Many individuals recognize the benefits of financial planning. A systematic plan often may uncover problems and provide motivation to make needed changes to solve those problems. Most aspects of planning can be positive and enjoyable, such as buying a new home, planning for a vacation, and making sure children are well educated. However, other aspects of planning can deal with less pleasant realities such as preparing for an untimely death, making provisions for long-term care, and saving today's hard earned dollars for retirement. Understandably, no one likes to think about death or old age. Moreover, many individuals are simply too busy, getting caught up in the demands of day-to-day living rather than plan for some “distant future event” such as retirement or death. Whatever the reason, failure to adequately plan for an untimely death and/or retirement can result in expensive, unintended, even tragic consequences.

Some Unsettling Statistics

Recent findings from LIMRA International indicate that a startling number of adult Americans today are woefully underinsured:

• Only 61% of adult Americans today even have life insurance protection, a decline from 70% in 1984.
• Only 41% of adult Americans have individual life insurance. Many rely on group insurance, leaving them vulnerable if they lose their job.
• The average amount of coverage for those having life insurance is only three times annual income – less than the five years that many planners recommend for financial recovery.
• Some 45% of widows and 37% of widowers say their spouse was inadequately insured. One to two years after the death, half of the widows and one-third of the widowers are just getting by financially.
• Perhaps most shocking is the revelation that almost two-thirds of middle income consumers ($25,000 to $100,000) have never had someone that they consider a personal life insurance agent!

The Risks are Bigger than We Think

The glaring life insurance shortfall revealed by the study is magnified further when the financial consequences of an untimely death are exposed. Surviving loved ones will face a future without the regular paycheck that disappears when the income earner dies. Immediate financial needs at death include final expenses, payment of debts (auto loans, credit cards), mortgage payoff, and emergency funds for other unforeseen expenses. Long-term needs include income replacement and college education funding for the children. In order to grasp the sheer size of the financial risk nationwide, consider the following chart showing the odds of death by age:

Age

Odds of Death Before Age 65

35

27.5%

40

26.4%

45

24.8%

50

22.4%

55

18.4%

Adequate life insurance is the most efficient and cost effective way to meet these needs, but as the statistics show, not enough Americans are buying a sufficient amount of insurance to protect themselves and their loved ones. As a result, many Americans are leaving a gaping hole in a crucial area of their overall financial planning.

Die Young or Grow Old

As for the fortunate individuals who do survive to retirement age, they face an equally daunting financial challenge: providing adequate retirement income to maintain their desired lifestyle for as long as they shall live. As the baby boom generation grows older, the number of people in the U.S. ages 65 and older is expected to double by 2030.

There are three major sources of retirement income and each possesses its own problems. These are Social Security, qualified retirement plans and individual private savings. Nationally, Social Security payments make up about 40% of the total income of people ages 65 and older. Further, about two-thirds of those people receive at least half of their total retirement income from Social Security!

This is a precarious statistic to say the least. Social Security basically operates as a pay-as-you go system. Workers pay taxes today and retirees receive that money in benefits today. However, because of the retirement wave of baby boomers, promised Social Security benefits will exceed revenue coming in from payroll taxes by as early as 2016! This could be a disaster!

Qualified retirement plans have their own problems. The defined benefit plan, the pension that was once a standard perk in larger firms, is a rapidly disappearing option for many Americans. Further, some of the largest corporations in the U.S. are struggling to meet their obligations to retirees. Currently the Federal program that guarantees these pensions is $11.2 billion in the red. Defined contribution plans are an alternative, but these expose employees to market risks such as interest rates and stock market volatility. Many Americans saw their 401(k) balances tumble during the steep market decline of 2001 and 2002.

The third source of retirement income is private savings. However, for nearly two decades, the total personal savings rate of U.S. households has been falling. Measured as a percent of gross domestic product, the personal savings rate was approximately 6% to 7% in 1980. By 2002, it had fallen to 2% to 3%.

The cumulative impact resulting from these retirement deficiencies is enormous. Tens of millions of Americans today are seriously under prepared to meet their financial needs in retirement. This was reflected in a recent survey conducted by Brightwork Partners for Putnam Investments. The survey analyzed people who have retired in the past two to six years. The findings follow.

When interviewed,

• 42% of retirees reported incomes of less than $25,000 per year; 25% had incomes less than $15,000 per year. These figures include Social Security Benefits!
• More than half said their standard of living had declined from when they were working.
• Retirement doesn't get easier; some 67% said the longer they're retired, the harder it gets.
• A majority of new retirees said they wished they had saved more when they were working.

The Need for Planning

For every 100 people age 65 and older today:

• 10 have incomes of $7,817 or less.
• 27 have incomes between $7,817 and $15,635.
• 35 have incomes between $15,635 and $31,271.
• 28 have incomes above $31,271.

Source: Older Americans 2000: Key Indicators of Well-Being from the Federal Interaging Forum on Aging-Related Studies.