a0 \u00a0 Generate alternative income streams such as rental property, business ownership, dividends. Even modest side income can dramatically reduce withdrawal pressure on your portfolio.<\/p>\n
\u00b7 \u00a0 \u00a0 \u00a0 Work a few years longer than anticipated \u2013 this improves long-term sustainability by increasing savings and reducing withdrawal years.<\/p>\n
If, like me, you enjoy metaphors, here is the one I\u2019ll leave you with: let Social Security be your backup singer, if possible \u2013 not the lead vocalist.<\/p>\n
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 (M\u00e1ster en Fiscalidad y Tributaci\u00f3n) from Nebrija University in Spain. He is a European Financial Planner (EFP) in Spain and is a CERTIFIED FINANCIAL PLANNER\u2122 professional and a Chartered Retirement Planning Counselor\u00ae in the United States.<\/p>\n