The first important thing to understand is that no one is driving this economic trend that we were all riding on.
Look inside the locomotive pulling this out of control train, and you won’t find the U.S. president, the Congress, the Federal Reserve Chairman or any elected or appointed bureaucrat.
We must awaken to the absurdity of 0% interest rates, endless Federal Reserve bond purchases and trillion dollar deficits and a fast approaching crushing $20 trillion national debt.
Washington refuses to admit it has a spending problem.
There simply couldn’t be anyone driving this economic train, or we would have changed direction a long time ago.
Now, many fear it is simply too late. We are moving too fast and the decline is too steep.
The people who insist on following the old financial strategies that developed during different times, to deal with different issues, will be faced with an unfair share of economic pain
People following these outdated strategies will continue to believe that as long as they do what they, their parents, their neighbors, and their coworkers are doing and have always done, that day will one day achieve Financial Security.
And well before the last baby boomer has died, we will know that these old methods have failed a large portion of these people.
Who’s at fault?
Is it the politicians, who sold out our fortunes by incurring more debt than any sane and rational person would ever rack up?
Is it the Wall Streeters, who have peddled low performing, high fee investments that are designed more to make them rich then to profit the clients they serve?
Is it the bankers, who destined millions of people to a life of virtual servitude, as ever increasing amounts of their wealth is lost to finance charges, credit card payments and student loans?
Or, is the people themselves, who see no value in saving for rainy day when they can enjoy the sunshine now as they ride their Sea-Doos and go on vacations?
While there is plenty of blame to be sure, there is no point in spending too much time in finding who is most at fault.
The challenges our clients face are either upon us or are rapidly approaching.
Our country is already bankrupt.
Boston university economics Professor Lawrence J. Kotlikoff is a very well respected economist, and in a recent article he summarized are current situation by saying:
“Let’s get real. The U.S. is bankrupt.”
Professor Kotlikoff took a close look at the congressional budget Office Data, and calculated that the U.S. gov’t is facing a fiscal gap of
$202,000,000,000,000. $ 202 TRILLION.
The reason this number is so much higher than the $20,000,000,000,000 of debt that most politicians will admit to is that Professor Kotlikoff’s total includes all of the unfunded future liabilities that the U.S. government has already committed to.
To put that into perspective,
According to the U.S. census bureau, there are a total of 113,000,000 households in the U.S.. If we divide the $202,000,000,000,000 debt among the total households each household share amounts to over $1,787,611.
There are about 300,000,000 people in America so if we divide the total estimated that by this number, it comes to $673,333 per person.
Unfortunately, that means if you are married with two children, your gang’s total share is a little under $2.7 million.
Our country is indeed bankrupt; most of us just don’t know yet. So who is going to help the aging baby boomers who run out of money and can’t pay for their food, rent and medical bills?
The cost of our country’s entitlement programs is growing exponentially.
Social security and Medicare currently take up about 1/3 current financial budget. If that isn’t frightening enough, consider that the share is expected to grow exponentially over the next 25 years.
The significance of exponential growth can be difficult to grasp. It means starting at one, an increasing to two, and then going to four, eight, 16, 32, and so on. Instead of increasing by a certain percentage, exponential growth means doubling and then double and again and again.
It is so significant that the financial rating agencies have started sounding the alarm:
The long-term deb rating on the US Government has been lowered.
If these Government programs continue their current trajectory, it will be mathematically impossible for country to pay for them.
So what do our leaders do? They spend even more money on new entitlements.
The 401 K disaster
Over the past three decades, almost every business entity in America has replaced its defined-benefit pension plan with a 401 K or similar defined contribution plan.
It is safe to assume that a large reason for this massive change was simply that business leaders realized it was a lot cheaper to provide a 401 K matching fund and it was to fund a true pension plan that provided a lifetime of guaranteed retirement income.
This no doubt retained billions in corporate profits, but at the price of sending a great many loyal employees down a path in which they will have only a fraction of what they will need in retirement.
According to the employee benefits research institute – EBRI, the average person approaching retirement today has a total balance in his 401 K and other retirement plans of only about three times his annual salary.
Without any other savings and only the additional income from social security, most baby boomers 401K balances will be completely exhausted in just seven or eight years.
Staggering Health Care costs after retirement
In 2006, fidelity investments did a study to learn how much savings a typical retired company couple without any form of employer sponsored retirement Health Insurance might need to pay for their Out-of-Pocket lifetime Health Care expenses. These expenses include things like Medicare premiums and co-pays, but did not include long-term care.
The estimated amount was over $200,000.
In order to save this much money in a 401k growing at an average rate of 6% per year, a person 15 years from retirement would need to contribute more than $8,000 annually for health care costs.
In August 2011, fidelity investments reported that the average annual contribution participants made to their 401K plan was $5,790. No doubt these participants are assuming that their contributions will provide them with future retirement income.
They will, but instead of using that income to pay for food, shelter, golf and gifts for the grandkids, these people will need all and more just to pay the estimated cost of their Health Care.
An unexpected rapid climb in inflation rates will hit the retirees hard
For the past few decades, the rate of inflation has been at historic lows. The government’s consumer price index has averaged 2.8% annually for the past 20 years.
But many experts expect that these low rates of inflation won’t last much longer.
Consider the massive amounts of money our government has thrown at our current financial woes, and then add the even greater amounts that will be necessary to keep step with the exponential growth of our social safety net entitlement programs, and it is no wonder that many experts expect a rapid climb in the future rate of inflation:
It’s difficult to estimate the magnitude
of the inflationary and interest rate consequences
of the fed’s actions because, frankly,
we haven’t ever seen anything like this in the US today.
What’s happening is potentially far more inflationary
than were the monetary policies of the 1970s when the prime interest rate peaked at 21.5%.
If the baby boomers are forced to contend with even a 4% inflation rate during retirement years, their cost of living will double in just 19 years.
This means at the purchasing power of what ever meet your income they have at the time will drop by half.
Challenge number 6:
Our politicians lack courage and leadership
The choices facing the US come at a time when the Federal government’s debt has increased dramatically in the past few years and when large annual budget deficits are projected to continue indefinitely under current laws or policies.
Beyond the coming decade, the aging of the U.S. population and rising healthcare costs will put increasing pressure on the budget. The Federal debt continues to expand faster than the economy, as it has since 2007, the growth of people’s income will slow, the share of pet Federal spending devoted to paying interest on the debt will rise more quickly, and the risk of a financial crisis will increase.
If you listen to the vast majority of politicians today, no matter if they are republican, democrat, or independent, it becomes painfully obvious that they are either idiots or they are more interested in their political futures in the future of the country.
For decades now, all we have really heard are the sounds made when these politicians just kick the can full of problems further down the road.
Challenge number 7:
Our economy, the driver of our country’s wealth, will slow considerably in the future.
When you combine the previously stated challenges, one thing should become clear. The standard of living enjoyed by Americans said they will decline in the future. It has to be.
A greater percentage of our population will stop working as this giant baby boomer generation enters retirement. With insufficient savings and their 401K’s, the baby boomers will have no option but to cut back their retirement spending to a bare minimum.
Though still working will be taxed even more. With less of their paychecks remaining after taxes people will have much less to spend on cars clothing appliances gadgets toys and everything else we now spend our money on.
Businesses that make these products will cut employment.
There will be fewer people working to pay the taxes needed to support the spending the government requires, which means that though still working will in turn be taxed even more. They will have less to spend and consumption will drop further.
It’s a vicious cycle that’s already in motion.
None of our political leaders seem to put possess the wisdom or the will to break this cycle now and limit the suffering.
So we all continue to sit back waiting for someone to do something while this cycle continues to spin out of control, until one day it will fracture by its own momentum.
In the process we will be forced to endure pain…
but some will suffer far less than others.
Those who suffer least will be the ones who realize now that the future will be different than the past.
And that because of this they will be wise to adopt a new strategy that will be required to cope with these coming challenges.
The strategies needed are those that martial all of a person’s resources in ways that make those resources work hard are to boost lifetime spendable income, and at the same time protecting those resources from volatile financial markets and higher taxes and inflation.
The old methods tell us that retirement will be built on the three legged stool of social security, personal savings and pensions -( now it’s 401K’s, and IRAs).
According to these methods at age 65 people retire claim their Social Security, and supplement this income as best they can by withdrawing first from any personal savings.
Once this money is gone they’ll replace income with distributions on their qualified plans
Unfortunately, by doing this, they ultimately expose themselves to the potential to have income hit with the highest possible taxation and risk.
Not only are qualified plan distributions taxable,
but as much as 85% of their Social Security will be as well.
To pay these taxes, many will be forced to withdraw even greater amounts from their taxable qualified plans in order to net the after-tax amount required to meet the spending needs.
If these withdrawals are coming from a portfolio of stocks during a period when the market is down, they will lock in losses that can never be recovered.
A much better way
Instead, by combining the right social security claiming strategy, the judicial use of annuities within a qualified plans, a partial Roth conversion tactic, a properly structured Indexed Universal Life Insurance policy and other financial Instruments, a synergistic effect can be created that could minimize exposure to: market risk, assure the continuation of tax-efficient income, significantly increase the after-tax amount received from so security and much more.
No politician, whether a member Congress, a member of the senate, or the President can come close to doing this for your clients.
Only one person can help these people: you.
This is, of course, assuming that you have an advisor who clearly sees the coming challenges, who knows how to implement these new strategies and who cares enough about there clients and are willing to serve them regardless of what it does to the bottom line.