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This lesson begins on Page 170 of the Instructor’s Guide so let’s turn to that now.
The Instructional Resource for this lesson is the Social Security Administration’s Quick Calculator. This is provided by the Social Security Administration for people to estimate their future benefits. In this lesson, you will use the Quick Calculator in class to demonstrate for students that they have a means, when they are older and employed of periodically checking their estimated Social Security benefits and that Social Security benefits are not going to make them rich! They cover basic living expenses — if that. A word about the calculator demonstration. It would be great if students could check on their own future benefits using some hypothetical earnings and retirement date. But the person using the calculator or the person for whom the benefits are being calculated has to be between the ages of 21 and 93. So students won’t be able to run their personal benefits yet because I assume your students are under the age of 21. You’ll have to use a hypothetical person.
The Online Resource for this lesson is your Elected Representative’s website. That includes both state and federal representatives. Students should know that they have the opportunity and the right to weigh in all sorts of political subjects and pending legislation which may afect them Going to the website to read about the issues and voicing your opinion is one way to be actively engaged in what happens to them. A financially literate person knows to check with their elected representatives’ websites and weigh in with issues which have a financial impact on their life.
Retirement is probably a topic that may not be all that interesting to your students, because they’re so far away from it. It might be hard to get them to connect to a topic they perceive as boring and irrelevant. So in Gaining Attention on page 172, I have tried to get them engaged with the subject by asking them to project their personal vision of their retirement. A lot of students will probably talk about having great plans of traveling or having fun and exciting adventures. When we move into Presentation of Content, we get to burst that bubble. The reason why this lesson is called Your Risky Retirement is because there is a great deal of risk of living in poverty when you’re a senior if you don’t have sufcient financial resources. There’s actually a large portion of the American Senior population that, sadly, is livIng in poverty or who have had to significantly alter their lifestyle and not in a good way (!) because they cannot support themselves in retirement. You can read about that on page 172.
How much is money enough? How much is enough for a comfortable? Experts advise having sources of income, that’s sources that produce money –equal to 75 to 85% of your preretirement income. That’s pretty easy to figure out. If you retire with a salary of $60,000 dollars. You’ll need sources of income providing between 45K to $51,000 dollars per year. So, figuring out how much you need is easy. Figuring out where it will all come from is not. That’s what we explore on the following pages — sources of retirement income. How a person can accumulate enough wealth to retire with an income that is sufcient for their needs.
We first explore government-sponsored retirement income. We’ve already learned a little bit about Social Security in Pay. It’s More than a Salary and in Honey They Shrunk My Paycheck. The employee and employer both pay into the Social Security system every pay period. But what many people don’t realize is that the money is not going into an account specifically for their benefit. It is being paid out to current retirees receiving Social Security benefits. You can read about that and Medicare on page 173. We want students to understand that Social Security benefits do not fund a lavish lifestyle. They are intended to cover basic living expenses. Many people would find it very difcult to get by on just Social Security.
In Section 3, we look at other potential sources of retirement income which people rely on to cobble together this 75 to 85% of their pre-retirement salary. First up is the 401k retirement plan. Undoubtedly at some point, your students will the encounter opportunity to participate in a 401K retirement plan. This is, bar none, one of the best benefits ofered by an employer. You can read about the diferences between the defined benefit plan which is basically a pension plan, like maybe your parents or grandparents had — and a defined contribution plan which is a 401K plan. The trend is definitely toward defined contribution plans like 401Ks. That means that the employees must elect to participate and that they define the amount they contribute each pay period into their own account. There are some key elements in 401Ks that you can read about on pages 173 and 174. But please take some time in class to use the retirement calculator to demonstrate the value of participating as early and as fully as possible in a 401K because — here our old friend compounding has a big efect in growing retirement funds over time. Remind your students that compounding applies not just to savings but also to investments and this is a good example where the compounding of investments happens. 401K contributions are invested through a professionally managed investment firm – the return on the investment gets added to the account so compounding takes efect that way.
Another thing to emphasize for students is that they should take into account their vesting schedule when they change their employment. There are always 100% vested the money that they contribute to their account. Vesting schedules apply to the contributions made by their employer. You can read about vesting and vesting schedules on page 174.
Page 175, we talk about IRAs which stands for Individual Retirement Account. Your students have probably already heard of an IRA because they are advertised a lot. But they should know that there are diferent kinds of IRAs. They are most likely to encounter the Traditional IRA or the Roth IRA.There are a few diferences between the Traditional IRA and the Roth IRA you can read about those on 175. The diferences are mainly tax related. IRAs can be opened at any age. So your students could even start saving for their retirement now. IRAs have many benefits similar to 401K plans. There are diferent maximum annual contribution levels between and an IRA and a 401K, but IRAs can really help build a healthy retirement nest egg.
Students should come away from this lesson knowing that if they plan to freelance, they won’t be participating in any employer’s retirement plan. However, they can and should open an IRA and fund it on a regular basis. That is how they can make the freelance gig — such as a musician playing in a club — work almost as well for them retirement-wise as a regular job. Even if they don’t remember the particulars of the diferent kinds of IRAs, they should know that these opportunities exist and they should definitely be pursued if they’re freelancing. At the bottom of page 175, we just introduce other potential sources of retirement income which are savings, home equity (recall from the last lesson) and inheritance.
Let’s move over to page 176. Roman numeral 4, 21st Century Challenges. With regard to retirement, times have changed. Grandma and Grandpa could pretty much count on Social Security, a pension payment, and savings for their retirement. Your students, however, face pretty substantial challenges to building an even moderately comfortable retirement. I don’t want to be an alarmist in this lesson, but they need, as financial literate people, to understand that the traditional sources of retirement income are under stress and perhaps, not so reliable, which we’ll talk about in a minute.
They have additional challenges that Grandma and Grandpa didn’t have. First up is life expectancy. People are living longer and healthier lives and guess what? That requires additional retirement savings of up to 15 or 20 years!
Another challenge is Social Security. The fund is becoming increasingly unreliable. Students will probably face a future of reduced benefits and increased age of eligibility. You can read about that on page 176.
Other challenges specific to the 21st Century are high levels of young adult student loan debt and consumer debt which require diverting income to make payments, a zero savings culture (people aren’t saving money), reduced homeownership habits which we talked about in the last podcast, and low 401K participation rates. Although the numbers are up lately with regard to 401K participation, this generation doesn’t seem to be embracing all the benefits of the 401K maybe because of their debt levels or maybe because they don’t understand how awesome 401Ks are and how much money they are going to need one day to retire.
Finally, a lot of money is being diverted by seniors to have to pay for a percentage of their Medicare costs. Medicare doesn’t cover a 100% of healthcare costs for seniors. And it’s highly unlikely that Medicare benefits will increase over the years. So, by the time your students are in their golden years, they will have to front more of their medical costs cause there won’t be as much covered by Medicare.
On page 177, Roman numeral 5 is Retirement Preparedness for Gen Z. You can review those with your students but the first one says simply Be Aware! That is actually very important because, unfortunately too many people don’t become aware of the risk that they face of a grossly underfunded retirement until it’s pretty late in the game. Your students are lucky! They’re learning this at a young age. The awareness of this risk should help them make the right decisions to elect to participate as soon and as fully as possible in their employer’s 401K plan or to create and steadily fund their IRA.
Moving over to The Big Picture on page 178 which is a review of the key points of the lesson. Under Let’s Practice is Activity A, Franklin’s Road to Retirement. You remember our friend Franklin from Lesson 1. He’d lost his job and hadn’t accumulated any wealth, even though he’d had a very high income. Franklin finally has a new job. So in this activity, he’s pondering some things about his retirement plan and making some calculations with regard to retirement.
Activity B is Eloise and Gunnar Tackle Retirement. This is also a review of the chapter terms and concepts.
Activity C is Speak up about Social Security. It’s our Debate-Persuade Inform activity. The issue regarding the Social Security fund is likely to stick around for a long time. It is a continuing controversy in this country and surely will have an economic impact on your students. They should know a bit about it. This activity has them researching the controversy, including whether Social Security should be privatized, and weighing in with their opinion. The curated college readiness resource is Evernote at evernote.com. Your students may already be using Evernote but it’s good college readiness resource that can take notes on pdfs, create a digital filing cabinet, a daily journal, or use the app as a task or project management system.
Our next lesson’s, Ponder and Predict, asks students what it means when someone says “Put your money to work for you!” How do you do that? How does money go to work? And what are the tools you use to put money to work?
Our Blog Q is related to retirement. Many Americans retire overseas because they haven’t saved enough money to retire comfortably in the US. Their dollars stretch a lot further in some other countries. Students explore the question of which are the best countries to retire in.They have to do a little research and weigh in on their top three choices.
So that’s it for Lesson 10. I’ll see you next time when we explore Lesson 11 Investing 101. Thank you for joining me!