America's two largest publicly funded retirement programs, Social Security and Medicare, are rapidly going broke. Medicare is already running massive deficits, and its trust fund is expected to be exhausted by 2017. Social Security has a bit more time. Its 2010 deficit is projected to be "only" around $10 billion, and the serious strain on that system isn't expected to start until 2016. Unfortunately, by 2037, Social Security's trust fund will be out of cash, too.
There are a handful of options to cover those gaps, but at the end of the day, they all amount to some combination of raising taxes and cutting benefits. Medicare, for instance, is scheduled to cut physician reimbursements by 21% next year, with more expected later. And when Social Security's trust fund is exhausted, its payments will be delayed or slashed.
There's already strain in the system
Doctors nationwide are already opting out of Medicare because of its low reimbursement rates. A study by the Medicare Patient Advisory Commission found that 29% of Medicare recipients who were looking for a doctor had trouble finding one that would take that insurance. If you think it's tough to find a doctor now, just wait until those reimbursement cuts take effect.
To top it off, baby boomers are only just starting to qualify for Social Security and Medicare benefits, increasing the near-term strain on those systems. For the first time in generations, it has become crystal clear: If you want a comfortable retirement, you'd better be prepared to pay for it yourself.
What to do
First, understand that neither Social Security nor Medicare will disappear tomorrow. If you're already receiving or scheduled to start receiving benefits soon, chances are pretty good that the programs will continue largely unchanged for you, at least in the near term. While you do need to prepare for a future with far less generous benefits, there's no need to panic.
Next, get the rest of your financial life in order. Pay off your high-interest debts. Figure out what's really important to you in life -- and what you'd be willing to live without. Make sure you have a sufficient cash buffer to handle the common curveballs life sends your way. When all is said and done, money does make a difference. If you owe it and times get tight, you're at the mercy of those to whom you owe the money. If you've got it, then you're in a far better spot.
Finally, invest as if you'll need money for the rest of your life. Health-care inflation has typically been rising far faster than ordinary inflation. If that trend continues, when combined with Medicare's increasing budget difficulties, it means that you'll likely need a significant nest egg to cover your health expenses in your golden years. Likewise, if you're alive once Social Security's trust fund is exhausted, you'll need to make up that shortfall, as well.
Protect yourself from escalating costs
If you expect to live for the next few decades or longer, you need to prepare for regular inflation, medical inflation, and the additional costs you'll see as Social Security and Medicare benefits decline. That's a pretty heavy burden to bear, and it will likely require you to invest for a bit higher returns than you may otherwise have been targeting.
Fortunately, that doesn't necessarily mean taking on outrageous risks. In fact, according to research by Wharton professor Jeremy Siegel, over the long run, stocks outperform other asset classes, and dividend-paying stocks outperform the overall stock market. Over a time span encompassing decades, inflation risk looms larger than the volatility risk associated with owning stocks. That's especially true when you consider the additional costs of making up for the failing public retirement safety nets.
With that in mind, companies with the following characteristics would likely provide fertile ground to search for great long-run returns:
- A dividend yield of around 3% or higher, which indicates a commitment to dividends that goes beyond a token payment.
- A track record of raising dividends, which help you to fight inflation.
- A payout ratio below 66%, which indicates that the dividends are very well covered by the company's underlying earnings.
Companies like these, for instance, which have maintained or raised their dividends for at least 10 consecutive years:
|
Company |
Dividend Yield |
Payout Ratio |
Dividend Growth (YOY) |
|---|---|---|---|
|
Emerson Electric |
3.1% |
58% |
10% |
|
Exelon Corp. |
4.5% |
49% |
8% |
|
Automatic Data Processing |
3.1% |
47% |
16% |
|
GlaxoSmithKline |
4.8% |
61% |
7% |
|
Honeywell |
3.1% |
41% |
10% |
|
Sunoco |
4.6% |
20% |
7% |
|
Novartis |
3.5% |
52% |
25% |
Data from Capital IQ, a division of Standard & Poor's. YOY = year over year.
You don't have to go it alone
Although Uncle Sam's safety nets may be running out of money, you won't be forced to face the resulting uncertain future on your own. At Motley Fool Rule Your Retirement, we're here to help you plan for what's coming next. By staying on top of emerging trends, best-in-class strategies, and the new innovations that are emerging to face those long-term challenges, we can help you build a plan that can get you successfully to and through your golden years.
If you're ready to do what it takes to stay ahead of the long-term structural challenges in the government's retirement safety nets, you can join us today. If you'd rather see the tools, strategies, and other resources we've assembled before joining, that's OK, too. Simply click here to try Rule Your Retirement, free for 30 days.
At the time of publication, Fool contributor Chuck Saletta didn't own shares of any company mentioned. Automatic Data Processing is an Income Investor recommendation. Novartis is a Global Gains pick. The Fool has a disclosure policy.
