For the past several years, Social Security's Trustees have been reporting on the accelerating depletion of that program's Trust Fund. As recently as 2008, the Trust Fund's doomsday was projected to be as far away as 2041. But over the past several years that collapse date has inched forward and now sits at 2033.
Unfortunately, even that projection looks like it's a bit too optimistic. It turns out that there's a very real risk that next year's report will move that date even closer.
Since the Trustee's Report was written in April, some news has emerged about the investments in the Trust Fund putting a drag on the returns.
Every year, Social Security rolls over its maturing long-term Treasury bond holdings, picking up new ones to replace the ones that are expiring. Because of exceptionally low interest rates, Social Security is earning less interest on its new bonds than it did on its old ones.
Take a look at the scary trend line that shows the annual interest lost when the old long-term bonds matured or were sold versus the annual interest on the new long-term bonds:
Every year since 2010, the new long-term bonds being bought by Social Security pay substantially less interest than the old long-term bonds that are maturing. That red line is getting deeper, and the 2012 total is nearly $5.4 billion in annual interest foregone because the new bonds pay that much less than the old ones.
That amounts to $5.4 billion less available for paying benefits or for reinvestment. That's a $5.4 billion deeper hole the program faces next year than it would have if rates had stayed steady.
And that's just from one year.
Since 2010, the total annual income foregone due to lower interest rates has exceeded $10.5 billion. Since this only counts the long-term bonds that Social Security is using -- not the short-term certificates that get traded much more frequently -- those numbers add up to create a whole world of pain.
It's a huge deal, because Social Security is already paying out more in benefits than it takes in as taxes. The only reason the Trust Fund is still growing at all is because of the interest it generates on the Treasury bonds it holds.
With interest rates so low and net interest received dropping as a those old bonds mature, that "net interest" kicker is rapidly losing steam. The sooner it runs out of gas, the sooner the Trust Fund starts actively shrinking, starting something of a death spiral as the stockpile depletes.
From the perspective of a potential recipient, this hastens the need for you to prepare for the Trust Fund's collapse. Every downward revision in the year the Trust Fund will expire hurts your chances to get ready in two ways. For one, the closer date gives you that much less time to prepare. For another, if you aren't already preparing, then you've already lost the time that had passed since the last revision.
In other words, assume for the sake of discussion that the 2013 Trustees' Report moves the Trust Fund's anticipated run-dry date a year closer -- to 2032 rather than today's expected 2033. If you did nothing to prepare in 2012 because you had 21 years before the issue struck, imagine waking up when the next report is published to find that you've lost not one year, but two.
What Will You Do About It?
Think it can't happen? Take a look at the table in this article along with the graph above in the one you're reading now. Ask yourself what's more likely: that the ugly trend that has already established itself will continue, or that these very serious issues will somehow, almost magically, solve themselves.
With around two decades left, you still have time to prepare. But your chance to let time and the magic of compounding work for you to cover for Social Security's shortfall is rapidly running out. So get moving now, or prepare for a really scary income gap when you are looking to retire.
"The decision to retire is sometimes made for superficial reasons," Alicia Munnell, director of Boston College's Center for Retirement Research, says. She's heard many stories of older workers quitting suddenly because they had been stuck on airplanes too long during business trips. She heard of a woman recuperating from a sprained ankle who decided she really liked to watch daytime television, so she retired. Some quit because they were peeved at younger bosses. Leaving in a huff without developing a solid exit strategy, though, can be financially foolhardy.
Plenty of investors turn timid as they age, so it's no surprise that many retirees consider stocks off-limits. What they fail to realize is that an ultra-conservative portfolio stuffed with bonds and certificates of deposit can't keep up with inflation. It may be hard to imagine, given the current bloodbath on Wall Street, but over the long run, returns from stocks and stock mutual funds tend to surpass the returns on other investments. Adding stocks to a retirement portfolio can boost your returns without exposing you to reckless risk.
Those lucky enough to retire with a pension must often decide whether to take a lump sum or a lifetime of monthly checks. Grabbing that huge chunk of change all at once is exceedingly tempting, but retiring workers should consider consulting a pension actuary before making such a momentous decision.
You can start collecting Social Security checks at age 62, and most Americans go for it. But their eagerness can curtail their retirement income. If you delay Social Security past age 62, your benefits will increase significantly. Crunch your own numbers, using various retirement scenarios, by visiting the Social Security Administration's website at www.ssa.gov.
What's required to be a successful investor hasn't really changed from the days when stock prices were ripped off ticker tapes. "The whole purpose of investing for the long term is to make your money grow faster than inflation deteriorates it, " says author Lewis Schiff. "For those investors who take the long view and practice the simple arts of diversification, compound returns and dollar-cost averaging, and especially those who do so in tax-advantaged accounts, this growth is well within reach." If you're not confident in your own investing skills, consider using low-cost target retirement funds offered by big mutual fund companies. Next: 5 Ways to Reduce Expenses
People need to remember that it's after-tax returns that matter," says author Taylor Larimore. The after-tax performance of mutual funds can look shockingly different from their posted figures. During the decade that ended in 2007, for instance, Lipper estimated that fund investors lost anywhere from 17% to 44% of their returns to taxes. Many retirees woefully underestimate their tax hit because they incorrectly assume that their tax burden will plummet once their paychecks dry up. A great way to stanch the tax hemorrhaging is to invest in tax-efficient index and exchange traded funds. Next: Secret No. 2
Obviously, carrying a credit card balance is a no-no, but if you haven't managed to erase your debt, there's a painless way to tackle the problem: Call your card issuer. "If you have good credit -- a 700 FICO score or better -- you have a ton of leverage with credit card companies, which are scared and worried about their profit margins," observes author Liz Pulliam Weston. Card issuers hate losing customers, so they're generally willing to negotiate. If you enjoy good credit, you should be able to capture a rate below 10%.
No one's asking you to deny yourself a $4 latte, but if you're living beyond your means, it makes sense to root out the budget-busters. "You have to know where the money is going in order to know where to cut back," Weston says. Recording your purchases for a week can prove a tremendous help.
Investment fees are a natural enemy of retirement portfolios. But many investors are oblivious to this predator. Why? Because investors of mutual funds and annuities aren't billed for these expenses. Instead, the fees are automatically deducted. You can see for yourself the damage that even average expenses can wreak on a mutual fund by using the U.S. Securities and Exchange Commission's mutual fund cost calculator at www.sec.gov/investor/tools.shtml. Try sticking with mutual funds that charge an annual expense ratio of 1% or less.
Regardless of your age, take care of your health and you'll probably save money. "Eat right, exercise and care for your teeth, eyes and ears," says Henry Hebeler, the creator of AnalyzeNow.com, a financial website geared toward retirees. "By the time we get to retirement age," Hebeler adds, "health care costs are the single largest item in most of our budgets, and early prevention of health problems pays huge financial dividends."