Pension Crisis: How to protect yourself today
From Nick Rokke, Analyst, Palm Beach Daily:
The biggest problem facing retirees today is underfunded pension plans.
They’re like a ticking time bomb buried deep within the financial system. And this time bomb could blow a $7 trillion hole in America’s retirement savings.
The pension fund crisis isn’t new. Yet it’s far from the forefront of most Americans’ minds.
However, looming demographic changes will quickly bring this crisis to the front pages.
In today’s interview, I asked Palm Beach Letter editor Teeka “Big T” Tiwari what Americans can do to protect their financial livelihoods from collapsing pension plans.
Nick: T, we get a lot of feedback from readers who are worried that their pensions (including Social Security) won’t be around by the time they retire. What would you tell them?
Teeka: I would tell them not to rely on their pensions.
Nick: Why not?
Teeka: The short answer is there isn’t enough money to pay them.
You see, according to the Social Security Administration, nearly 80 million baby boomers will file for retirement benefits over the next 20 years. That’s an average of 10,000 people per day, or 3.65 million per year.
In 2010 (the last time the census was taken), people 65 and over made up 13% of the population.
That will hit 18% by 2030.
We’ve never had this many retirees before. Thirty million Americans are counting on some form of pension to see them through retirement.
The problem is the money simply isn’t there.
Pension funds are all but dried up—and this problem extends to both public and private pension funds.
Nick: That’s not going to put anyone at ease.
Teeka: People should be worried. They’re being lied to by state pension officials and pension fund administrators.
Most Americans don’t even realize how widespread this problem is.
I call it a ticking time bomb. That’s because it could blow a $7 trillion hole in America’s retirement savings.
That’s how much credit rating agency Moody’s estimates pensions are underfunded.
That’s 10 times larger than the bank bailout in 2008.
Nick: But most people don’t have pension plans. Why should they care about this crisis?
Teeka: Who do you think is going to pay to bail out these pension plans? Do you think any politician is going to let pensions for firefighters and policemen go bankrupt?
Nick: Not a chance.
Teeka: Right… Taxes have to go up. For those in areas with unfunded public pensions, you can expect increases in state income tax, property tax, sales taxes, and whatever else politicians can possibly tax.
Illinois is a good example. Moody’s estimates the state’s net pension liability is nearly $200 billion. That’s how much the state needs to put in the pension fund to make it whole.
That’s almost five times more than the state collects in taxes every year. There’s no way the state can meet its obligations.
And remember that $7 trillion liability? To pay for that, every American household will have to chip in about $56,000.
Nick: That’s scary…
Teeka: And it’s not just public pensions that are in trouble. So are private pensions. These people can’t count on their retirement plans either.
Just in February, members of Ohio Iron Workers unions had their pension benefits slashed in half. There are 50 more pension plans in the Midwest following suit.
Even extremely profitable businesses are neglecting their pensions. General Electric has a $27 billion shortfall in its pension. General Motors has a $21 billion shortfall.
To make up these shortfalls, these pension funds are all going to need double-digit returns in the stock market… for years. Without that, they will run out of money.
Nick: So if readers can’t rely on their retirement plans, what should they do?
Teeka: That’s a big reason why the Palm Beach Research Group exists. Our goal is to help our subscribers grow a little wealthier every day.
In my flagship service, The Palm Beach Letter, I tackle this problem head-on by focusing on safe growth and income investing.
I always look for ideas that will give us good growth upside, but also pay out a good dividend while we own it. That’s one of the best ways for retired readers to invest their money.
If you look at our portfolio, you’ll see our average yield is over 6%. I’m looking at yields here of 6.8%, 8.7%, 7.4%, and 7.6%. We’re very focused on income because we recognize how important it is for retirees and near-retirees to secure safe income.
Nick: So finding stocks with a good dividend is one thing people should do to prepare for retirement?
Teeka: By good, I think you mean large. A large dividend is not enough. It also has to be a safe dividend. On top of that, we need to see growth potential. What’s the point of having a dividend if your capital isn’t growing, too? You need growth so your money can outpace inflation.
At The Palm Beach Letter, finding safe dividend ideas that can also grow in value is my top priority.
Nick: Thanks T. That’s all I’ve got for you today.
Teeka: My pleasure.
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