Doing Better Than Your Peers
Henry K. Hebeler
Today, it’s all about keeping up with the Joneses. By foregoing their lifestyle now, you are likely to do better in the long run. Here’s why:
Demographic Shifts: We’re talking big changes here: People are living longer and the elderly part of our population is increasing. This has profound implications, especially economically. Most notable right now is the increase in health care costs for older people that currently consume about one-third of the federal budget. In ten years, that will grow to almost half the federal budget according to the Congressional Budget Office. Most notable only a decade or two from now will be the inadequate savings of older people. The net result is that the elderly cohort will have considerably less to spend, and a good part of their income will come from support of a proportionately smaller working population. When social security was started, there were five workers for each person that was over 65. By the time the younger people in our workforce today reach retirement, there likely will be two workers for each person over 65 instead of three workers today. The advent of the cell phone has made it difficult to tell whether people are really at work. When I see large numbers of people of working age at home, shopping or at the golf course during normal working hours, I wonder if we are already at two workers per retiree.
Demise of Pensions: Employers are becoming increasingly unwilling to assume the financial obligations and risk of funding pensions. The working environment for Americans has changed appreciably. Employers that were once paternalistic have shifted from the concept that employees were the most important asset to an unbridled drive for profit and executive compensation. The labor force is now more of a commodity to be purchased at the least possible cost—often from suppliers which are sometimes overseas. Workers have been forced to shift their allegiance from an employer to a trade or profession. Since pensions are largely determined by wages late in employment multiplied by the amount of cumulative service in a company, frequent job changes do not provide sufficient time to build significant pensions. Several decades ago, the vast majority of people expected to retire on the combination of social security, a pension, and some personal savings. However, with the exception of the large number of public workers supported by our taxes, pensions are rapidly disappearing leaving retirees from industry or commerce to rely on social security and personal savings.
Large Homes: The standard size home for any economic class has grown enormously in the last few decades. In part this is driven by the desire to live like the Joneses, but also by easy credit, often with no money down and/or temporarily low interest rates. In recent years, the rapid increase in home values has made home ownership equivalent to retirement investment in many people’s minds. This logic helps justify the need to have special rooms for special purposes or additional space for just-in-case needs. Massive kitchens and master suites are now the objective of most families. Family and great rooms supplant, not replace living rooms. Large garages add to the need for larger lots. The net result is massive home debt with an illusive promise of great wealth. Those who have taken on adjustable rate mortgages (ARMs) may be the first to realize the trouble they are in. Many of the others will see the light when the need to convert real estate to cash comes, never mind that all of the Joneses will want to sell at the same time.
Multiple Automobiles: The one-car family is obsolete. Not only must each spouse have a vehicle, but so do most high school seniors. Parking lots in schools are jammed and ever expanding. The number of cars for students exceed the number of cars for school staffs. A senior would not be seen dead on a school bus. The car has become a status symbol for American youth, and parents seem supportive, not resistant to this. Children with cars give the parents more freedom themselves since they no longer have the burden of driving the youth from one activity to another. Of course, things like a large house and multiple automobiles come at the expense of reduced saving for the parents’ retirement, never mind that retirement could well mean thirty years of living on little savings.
Unbridled Consumerism: The desire to have the latest and best products has driven Americans to spend all they have and more. This is exacerbated by massive advertisements on TV and popular media. Our children MUST have the latest electronics, media and other goods that all of their classmates possess. Not only is cell phone and audio equipment ownership almost universal, but their use seems never ending, often leaving little time for more productive pursuits. Parents exercise little restraint and MUST have the most recent developments in technology themselves. These are accompanied by very large phone, cable and internet costs that would shock those a generation ago.
Record Debts: We are building massive debts, not just from large homes, multiple automobiles or unbridled consumerism. Our debts include our international trade balance, national debt, state debt, industrial debt, and personal debts of all kinds—all at record levels. Even worse are the promised, but unfunded, benefits of social security, Medicare, Medicaid, government employee pensions at both state and federal levels as well as obligations of the government’s Pension Benefit Guarantee Corporation. Virtually everything is leveraged with the hope that the future will be better than the present. The financial industry and government often act as if debts don’t have to be paid. But indeed they do. We’re living in a time of record debts at all levels. Somehow both the government and security dealers will have you believe that consumerism will defy the demographic changes, international outsourcing will not affect job and wage growth, economic growth will continue unabated, and interest rates, inflation and taxes will remain low.
Low Savings: The flip side of spending is savings. What you don’t consume, you save. What you save is not consumed. For the last several decades, the national savings rate has steadily declined to the point where it was less than zero in 2005. The last time this happened was during the great depression. The national savings rate used to be at about 9% of disposable income. This was enough to sustain the relatively small number of retirees at that time. But they retired later (if at all), lived shorter lives AND had significant pensions to sustain them. Low savings rates have gone on for such a long period now that it would be virtually impossible to increase personal savings balances to the point where we could achieve a savings level suitable for our times, much less the much lower amount that was required to accumulate in previous generations.
Escalating Health Care: Lots of things are driving health costs to increase much faster than inflation. First there is the aging of the population as a whole with the need for more care for the elderly. This is exacerbated by increasing life expectancy, brought on, in part, by better medical care. Better medical care requires more costly diagnostic equipment, facilities, and trained personnel, particularly specialists. Hip and knee replacements are now common and even heart and lung transplants are now not unusual. Then there is the ever increasing cost of drugs. Expensive drugs help the elderly to live longer or more comfortably. Some drugs are so exotic that costs of over a thousand dollars a month still do not reduce their use below the drug industry’s ability to produce them. Long-term-care costs continue to escalate as costs for care, service, facilities and insurance grow. Medicare and Medicaid have paperwork that often requires more people in the back office than those actually applying the care. Finally, the largest costs may well come in the final days of life as extreme measures become more common and both medical personal and relatives try and add some more time to the life of a dying person.
Wealth Misconceptions: There are those that say the savings rate doesn’t matter. This argument was voiced when investments grew so much during the late nineties. In an effort to keep consumerism going, some economists said that people didn’t have to add to savings because investments had grown so much on their own. Then the market fell, and we didn’t hear from these economists again until the recent escalation of home prices. Now they have again come out of their scholarly cubicles with the same story based on the theory that home prices will continue to grow, and equity growth will be recovered sometime in the future as the population downsizes their homes or takes out additional debt using homes as collateral. Never mind that homes as “investments” are equivalent to illiquid highly leveraged long term securities which would be shunned by the average person if they had a name other than “home.”
What alternatives might provide a
A Self Sustaining Economic Boom: Considering all of the aforementioned conditions, it seems unlikely that the ultimate solution will come from a steady state of doing more of what we are already doing. Still, that is the argument used by both the government and the financial industry. Remember though, that both of these sectors rely on such notions. The government needs industrial and personal economic activity (i.e., employment and spending) to get the taxes for its commitments. The financial industry needs an upbeat view of the future to sell stocks, the most profitable of its security transactions.
Full Commitment to a Worldwide War: World War II brought us out of the Great Depression. People were fully employed, made sacrifices, had rationing instead of consumerism, and saved more money than ever before. War too is an unlikely solution in this age because of the demise of patriotism, nationalism, and universal commitment to preserve the principles of our founding fathers—to say nothing of the fact that the enemy today doesn’t require massive defense plants employing those who would otherwise be homemakers.
Major Personal Savings: I maintain that this should be the first priority for those individuals who want to rise above this mess. It’s going to take a lot of other things too, but only the foolish will not examine their own situation and try to find ways to get personal savings well over 15% of their income when they are young. Those who have already saved little and are already middle aged may well have to more than double or triple these amounts if they expect to retire at a relatively normal age. But saving more money is going to come slowly for the Joneses, so they are going to have to look elsewhere for their retirement livelihood.
Jobs for the Elderly: Retirement at age 62 or less will be a thing of the past. The average person should be considering employment until age 70 or beyond. The best jobs may well be full time employment in a firm that has both good medical and retirement benefits. (Unfortunately, the best positions may be government jobs supported by tax payers.) Many will seek part time work which may mean cottage industries, odd-hour or odd-season jobs, handyman businesses, social services, etc. Two major problems face the elderly when seeking employment: (1) Many employers do not want the burden of elderly workers who use more sick leave and increase the costs of the company’s medical insurance, and (2) the workers may not have the physical capacity or training that the employer expects.
Reduced Welfare Benefits: Although
welfare benefit reductions are likely to be small because of political
pressures, there will certainly be efforts to contain costs, especially medical
benefits. If the same thing happens
Significantly Higher Taxes: Since it is unlikely that the government will make huge reductions in promised future welfare benefits much less current spending outlays, it is very likely that tax rates will increase significantly at both federal and state levels—especially for higher income people who have little weight at the ballot box. The current promises for social security and Medicare benefits are unsustainable and therefore need much greater tax support as well as the need to offload some of the responsibilities to states. These offloads will further strain state budgets and result in the need for higher tax revenues at the state level as well. Remember there are a lot of taxes other than state and federal income tax. Consider building permits, business & occupancy taxes,
cigarette and liquor taxes, driver’s licenses, fuel taxes, inheritance taxes, luxury taxes, licenses of all kinds, Medicare tax, property tax, road tolls, sales taxes, unemployment tax, federal excise tax, telephone taxes, utility taxes, vehicle registration, and workers compensation tax, to mention a few.
Inflation to reduce the apparent size of debt: One way to make debt seem smaller is to reduce the value of currency. Not only does it make the debt seem smaller, say in relation to the gross domestic product (GDP), it makes it possible to pay the debt with less valuable dollars. As an example, during the first ten years of my retirement which occurred in a period of quite low inflation, the value of the dollar reduced by almost 30%. So the holders of bonds, mortgages and loans effectively took a beating both be getting cheap dollars back for interest payments and effectively 30% less principal on a ten year note or bond. In effect, the government debt will be the major beneficiary of inflation. If welfare programs are constrained so that they do not increase as fast as inflation, they too will be effectively reduced, probably with less vocal opposition because the average person does not understand that inflation compounds just as investments compound.
How You Can Ultimately Beat the
Make Conservative Plans: The first step to do better than the aging Joneses is to develop a conservative plan that foretells a reasonable lifestyle in your retirement, particularly your late retirement. We’re looking for how much you’ll be able to spend in retirement, and, if you are not yet retired, how much you’ll have to save beforehand. The environment we envision requires forecasts of lower than historical returns, higher inflation, and higher tax rates. It also means setting aside some money as a contingency for unforeseen events which could include things that could happen to your adult children or aged parents. You can make such plans yourself using a competent computer program or you can rely on the help of a professional planner, but you may have to lean on the planner to use conservative inputs because less experienced planners often believe they can foresee the future—and they would have you believe the future is going to be glorious with their help.
Curb Family Consumption: Analyze your current spending and make a budget for your future outlays. On the average, people will have to make considerable reductions in discretionary spending—as well as to recognize that there are many things that are really discretionary even though you or members of your family haven’t felt that way in the past. (For example, think pets. They are likely to be more expensive than you think.) Look particularly at your home, automobiles, and everything that uses electricity or power. Look at your utility bills. Maybe you really don’t need an extensive TV cable alternative or all of the communication devices you have. Consider how much you spend for food at restaurants. Remember, “Necessity is the mother of invention.” You’ll probably be able to invent many ways to save when you really understand the needs of your future sustenance. Further, you may teach your children that it’s not wise to have everything now when you consider what may be needed for the future.
Stop Buying on Credit: If you are buying on credit, you are not saving. You are living beyond your income. If you can’t completely pay your credit card bills every month, tear up the cards and start paying down the debt immediately. Start saving the money needed for your future purchases and then make the purchase only after you have saved the required sum. Also, take a look ahead and consider that many of the things you have will wear out and need cash for their replacement. Start building some reserves for things such as auto, appliance and roof replacement. You don’t want to have to pay for these with future credit.
Downsize Your Home Now: If you know you will need to get money from your home to support your retirement, it’s better to downsize now than to wait till later. John Paul Getty was once asked how he got so rich. He answered that he always sold too early. That advice applies here as well. Larger homes have larger taxes and cost more to maintain. They also tend to beg for more furnishings and things to fill closets and shelves. But be sure to invest, not spend, the gain that you recognize from the sale less the purchase of the smaller home.
Invest More Prudently Than Ever: No one knows the best investments for your savings because no one knows what will happen in the future to any particular investment. Therefore, it is very important to hold a portfolio that is widely diversified. Include some inflation protected securities such as government I Bonds or TIPS. If you are considering buying an immediate annuity, look into some of the new offerings with inflation adjusted payments. If you are eligible for a Roth IRA or Roth 401(k), invest the most you can. And save on a regular basis, preferably with a payroll deduction plan. That is likely to give you the benefit of dollar-cost-averaging. Finally, always invest in a company plan at least up to the level of your employer’s matching contributions. That’s free money that you’ll never find anyplace else again.
Get Active in Political Circles: Perhaps you can influence candidates for office and currently seated members of congress to take more responsible actions to curb government spending and especially unfunded promises of future spending. We can all hope for candidate that will champion responsible government budgets, immigration, trade policies, etc., but the likelihood is small that they would fulfill such objectives once in office. Still if the outcry for financial responsibility is strong enough, we might see a turnaround.
These actions will put you ahead of the Joneses in the long run. Sure, you’ll not appear as affluent right now, but you’ll be a lot better off being able to retire earlier and have some money to spend in retirement. Contrast that with a life where money problems are always with you, and your sustenance is dependent on the equivalent of standing in line for food stamps, long waits for medical care, public housing, impersonal and fleeting help with personal needs, and a need to rely on charity or your already financially strained children. Is this kind of a future really worth an impressive house, cell phones for all family members, high speed internet service, more channels on TV than you can actually use, large flat panel TVs, thousands of tunes, phone games, the latest digital cameras, etc., etc.? I think not. Look to your conservative plan, not the Joneses of the world.