A Suze Orman exclusive

I know I talked a lot about Federal Reserve Chairman Alan Greenspan in my previous column, but I want to revisit some of the issues he raised recently, because they are at the core of why you may need to rethink your approach to retirement. 

In late February, Chairman Greenspan went up to Capitol Hill for one of his scheduled visits to discuss the state of the U.S. economy. Before he left, he grabbed headlines from Portland, Oregon to Portland, Maine, by suggesting that rather than raise taxes to generate the money to pay off our gargantuan federal debt, we should consider reducing benefits the government pays to its citizens. And the benefit he has in mind? Oh, merely Social Security. Your Social Security. That comment unleashed a torrent of debate and worry; hell hath no fury like the threat of retirement benefits being scaled back.

The chairman's barrage of statements - Greenspamming if you ask me - was not solely intended to spark debate in Congress. No, I'm pretty sure it was also intended to start getting the rest of us accustomed to the harsh reality that the government may not deliver what we thought it had promised to us when we reach retirement age.

Don't be foolish and think this issue is a non-starter that won't ever come into play. My friends, it has already come into play. How many of you are aware that if you were born after 1937 you no longer get full Social Security benefits at 65? In fact, for those of you born in 1960 or later, you do not receive your full benefits until you are 67. Let's be clear about what that means to you really. Assume that before they made those changes a few years ago, you were to receive a $1,500 monthly Social Security check at 65. But now, since you will not get that payout until you are 67, we're talking about $36,000 in foregone benefits. That's lost income, pure and simple. Then consider the "hidden" cost in lost investment potential that comes with those two years of vanished payments. Say you didn't need the $1,500 a month to live on and planned to invest it all. Well, if we assume the $1,500 a month over those two years was to go into a broad market index fund and earn a moderate 8 percent average annual rate of return, you would have $38,900 after the two years. Then let's say at that point (when you become eligible for benefits) you decided to take your $38,900 and simply invest it for income. At 5 percent, that is an extra $162 a month. Or maybe you're one of the lucky ones who don't need that extra income in your 60s and 70s, so you took the $38,900 and kept it invested for another 20 years (we're figuring you get to enjoy a terrific and long retirement). Guess what? That hypothetical $1,500 a month you couldn't collect from 65 to 67 ends up costing you a mere $181,311. That's how much you would have if you had been paid the $1,500 a month during that two-year stretch and then had grown that sum at an 8 percent average annual rate of return for 20 years. So if you think that $36,000 is only a modest reduction in your benefits, you've just bought the ticket the government sold you. And I bet a lot of you were not even aware of the purchase, were you?

Broken Promises Can Break Your Retirement Back!
I don't mention this to scare you or depress you. Far from it. My point is that there is a very good chance the government is going to continue to nick away at the promise of Social Security benefits. Something's gotta give so we don't bankrupt the entire system, or run up colossal debts that will kill our economy.

That's life, my friends. The question is what you are going to do about it. Don't worry, this isn't the part of the article where I send you off to an online calculator that will tell you exactly how much you need to save right now so you can meet your income needs 20, 30, or 40 years from now. Puh-leeze. I can't stand those calculators; all they do is cause heart attacks by making us feel that the only way we will ever be able to retire is to rob a bank.

That said, I do believe you need to face up to the reality that you, and you alone, are going to be the one responsible for supporting yourself during your retirement years. Even if you are currently employed at a company that promises great retirement benefits, I want you to be very careful. Scores of companies are breaking the promises they have made and actually reducing benefits for retirees. How are they doing this? Simply by increasing the retiree's share of health insurance costs.

Bottom line: The smartest approach to your retirement is to do the preparation so you can be as self-sufficient as possible.