Guest Post By: Simon Black
In the late in the 5th century BC, the government of ancient Rome came up with a new idea that has lasted for thousands of years.
I’m not talking about their roads, republican form of government, or water sanitation.
Their bold idea was to start paying retirement benefits to Roman soldiers.
This was a pretty big deal. In ancient times, you worked until you died. There was no such thing as retirement.
But under the praemia militiae, retired legionnaires could be secure in their futures when they completed their service to the republic.
Roman pensions were generous. During the reign of Augustus, a retired legionnaire received a pension of 12,000 sesterces, worth nearly $40,000 in today’s money.
Eventually Roman soldiers came to depend on their pensions; they no longer viewed the money as a privileged benefit. Pensions became an entitlement.
The problem was, though, that the government made too many promises; there were too many retirees, and Rome hadn’t set aside enough money to pay them.
In time, the government’s inability to pay military retirees became a major source of social unrest, fueling the demise of the republic and rise of the Empire.
So just as the ancient Romans invented the first pensions, they also invented the first pension crisis. It wouldn’t be the last.
Most major governments find themselves in a similar position today.
According to a 2016 report from Citibank entitled “The Coming Pension Crisis,” the 35 developed nations which comprise the OECD (including the US, Canada, Japan, most of Europe, etc.) have pension shortfalls totaling $78 TRILLION.
To put this in context, $78 trillion is more than the size of the entire world economy.
And the shortfalls get worse each year.
It’s not just big national governments either.
State / provincial governments, local governments, and even countless private companies have underfunded pensions that are rapidly running out of cash.
In the United States, Social Security releases an annual report every summer describing the program’s pitiful finances in excruciating detail.
They don’t mince words: “projected [costs] will exceed total income . . . starting in 2020,” and, “trust fund reserves decline until reserves become depleted in 2034.”
You can literally circle a date on your calendar when Social Security’s trust funds are depleted.
Frankly I think their projections are optimistic.
Remember that the program is funded by taxpayers who are currently in the work force.
12.4% of your paycheck gets funneled to Social Security, and that money goes in the pockets of current beneficiaries.
There is a rather interesting long-term trend, however, that robots and artificial intelligence will replace a lot of human workers.
From self-driving cars to algorithmic financial advisers, millions of people may find themselves out of work in the future.
The problem for Social Security is that robots don’t pay tax. So the program will lose a LOT of tax revenue as a result.
This is clearly a long-term issue; nothing is going to happen to Social Security tomorrow. And that’s why few people really think about it.
Except that… this is RETIREMENT. We’re SUPPOSED to think long-term about retirement.
And if you think long-term about your retirement, it becomes pretty obvious that Social Security probably isn’t going to be there for you, especially if you’re in your mid-40s or younger.
Fortunately we have time to prepare.
It starts with a shift in mindset: the government won’t be able to take care of you. You have to be self-reliant.
One way is to start saving, and to do so with a better retirement structure.
A conventional IRA, for example, allows you to contribute up to $5,500 if you’re under the age of 50.
If you switch to a 401(k), however, you can contribute up to $18,000 per year.
Or if you own a small business, you can establish a SEP IRA and contribute potentially up to $54,000 per year to your retirement.
Obviously most people might not have an extra $50k each year to save for retirement.
But just putting away an extra $1,000 per year can result in a difference of more than $100,000 when compounded over 30 years.
Even more importantly, think about establishing a much more ROBUST retirement structure that allows you greater flexibility in how/where you invest.
Most retirement plans are confined to your back yard. If you have a US retirement plan, you’re allowed to invest in government bonds and the US stock market.
But what if US stocks are overvalued? What if you don’t want to loan money to the government?
With a more robust structure like a self-directed IRA or solo 401(k), you’ll be able to open up an entire universe of new investment opportunities.
All of these options are available with a more robust retirement plan, allowing you the chance to generate higher returns without the cost of paying some Wall Street firm to manage your account.
Consider this– if you’re able to save an extra $2,000 per year and generate, on average, 2% more per year (i.e. 10% versus 8%), you will end up making an additional $610,000 for your retirement over 30-years.
This matters. A lot.
Some small changes today could easily make the difference between financial stability and financial chaos down the road.
This isn’t some wild conspiracy theory.
The government itself is telling us that Social Security is running out of money. They’re even telling us when.
And all it takes to fix this problem is a little bit of education… and the will to take a few basic steps.