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, the middle and the 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 when we can no longer work.

     Viewed this way, the rich are more vulnerable than the non-rich.

     Suppose, for instance, that 100 percent 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 percent. Then your security would be rated at only 70 percent.

     That’s pretty “iffy,” but it’s what the very well-off are facing.

     Now let’s consider regular people. Most people have an income from Social Security. Indeed, Social Security Administration figures indicate that 54 percent 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 percent get at least half of their income from Social Security.

     Since that income is considered secure, let’s see how it would impact the security rating of a retiree. With the 50 percent from Social Security completely secure (100 percent) and the 50 percent from investments 70 percent secure, a retiree with 50 percent of income from Social Security would have a security rating of 85 percent.

     That’s a big improvement over living entirely on investments.

     But it gets better.

      Many retired people live in homes they own free and clear. They have a roof over their heads that doesn’t cost much. 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 can argue about exactly what it’s worth for a long time, but let’s just say that shelter accounts for 25 percent of their standard of living. And, since they own it free and clear, it’s 100 percent reliable--- it has no risk. Now, 37.5 percent of their retirement comes from Social Security. The portion coming from investments has been reduced to 37.5 percent.

     So what happens to their security rating? It increases again--- to 88.75 percent.

     By making simple, realistic observations about how real people actually live, we’ve found that many households are a good deal more secure than households that depend entirely on financial assets.

     Query: Can it get still better?

     You bet. Suppose a portion of those financial assets that deliver an uncertain income are converted into a lifetime annuity, either fixed or inflation-adjusted. What does that do for the security rating?

     It increases it.

     Here’s an example. Suppose one-half of the financial assets are converted into a life annuity and become 100 percent secure. Then the portion of living resources that is vulnerable gets chopped in half. Their security rating rises to 94.37.

     While few people choose to convert any of their savings into a life annuity, millions of people may still look forward to a lifetime pension that serves the same function--- less of their lifetime resources come from their accumulated financial assets.

     Follow the same logic and you can understand why having mortgage debt reduces your security in retirement--- all other things equal, you’ll have a greater dependence on income from financial assets.

     Bottom line: If you have some savings, a healthy Social Security benefit, expect to own your home debt-free and live on a middle income, your retirement is likely to be far less uncertain than the retirement of someone with a much higher net worth.

On the web:

Facts about the role of Social Security benefits: