Creativity In Retirement Plans

The Social Security folks, on the other hand, have never associated themselves with absolute dollars. Rather, when they go to Congress, they advocate benefit increases based upon replacement ratios. Increases in benefits are presented as necessary to maintain the traditional ratio of covered income to be replaced by Social Security. Thus, while it's true that the base for covered wages has increased dramatically, the replacement ratio of Social Security benefits to covered wages has remained fairly stable at about 32%.

The large Social Security benefits being projected today present a serious problem to low- and middle-income families and are increasingly encroaching upon pension and disability income markets. Historically, Social Security as a planning base has been an effective sales tool. Today, however, it can be detrimental to the sales process if we express future benefits in today's dollars.

For example, a young person today is not likely to be terribly disturbed if a proposed financial plan concludes that his projected retirement income will exceed his current income. Of course, his or her reaction ignores the concept of replacement ratio and could lead them into serious trouble.

What the prospect must understand is that whatever the size of the future benefits–$1,000, $2,000 or even $5,000 a month–it is still going to be only 32% of covered wages at retirement. When prospects understand that, they won't be quite so complacent about future security.

You don't have to look very far today to find people trying–and failing–to live on Social Security. This is true despite the fact that their benefit has been excessively indexed for inflation.

Once the prospect accepts the notion that they cannot retire on 32% of their covered wage base, they will acknowledge that additional income must come from either personal or company effort.

Thus, it is reasonably certain that even a $2,000 a month projected benefit will represent less than one third of a person's final working wage. If they, like most, would like to retire with at least 60% of final salary in retirement income, then 28% of that desired retirement income will have to come from other savings.

Translating that 28% replacement ratio into dollars indicates that pension plans or savings must supply an additional $1,750 per month. These figures are more disturbing than simply asking someone, "How much income would you like at retirement?" The answer to that question is always couched in today's dollars, not tomorrow's.

The retirement market is huge and the key to it is creativity.