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How YOU'LL End Up Paying THEIR PensionsBy Dr. Steve SjuggerudTuesday, June 28, 2011 What are you going to do for income in retirement?
Social Security is already bust... For 2010, it paid out more in benefits than it brought in through Social Security taxes. If you're in your 40s or younger, you can't rely on Social Security.
Chances are, your OTHER pension won't be able pay you either (if you have one), as I'll explain today.
Even worse, even if you have NO pension yourself, don't think you're immune from the problems. The reality is, YOU – the taxpayer – will be forced to pay the promised benefits that pension funds won't be able to deliver.
The crisis in pension funds is much worse than you can imagine.
Right now, pension funds in the U.S. are underfunded by at least $1 trillion. "Underfunded" means the difference between the promises made and the money set aside to meet those promises.
The thing is, that trillion-dollar underfunding is understated by a wide margin... The true number is probably closer to $3 trillion. Here's why...
Pension funds currently expect they can earn an 8% return on the money they have. They think they're solvent because they can grow the assets they have at 8% a year. But that's foolish...
Pension funds simply can't earn 8% right now. Here's why:
Think about this... If your pension fund holds half its assets in safe bonds earning roughly 3% now (which is what 10-year Treasury bonds pay), how much would your pension fund need to earn on the other half of its assets to earn a total return of 8%? The answer is 13%. That's not going to happen.
My friend Meb Faber recently wrote a "white paper" on this subject...
He says, assuming a more conservative return, "the 50 U.S. states' pension plans have $1.94 trillion in assets versus liabilities of $5.17 trillion, resulting in a funding ratio of only 38% and cumulative unfunded pension liabilities of $3.23 trillion. [Paying out these pension benefits] would require significant debt issuance or increased tax revenue."
The size of the problem is staggering. And guess who is on the hook...
YOU.
Here's how Meb explains it:
So if you're in your 40s or younger...
1) Don't bank on Social Security for your retirement income. It doesn't have the money.
2) Don't bank on your other pension plan, either. Using realistic assumptions, it's likely underfunded, too, and won't be able to pay you when the time comes.
3) Finally, as a taxpayer, get ready to pick up the tab for the already-promised pension benefits when these pension plans are out of money.
The problems with traditional pensions are too big to cover in this little essay. My best advice is: DON'T rely on government-created pensions in particular and continue to build your own nest egg outside of a promised pension.
Good investing,
Steve
Further Reading:
Meb's recent number-crunching shows just how powerful one stock market strategy is. Over 38 years, it's the difference between turning $1,000 into $37,147 or $381,229. Learn more here: This Simple Stock Market Strategy Would Have Increased Returns 926%.
"Except for a tiny, less-than-1% loss in 2008, when everything went down, this system hasn't had a losing year, going back to the 1970s," Steve writes. "And now, an even better version of it is available as an exchange-traded fund (ETF)." Get the details on Meb's system here: How to Safely Manage Your Retirement With Just One Trade.
IT'S "TEST TIME" FOR THE STOCK MARKET Not even one month after stepping over a critical "line in the sand," the stock market is toeing up to another one.
Since late May, the big-cap S&P 500 index has been trading below its 50-day moving average (DMA). Longtime DailyWealth readers know we check in with the S&P 500's 50-DMA to test the "temperature" of the market. When the market is trading above this indicator, it's said to be in an uptrend. When the market is below this indicator, it's said to be in a downtrend. There's nothing magical about this moving average... It's simply popular because it's popular.
Another popular "test point" for the market is the 200-day moving average, the blue line in the chart below. Because it takes into account a longer timeframe, it's a bigger-picture look at which way the tide is flowing when it comes to stocks.
After its 7% decline in May and June, the S&P 500 is creeping closer to this next line in the sand. If the S&P can overcome this "test" and blast higher, it's a sign buyers are shrugging off the end of "QE2" and the trend is back in the bulls' favor. But if the sellers take over here and push the S&P below its 200-DMA, stocks are in for a rough time.
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