Plan for retirement with worst-case in mind

Just when market conditions appear to be stabilizing and you think that the worst is behind you, I have something else to keep you awake at night. If you plan to retire soon you should know that both Medicare and Social Security are on pace to disappear even earlier than expected.

The current economic meltdown has affected more than just your 401K and home values. It has put both primary health care and income sources for retirees on life support. Back when I was doing retirement calculations for my clients, I would include entitlements in their projected income and benefits. Now you or your advisor must confront the possibility that those programs may not be there come retirement day.

Treasury Secretary Timothy Geithner announced recently that Medicare will run out of money by 2017 and Social Security will do the same in 2037. These projections are much sooner than what was expected and I have my suspicions that these "Geithner guesses" may be optimistic. So what are people planning for retirement supposed to do? I say, save as if these programs will not exist in the future, and if they do in some modified form, then treat them as a bonus.

Let's say you are a married couple and you plan to retire in a year. The average total medical costs for a couple during retirement above and beyond Medicare comes to around $240,000, according to Fidelity Investments. That is a big chunk of change. So if you are not close to retirement, please consider a health savings account or retiring later to remain on your employer-sponsored health plan. For those of you who are not familiar, the account works like a 401K but for your health and medical care costs during retirement. The money you would withdraw for health care costs could be tax free, but if you do not use all the money in your account for health-related expenses, then it's treated basically like an ordinary retirement account for tax purposes.

Social Security currently accounts for around 20 percent of an individual's retirement income today. You may be thinking that 20 percent is not a big percentage and 2037 is a long way off, so why worry? Think again. You will need to start planning now for the potential loss of this income. I have maintained for some time that people need to stop counting on entitlement benefits and be prepared for the worst. That means having a plan that does not include these benefits and if by chance they are still around when you retire, they are additional or windfall benefits and not the core of your retirement plan. I know this hardly seems fair.

Many of you (and this includes me) in the Baby Boom generation have had money withheld from earnings all our working lives just to find out that this money is not being saved for us, but is paying current retirees. That means there may be very little left when it is your turn to collect. When the Social Security Act was signed by FDR back in 1935, taxes were collected to start lump sum payments as early as 1937. Monthly benefits came along in 1940. In 1939, the law changed to include benefits for spouses, children and the disabled. Medicare was passed into law in 1965 with the first beneficiaries signed up by 1966.

Many people have wondered why the retirement age of 65 was chosen. It is not the popular belief that people in the U.S. only had a lifespan of 66 years. It was chosen because the Germans used 65 in their system and the Germans chose it because Chancellor Otto Von Bismarck just happen to be 65 when they developed their system. In 1935, life expectancy for a US citizen was actually only 58, but that was because of high rates of infant mortality. A better measure for retirement age would have been people who survived to adulthood. Today, thanks to modern medicine, people live much longer than those 1935 projections.

So, now that you know there was really no magical or even logical reason to retire at age 65, you need to save more, work longer and spend less. Whether Social Security or Medicare benefits will be around for you when you retire is anyone's guess. Do not guess about the rest of your life. Plan for it.

NOTE: Historical data provided by ssa.gov.

• Carol Perry has been a Northern Nevada resident since 1983. You can reach her

at carol_perry@worldnet.att.net or

267-5358.