We live in a nation that has become one of the most prosperous in the world. Great advances in medical science and healthcare, extensive social welfare programs to those less fortunate, a military that protects us abroad and domestic, freedom in our capital markets to start a business and work with equality and great opportunity — we are fortunate to live in the U.S. We are also reminded that the success of this country has not come without challenges. Inherent in those are a series of financial challenges that one could argue are the price of success, and the longer we live the greater those challenges become. Let us take a look at some of our financial challenges — some of the realities we face.
The healthcare challenge
Millions of Americans are worried about their so-called golden years — with good reason. According to Bankrate.com, 28 percent of Americans say high medical bills are their top financial concern about retirement. Making matters worse, higher income provides little comfort. Households making more than $75,000 are actually more worried about medical expenses than the overall population. (bankrate.com)
Because advances in healthcare have lead to people living longer, there is greater strain on our social welfare programs. This has put pressure on the government’s ability to remain fiscally sound, which ultimately affects your ability to plan for a sound financial future. As we plan how to pay for it all, one thing is certain: we will pay more and more for our healthcare costs.
The longevity challenge
We are, as a nation, living longer; however, we must remember that with a longer life comes the responsibility to pay for it. The chance of living to age 100 is much greater than you think. There were only 2300 100 yr olds in 1950, 80,000 in 2010, and there are predicted to be 600,000 centennials by 2050. (US Census Bureau 2012)
In short, you should plan on living to at least 90 years old or perhaps even longer, depending on your family history. While more people are working beyond the age of 65, that doesn’t mean you should assume you will be able to do so. JPMorgan finds that almost 70 percent of actual retirees left the workforce before age 65, primarily due to health problems or disabilities. As you near the typical retirement age, the probability of you living for another decade or two is remarkably high. Men age 65 today have a 78 percent chance of living another 10 years, while women have an 85 percent chance. The odds of a long life increase dramatically for couples. In fact, couples age 65 today have an astounding 97 percent chance that at least one of them lives another 10 years and an 89 percent chance that one experiences his or her 80-year birthday. (Congressional Budget Office, An update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022)
The Social Security challenge
If we are living longer, it stands to reason that the government is spending more on Social Security, our most powerful national social net. It is simple fact that the Social Security we know needs some fixes to remain solvent long into the future. The chief reason for the challenge is there will be fewer payers into the system down the road. The Congressional Budget Office projects by 2035 there will be 1.9 workers for each SS beneficiary compared to 4.9 in1960 and 2.8 in 2010. It will take careful planning to make good decisions for maximizing your Social Security Benefits.
If you can, delaying Social Security benefits may help you achieve a more secure retirement. Those born 1943 to 1954 can receive 32 percent more in a benefit check by waiting until age 70 to claim Social Security, compared to the full retirement age of 66. At age 62, beneficiaries receive only 75 percent of what they would get if they waited until age 66. For younger individuals, delaying benefits until age 70 results in 124 percent more benefits than age 66. If you have a health problem or family history indicating you will not live for decades beyond age 62, you may want to claim Social Security as soon as possible. On the other hand, if your health and finances are stable, you may want to wait. The Social Security Administration now offers online accounts so that Americans can stay up to date on their financial situation at www.SSA.Gov. (Government, FY 2013: Historical Tables, T able 1.1, February 2012)
Due to inflation eroding the value of money, it’s not enough to simply let your savings sit in cash. One dollar invested in Treasury bills in 1950 would have only grown to $16 in 2013. However, that same dollar invested in large-cap stocks would have grown to $969, while small-cap stocks would have grown that dollar into $4,260. There are certainly other investment choices than stocks, but this illustration reminds investors that cash can be a terrible wealth generator over the long term.
Faced with these challenges, millions of Americans the past few years have decided not to participate in the stock market and decided to do nothing but sit in cash. This is a strategy of going broke safely, which loosely translated means keeping a significant portion of your retirement money in “safe” investments such as certificates of deposit and money market products. While they are “safe” from market forces, their value will erode over time against the hidden forces of taxes and inflation. Source: Congressional Budget Office, 2012 Long-Term
Warren Buffett once explained how investors should view cash. He said, “The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them, so you have to have some discipline about what you pay.”
Jeffery Masters is president of Jeffery W. Masters & Associates. 954-977-5150 Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Financial Partners, a registered investment advisor. Independent Financial Partners and Jeffery W. Masters & Associates are separate entities’ from LPL Financial.