If You Are Counting On A Government Pension, What Happened in Rhode Island Should Make You A Little Nervous
By Teresa Kuhn, JD, RFC
A few days ago, a news blurb, tucked away on the digital site of the Los Angeles Times caught my attention:
“Federal Judges Dismiss Unions’ Appeal Over Pension Overhaul”
The article was a mere blip on the news radar- a seemingly mundane Federal courts appeal decision that upheld pension reforms in Cranston, Rhode Island; a town formerly known as Pawtuxet, with a population of about 80,000.
Firefighter and police unions filed the appeal, saying that governments don’t have the right to change the terms of public employee contracts, even when those governments are experiencing severe financial distress. In other words, unions maintained that pensions are sacred and untouchable and that government entities cannot reduce them or change the terms, even if such a reduction would prevent bankruptcy.
The court disagreed, however, and upheld governments’ rights to modify contracts based on some essential tenets of contract law. I won’t bore you with the specifics, but if you are interested you can read it here: http://media.ca1.uscourts.gov/pdf.opinions/17-1293P-01A.pdf.
The point of this is simply that Cranston’s appeal is establishing a precedent for other cash-poor municipalities, counties, and states to use as they seek to reduce or even eliminate pension pay-outs.
This scenario is playing out again and again, as cities, trying to achieve some measure of fiscal responsibility, try to trim the largest item on their bloated budgets: so-called “unfunded liabilities”, the lions share of which involves government employee pensions.
In California, for example, a meltdown of epic proportions is on the horizon. In 2015, Pew Charitable Trust reported that the state’s two largest pension funds gathered just 79% of the nearly $18.9 billion they needed to keep their pension debts from increasing.
Since that time, things have continued to worsen with some government entities’ funding levels dropping as low as 64%! Adding to this is an increasing number of state appellate court decisions challenging the so-called “California Rule.” The California Rule has long been interpreted to prohibit any changes to public pension benefits and has served as a model for other states as well. But with more and more cities in the red, challenges to the California Rule and to the idea that pensions are untouchable are increasing. The math has finally caught up to free-spending politicians who are being forced to enact pension reform , whether they want to or not.
What does this mean for YOU?
Pension woes aren’t exclusive to California and New York, but have also had an impact in Michigan, Kentucky, Alabama, Pennsylvania, Rhode Island, and Idaho. According to the Governing.com website, there have been 61 municipal bankruptcy filings in the US since 2010.
Many other states and localities are in poor financial health, and the only way they can turn it around is to slash city services and/or trim pension costs. This means, that although it’s great if you have a government pension, you MUST build up your Plan B in case that pension experiences changes which could severely impact your retirement plans.
At Living Wealthy Financial, we believe that pro-actively managing your wealth is the only way to ensure that your life after work will be less stressful and more fulfilling. We build our clients’ financial future on a solid foundation, taking into account their unique situations and incorporating the power of specially structured cash value whole life insurance. We’d love to talk to you about how we can help you create the financial future of which you’ve always dreamed. Call us today for your initial consultation at (800)382-0830.
By: Teresa Kuhn, JD, RFC
The genesis of the modern movement to retire by 40 was Jacob Lund Fisker’s 2007 book, Early Extreme Retirement”(ERE). Fisker, who retired from his profession at the age of 33, theorized that nearly any individual could retire long before age 65 by following a few simple steps. His book laid out a blueprint and principles for attaining financial independence in just 5-10 years.
The principles advocated by Fisker, including avoiding debt, acquiring passive sources of income such as real estate, and saving as much money as possible are certainly sound and worthwhile strategies. However, as enticing as the premise of early retirement may be, there are some serious limitations that you must look into before taking this path yourself. When designing your early retirement blueprint it is critical that your financial strategist does not use traditional retirement modeling and that he or she factors in the potential problems of retiring before 65. In other words, the math that your mother and father used to retire at 65 won’t work for you.
You’ll Rely More on the Whims of the Stock Market
If you’re considering retiring early then you’ll probably be forced into the stock market, whether or not you want to be there.
According to American Funds, longer time horizons will create a greater reliance on stock market returns. The traditional “4% withdrawal rule”, based on a 30-year retirement, is invalidated when adding an additional 20-30 years of retirement to support. Given the history of ups and downs in the American Stock Market, failure to account for poor returns early in your retirement could spell disaster later.
Many Happy Returns in the Future?
Traditional retirement math must be reworked to contemplate the potential for lackluster returns in the future and lowered rates of economic growth. Since a person on a longer retirement plan is so reliant on investment returns, and a new normal of less than 4% withdrawal rates could wreck their plans, your financial advisor must anticipate this when designing an early retirement blueprint. Past performance, as you know, is not necessarily a good barometer for predicting the future when it comes to the market. You’ll need more money to overcome market downturns.
The Longer You Are Retired the More Risks You Face
Contrarian financial website, ZeroHedge uses a grimly humorous tagline: “On a long enough timeline, the survival rate for everyone drops to zero.”
I’ve reworked this a bit… “On a long enough timeline, there’s a 99.9% chance that you will face unexpected risks and spending shocks.”
Think about it. If you leave your job at age 40, you could live 40, 50, or even 60 years in retirement. During that time, you will almost certainly face small and large financial shocks that could bust your budget in a big way.
A recent actuarial study reported that over 38% of age 65 and over retirees experience a spending shock of 25% or more during retirement. Unanticipated expenses such as health crises, natural disasters, home and automobile repairs, and other unpleasant surprises are major causes of retirement plan implosions. This risk is magnified on a longer timeline. If you plan on retiring early, be sure to factor in an additional 20% or more to account for these potential risks.
Do You Really Want To Live This Way?
The average American needs at least 20 years or more to accumulate a significant amount of retirement money. In order to take off a third of that time, you’ll need to maximize your savings percentage as much as possible. Doing so will require making lifestyle sacrifices with which you may be uncomfortable.
I am always for getting rid of debt and unnecessary expenses, but if you want to retire in 7 years, you will have to save nearly 75% of your income! To do so, you’ll have to cut back on every single expense and be so frugal that your present life becomes unenjoyable. For example, Fisker’s book recommends getting rid of your air conditioning to save money. Those of us who live in hotter regions would likely have a tough time doing that.
Even if you love your job, you probably don’t want to work until you die. But, you don’t want to make your present life miserable trying to retire too early, either. Luckily, there is another way that I would love to show you that allows you to avoid Wall Street and banks, save on taxes, and which gives you the possibility of retiring before you ever imagined. Call our office today at (800)382-0830 and I will be glad to send you free educational materials that will help you learn how to take charge of your financial future and create a healthier, more fulfilling life.
What a 40 year old needs to invest with 95% confidence