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- [Bob Powell] Those who save may end up paying for those who didn't later in life and that's why everyone has to, you know, we're not going to have defined benefit plans to bail you out, you may not have Social Security. It's going to be up to you.

- [Tony Owusu] There's a risk that Social Security might not be around by the time we're ready to retire. Do you factor that in and how do you save?

- [Bob Powell] Yeah, it's a good question and it's a big worry. My children say to me you know, 'Let me get this straight. I'm working so that when you retire you're going to get Social Security but when I retire, there won't be enough people to give me money?' I'm like 'Yeah, that's how that system works.'

- It sounds like a Ponzi scheme.

- Yeah, well, yeah a little bit. I mean some of the things that happened, when Social Security was first started we had 10 workers for every one retiree, right? So the system was designed to be solvent back then.

- [Kevin Curran ] And the life expectancy was-- 

- And life expectancy was a little bit lower. Today we're in an environment where there are only two workers for every one retiree and that number's falling, the fertility rate in the United States is falling, we're not allowing immigrants into this country, so now we have this world where it's going to become insolvent where in the next 10, 12 years, we'll be paying out more than we collect and it will be on the order of 80 cents on the dollar of expected benefits. So for me, I have to plan for that. For you in your 20's I would plan on it not even being there, right? I would plan on you having to fund all of your retirement through your savings and your 401K. I'm sorry, but I didn't design the system.

- You're not really at fault.

- I'm not at fault but I'm here to tell you don't depend on it and don't factor it into your retirement.

- I blame FDR.

- Yeah, well FDR, I don't blame FDR, I blame the current political state. Because in the 1980s, the Greenspan Commission went and solved some of the problems that existed back then and here we are however many years later and no one has the courage to tackle Social Security. No one wants someone to say "I'm going to reduce your benefits" or "I'm going to raise your taxes".

- It's a sure way to not get re-elected.

- Right, right.

- Because you can't put the toothpaste back in the tube once you give people benefits.

- Yeah that's right, toast can't become bread.

- [Kevin Curran] Exactly.

- So the problem is someone has to have the courage before it becomes too late to tackle this issue and I give credit to, actually it was Reagan who was in office back in the 80s when they created the Greenspan Commission and they said "We're going to raise the full retirement age." But it happened over the course of decades. It was a slow motion solution that worked for as long as it did. But now we need another slow motion solution and we need some courage in Washington to do it.

- One thing I wanted to ask Mr. Retirement was I have the Roth option or the traditional option for my 401K. As a millennial, what should I be looking at?

- So you're lucky, a lot of folks who have a defined contribution at work, a DC plan sometimes they're called, don't have a Roth option. So you're lucky to have one and when you're younger and traditionally when you're younger, you're in a lower income tax bracket, you would use a Roth and if you were in a higher income tax bracket typically later in your career, you would use the traditional defined contribution or 401K plan because you get the benefit of the tax deferral on it or you get the benefit of being able to lower your taxable income, I should say. So later on when you go to retire and you have a Roth and lots of money in it, you've already paid the taxes on it and you'll be able to withdraw that money tax free. Which is a great benefit of the Roth. Here's the problem that millennials have, right? And also older people but millennials in particular. You'll talk about investing because it's sexy, it's really fun to talk about investing and how much money you made and what stock you own and that sorta thing. But what people forget is you also need to talk about disability insurance and life insurance and I know it's boring, boring as all hell. I don't like talking about it, right? But if you don't have disability insurance, the biggest risk that you face as a young worker is the possibility that you won't be able to keep working due to injury, right? And it happens, if you're on a bicycle and you get hit by a car or you slip on the ice.

- [Kevin] I've had four knee surgeries, so I know exactly--

- There you go right, so you're not at work right? And if you don't have a disability insurance policy through work and even if you do, typically they tend to be short term, you'll still need to go buy one that you'd buy privately in the marketplace and they seem expensive, right? And they're really difficult to understand because you have to figure out is it my own career or is it just general pay and whatnot and so it's really hard to buy disability insurance. Maybe talk to a trusted advisor when you go to do it but do buy it and don't neglect life insurance. So you may have, I don't know, you have student debt?

- No.

- Lucky you.

- I know, I got really lucky.

- Lucky you but you might want life insurance for another reason, not just to pay for the student debt that has to be paid.

- That doesn't go away.

- It doesn't go away. So you might want to be able to at least cover that with life insurance but the other thing is you want to maintain your insurability. So when you're young and healthy, your premiums will be low, right? But let's say you get sick in your 30s, I don't know what happens, maybe leukemia or something, then you become not uninsurable but your premiums become all that much higher because now you're, the risk factor is that much higher. So don't neglect disability or life insurance and the other thing I'll mention too, I love talking about risk.

- We're finding out, we're finding out.

- You're right because life is about risk and reward. So we're always focused on reward but we seldom think about risk. So become a student of risk. There are several books out there that you could read that at least give you a sense of what risk is, right? Is the risk of, people always talk about oh, the number of airplane deaths that happen in a year, the number of people who've died in a car accident is far greater, right? It's almost far greater to be in a car than it is in a plane. So go become a student of risk and learn about statistics and what it may mean in terms of investing, life insurance, crossing the street.

- We've asked you all these questions and now I'm curious, have we missed anything? What are the questions that we should've been asking you?

- You can't just think about your financial capital. You also have to think about your human capital and your human capital is in essence what's my earnings potential? And so your biggest asset when you're younger is your human capital because you have more of that than you do financial capital and then you should also manage your human capital in two ways. If you're an entrepreneur and your income is up and down, well maybe you want to invest more in bonds in your 401K. If you're a schoolteacher and your income is stable, maybe you want to invest more in stocks in your 401K because your income is like a bond. So that's one, the second thing is given that you're in your 20s and you may have five or six or seven careers, you want to make sure that you're always investing in your human capital because that may be the far better return on your investment when you're young than investing in the market. Think about it this way, Fidelity just came out with a study that said when you retire at age 65, you should have 10 times your final salary set aside for retirement to fund an adequate standard of living. 10 times your final salary. So if you think about the fact that two-thirds of Americans have less than $100,000 and you think that the median household income in America is 50 to 60,000 give or take.

- Around there.

- Around 58.

- So that means that they have less than two times their salary set aside for retirement at this point. So right, they're off by a factor of eight. So save young.

- I shouldn't laugh at that.

- It's terrible right because someone's gonna have to pay for this. This is the problem that I think about when I think about the social issues that we're gonna face in America is those who save may end up paying for those who didn't.

- Right.

- Later in life.

- And that's why everyone has to, you know, we're not gonna have defined benefit plans to bail you out. You may not have Social Security. It's gonna be up to you to bail yourselves out.

You're never too young to start saving. 

There's a risk that Social Security might not be around by the time millennials are ready to retire.  Social Security was created in 1935. The system was designed to be solvent back then.  And life expectancy was a little bit lower. Today, we're in an environment where there are only two workers for every one retiree and that number's falling, the fertility rate in the United States is falling, we're not allowing immigrants into this country. 

Now it's possible that in the next 10 to 12 years, we'll be paying out more than we collect If you're in your 20s, you should plan on it not even being there, plan on having to fund all of your retirement through your savings and your 401(k).

Related. Ask Bob: Social Security and Working Part-Time

Student Debt vs Human Capital

Student Debt doesn't go away. So you might want to be able to at least cover that with life insurance but the other thing is you want to maintain your insurability.  Life is about risk and reward. So we're always focused on reward but we seldom think about risk. So become a student of risk.

Related. Ask Bob: Social Security Disability Benefits for Children and Adults

You can't just think about your financial capital. You also have to think about your human capital, it's your biggest asset when you're younger because you have more of that than you do financial capital.  

Fidelity came out with a study that said when you retire at age 65, you should have 10 times your final salary set aside for retirement to fund an adequate standard of living. So two-thirds of Americans have less than $100,000 and you think that the median household income in America is around $60,000.  That means that they have less than two times their salary set aside for retirement at this point, they're off by a factor of eight, so save young.

Related. Ask Bob: Social Security Survivor Benefits

Need help preparing for retirement? Check out Retirement Daily.