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Our future may be less vulnerable than the financial-services industry says it will be.
There is a simple reason for this: Our security is based on more than our financial assets. Much of the survey and research work done by the financial-services industry, however, assumes that financial assets are the beginning, middle and end of all security and all income.
As a practical matter, that's true for the mega-rich. But most of us aren't rich, let alone mega-rich.
So what determines security for most of us? Answer: Having the resources -- whatever their source -- we need to sustain ourselves and our lifestyles when we can no longer work.
In a way, the rich are more vulnerable than others.
Suppose, for instance, that 100% of your needs had to be drawn from an investment nest egg. Suppose also that the probability your portfolio could provide for your needs for the remainder of your life was, say, 70%. Then your security would be rated at only 70%.
That's pretty iffy, but it's what the very well-off are facing.
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Now let's look at regular people. Most people have an income from Social Security. Indeed, Social Security Administration figures indicate that 54% of all retired couples get at least half of their income from Social Security.
Yes, you read that right: at least half of their income from Social Security. Among single retirees, 74% get at least half of their income from Social Security.
Because that income is considered secure, let's see how it would affect the security rating of a retiree. With the 50% from Social Security completely secure (100%) and the 50% from investments 70% secure, a retiree with 50% of income from Social Security would have a security rating of 85%.
That's a big improvement over living entirely on investments. But it gets better.
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Ready to retire yet?Ian Shipway, the founder of one of the United Kingdom's leading financial-planning businesses, tells how he thinks people should prepare for retirement.
The majority of retired people live in homes they own free and clear. They have a roof over their heads that doesn't cost much aside from taxes and maintenance. Economists call their shelter benefits "imputed income" -- shelter services that aren't received in cash but that would require cash if the retirees didn't own the house free and clear.
We could argue about exactly what it's worth, but let's just say that shelter accounts for 25% of their standard of living. And since they own it free and clear, it's 100% reliable -- it has no risk. Now, 37.5% of their retirement comes from Social Security. The portion coming from investments has been reduced to 37.5%.
So what happens to their security rating? It increases again -- to 88.75%.
Continued: Can it get even better?
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