Your economic situation is a matter of choice, not a matter of chance.
Demographics
Introduction
Your
economic situation is a matter of choice, not a matter of chance.
Misguided and self- inflicted, it is centered on the lack of knowledge.
Driven by fear, cautious of change and paralyzed by perceptions,
financial decisions are made by default, without knowledge, unaware of
unintended consequences.
Today,
the vast majority of people are troubled and confused about the
economy. They have been bombarded by the media, bullied by sales people,
and bewildered by the millions of things they feel they need to know.
Over the past eight years, they have seen all the financial lessons they
learned in the 1980s, 1990s and even recently, fail them. They know
they can’t live on four and five percent rates of return, yet they are
scared and hesitant to make crucial decisions necessary to survive in
today’s economy. To make matters worse, right now, 90 million Americans
are faced with the most critical investment challenges of their lives.1
We
are going to shed some light on this darkness. We will break this
problem down and analyze it carefully. Then, you will have a clear view
of choices open to you. You will feel more confident and prepared to
make financial decisions.
If something you thought to be true wasn’t true, when would you want to know about it?
That
defining moment in your financial world comes with the understanding of
the efficiency of money. It is a simple yet effective method of
uncovering and reducing transfers of your wealth that occur everyday,
unknowingly and unnecessarily. The financial savings are staggering.
Setting The Stage
Traditionally,
we have been taught that there is only one way to make money grow: To
get a higher rate of return on the money. But who is the one at risk in
this quest? You, or the one making the recommendation? There is another
way to make your money grow, but it is often overlooked. It is called
the Efficiency of Money. To get a better understanding of this, you must
look deeper to get a clearer view of what is happening in your
financial world.
First,
you must understand that there are only three types of money
in your life . . . lifestyle, accumulated, and transferred money. Your
lifestyle money is the money you spend to maintain your standard of
living. Accumulated money is the money you try to save, and transferred
money is the money that you spend and give away, sometimes unknowingly
and unnecessarily. It is in transferred money where you lose most of
your wealth. This is where your perceptions become greater than your
knowledge.
There
are many forms of transfers, but the largest by far is taxes. The
average household hands out about 50% of its earned wealth for direct
and indirect taxes. For whose benefit do we labor, ours, the banks’, or
the government’s? Financial advice given by the government and the banks
has created record profits for banks and record tax revenues collected
by the government. It is no longer enough to simply invest money without
understanding the unintended consequences that will confront you
financially in the future. Understanding the changes that are going to
occur in the near future could dramatically affect any financial
planning that you may have considered. If several years ago someone
would have given us warning signs that the market would be depressed,
that we would be involved in a war, that the Twin Towers in New York
would be attacked and destroyed, that thousands of people would die,
that we would have terror alerts every day, that entire industries would
be near financial collapse, that scandals would rock Enron, Kmart,
Arthur Andersen, WorldCom and the airline industry, would we have made
some changes? Having that information in advance could have eliminated
huge personal financial losses.
Today
we have uncovered some of the problems that we will have to confront in
the near future. They could affect your personal finances
tremendously. Given this information now could help you eliminate or
reduce future financial trauma. This is not about the financial
products you own, rather what you know about controlling your money. Without this knowledge, you may simply become the perfect taxpayer.
One
of the problems we have is that we confuse assumed rates of return with
facts. A fact is something we know is going to happen. In preparing
your financial future you need more facts than estimated guesses.
Wouldn’t you agree that having the facts would be a good place to start
planning your financial future?
Demographics
In
3000 days, about two-thirds of the now-working population will be 60
years old or older. This is a certainty! Unfortunately, this leaves
one-third of the now-working population to pay for all the government
social programs for a majority of retired citizens. To compound the
problem, the costs of social programs such as Medicaid, Medicare, and
Social Security increase every year. This leaves little doubt that
increased taxation will be needed to maintain these programs.
Increased
life expectancy of retirees also adds to the cost of these programs.
According to the 2000 U.S. Census, there was a 12% increase in people 65
years of age or older during that decade from 1990 to 2000. It is
estimated that by 2040, the elderly population will represent
20.7%
of the total population. The largest segment of the population that
grew the fastest was people between the ages of 90 and 94, which
increased 44.6% since 1990. 2 Overall, the number of people between the
ages of 80 and 94 increased 25.7% since 1990. A 65-year-old woman in
the U.S. as of the year 2000 could expect to live another 19.2 years and
a 65-year-old man could expect to live another 16.3 years. In 1900, the
average life expectancy was 47.3 years.3
This
shift in the demographics creates other problems we must face. As
elderly people retire, they have a tendency to shift their
investments from stocks to more secure positions.
Alan Greenspan addressed this issue in February 2002.4 Greenspan
stated that because of the demographics of the country, it will be a
real challenge to maintain the value of these retirement assets. He
states, “This ever larger retired population will have to be fed,
clothed, housed, and serviced by a workforce growing far less rapidly.
The retirees may have accumulated a large stock of retirement savings,
but the goods and services needed to redeem those savings must be
produced by an active workforce assisted by a stock of plant and
equipment sufficiently productive to meet the needs both of retirees and
a workforce expecting an ever increasing
standard of living.”5 He goes on to say that “. . . the focus of the
economy as a whole, of necessity, must be on producing the real
resources needed to redeem the financial assets.”6
In
that same speech, Greenspan goes on to state that “[i]f the Social
Security Trust Fund is depleted, the law requires that benefits are paid
only to the extent that they can be financed out of current payroll tax receipts.”7
Do you really think a politician will allow this to happen? No, but it
will take increased taxation and less benefits to keep them in
existence. If retirees move to more secure investments, it leaves only
one-third of the now-working population to buy the stocks being sold
off. The problem is, when there are more stocks to sell than buyers to
buy them, prices fall. Future retirement accounts could plummet again.
Compounding this problem is the fact that companies rely on stock
revenues for future research and development. This loss of revenue could
stifle future economic growth and profits. Relying only on stocks for
retirement could result in unintended consequences, caused by taxation,
unstable market conditions, and the inability to maintain the value in
stocks as we now know them.
Along
with shifting age demographics, the government itself plays a role in
diminishing our future wealth. Over the last 30 years, the only thing
the government has done consistently is overspend the amount of money it
has taken in. The government’s central focus has become collecting
revenues, a/k/a taxes. The government is very good at it, but the
financial burdens are
passed on to us. We are expected to follow the 47,000 pages of tax law under the threat of penalty
or imprisonment. Another problem is that, in 3,000 days, there will be
fewer workers to pay for the government’s increases in spending, along
with the cost of social programs. This will leave
an enormous cost burden for the workers to pay, along with the
challenge of trying to improve their own standard of living. Diminishing
benefits and increasing costs will leave no one satisfied. To survive,
the government will have to raise taxes. Let’s take a look at what the
government has said they have done to help us. Recently they raised the
amount of money you can put into the government qualified retirement
plans. Why? Why? Why? To secure your financial future, or
theirs? It sounds like you will save on
taxes but you most likely won’t. We have left it to them to
decide at what rate they will tax this money in the future when we
retire. Will it be lower, likely not! Just look at the dilemma they
have created for themselves. This is imperative: DO NOT BECOME THE
PERFECT TAXPAYER.
If We Know Something For Certain
Once
again, why did the government recently increase the levels that an
individual can contribute to 401(k) plans and IRAs? Was this change
initiated because they were concerned about your financial future OR
THEIRS? A 401(k) or IRA simply defers taxation to a later date. It would
be a different story if the government would guarantee that you would
be taxed at the same tax level you were at when you put the money into
these plans. Will they ever do that? No! They need and want as much of
that money as they can get.
I
can still hear the words echoing in the halls of financial wisdom “You
will probably retire to two-thirds of your income, and thus be in a
lower tax bracket.” Don’t count on it! Many professional planners
believe that you can retire to two-thirds of your current income. Be
cautious of this thinking. They are telling you to retire with less
money so you pay fewer taxes. Not a great solution. When you add the
changing demographics, do you really think that, at any level, taxation
is going to be lower in the future?
Now
let’s look at government spending. To get current levels of the public
debt, go to: http://www.publicdebt.treas.gov/opd/opdpenny.htm. There,
the current public debt of the government is listed daily. Look for
the years in which large government surpluses were proclaimed and look
for payments against this debt. Can you find any?
2011 $15,125,898,976,397.11
2010 $14,025,215,218,708.52
2009 $12,011,838,881,463.68
2008 $10,699,804,864,612.13
2007 $9,229,172,659,218.31
2006 $8,680,224,380,086.18
2005 $7,932,709,661,723.50
2004 $7,379,052,696,330.32
2003 $6,783,231,062,743.62
2002 $6,228,235,965,597.16
2001 $5,807,463,412,200.06
2000 $5,674,178,209,886.86
1999 $5,656,270,901,615.43
1998 $5,526,193,008,897.62
1997 $5,413,146,011,397.34
1996 $5,224,810,939,135.73
1995 $4,973,982,900,709.39
Now
do you think that with this increasing debt to be paid, and the
changing demographics of the country, that future taxation will be
lower?
People
should be hesitant to put money into government-sponsored retirement
plans (401(k)s and IRAs) at a 28% tax bracket, knowing that upon
retirement the tax levels could be, at that time, 35% or higher. Is that
a 7% increase in taxes? No, that’s almost a 30% increase in tax
levels. One thing you do need to know for certain, taxes will be
waiting for you in the future.
There will be fewer workers and more retirees and possible increases in government social programs and spending.
Doctor, It Hurts When I Do This
If
it hurts you, don’t do it. The government’s doctor says don’t worry
about the pain (paying unnecessary taxes) keep doing it until you die.
Even then, taxes will be due but at least you won’t feel the pain.
Today, you need more knowledge so you are capable of making better
financial decisions. The more you know the less pain you will suffer
financially. The solutions to a rewarding financial future are not
found just in the stock market. But that’s what most people believe.
Why? Because that’s all they know. IT IS DIFFICULT TO GET THE RIGHT
SOLUTION WHEN YOU START OUT WITH THE WRONG PREMISE.
Remember Who You Are
Not only must you invest wisely but you must learn about the Efficiency of Money and
wealth
transfers. Your investments must be intertwined with these lessons to
maximize your wealth no matter what level of wealth you are at.
REMEMBER: The government sees you as a taxpayer. The bank sees you as a
borrower. Investment companies see you as a fee payer. If you don’t
utilize the lessons of efficiency, these organizations, the government,
the banks, and investment companies, will be first and foremost in your
entire financial life. There will be no financial freedom until you can
loosen the burdens in dealing with them.
The Last Picture Show
Imagine
taking your spouse and kids to see a movie. You go into the theater,
buy some popcorn and snacks. You find seats with no tall people in
front of you and you start to relax. Looking around you notice an IRS
agent that you’re acquainted with. His family is with him. You
continue looking around the theater and you notice your banker and his
family are also there. A few rows behind them are your investment
broker and her family. What a small world! The lights dim and the movie
begins. About five minutes into the movie an usher comes down the main
aisle and the lights come up. “Ladies and gentlemen we have a
problem. There is a small fire in the lobby and we want everyone to
leave calmly using the emergency exits.” You’re stunned. You look at
your spouse and kids and say, “Don’t worry, everything will be okay.
Wait right here for one minute.” You run over to the IRS agent and his
family and help them out of the theater. Running back to your family you
say “just one more minute,” and you run back to help your banker and
his family to the exits. This time on your way back you don’t even stop
at your family but simply give them that gesture with your index finger
meaning you’ll be right back. You continue running to assist your
investment broker and her kids out of harms way. Finally, you get back
to your family to secure their safety. They have that dumbfounded look
on their faces and you realize you may have lost a few votes for the
Parent of the Year Award.
First, Not Last
This
story may be irrational from a humane, loving standpoint. But from a
financial standpoint, it is very true more times than not. The
government, the banks, and investment companies have remedies to make
sure that, in the event of something happening to you, they will still
get paid...FIRST. Your family’s outcome is of little consequence to
them. Sustaining their financial future is more important to them than
yours is. You must learn financial concepts and ideas that will put you
and your family and your financial goals first. You must develop
liquidity, use, and control of your money. You must also learn about
lost opportunity cost. These concepts will increase your wisdom in
making financial decisions. Knowing this, the next time your family is
faced with a crisis or even new opportunities they will be first, not
last.
You’re Hooked
Nevertheless,
we continue to load up 401(k)s and IRAs without any clue what future
tax rates on these programs will be. The government is like a casino
owner, they know they are going to win. You must learn the difference
between government debt and government deficit. You must also learn and
know how to plan for retirement besides using government-sponsored
programs.
Handwriting On The Wall
Handwriting On The Wall
The
government knows it is between a rock and a hard place on the issue of
Social Security. Greenspan’s comments are an “I told you so” type of
statement. “In addressing the impending retirement of those born just
after WWII, we will need to consider whether Social Security should
better align itself with the funding provisions of our private pension
and annuity system. Policy makers need to consider these issues now if
we are to ensure a comfortable retirement for the post-war generation,
while at the same time according due consideration to the
needs of the later generations that now make up our work force.”8
The
problem is the politicians spend our Social Security revenues faster
than they are collected. If they would create a Social Security system
with a public investment option, the government would lose control of
that money. Remember, they consider it their money, not yours.
They Do It Well
In
recent years, the government has become obsessed with imposing and
collecting taxes. The collection of taxes has become job one and they
do their job well. We are now being taxed at the highest levels in our
history. Yet, even after collecting historical amounts of revenue in
the form of taxes, the government continues to outspend these revenues
and posts record amounts of debt. Even with all the proclaimed
surpluses of the 90's, did taxes or government debt go down?
One
could argue that we have experienced tremendous growth in our standard
of living. However, those increased standards have been fueled by a
record amount of personal debt. Personal bankruptcies are at all time
highs along with credit card debt. For the last several years, the
average household has saved at a negative rate. Any sustained economic
downturns or lethargic stock market results, or both, will do serious
damage to future savings.
Demograph X
Without
understanding the demographics of our society, any attempt to
financially plan our future will be doomed and filled with unintended
consequences. My spelling of demographX with an “X” represents a
missing factor. The “X” represents all the necessary changes that will
have to be made by the government in order for it to survive. This will
dramatically affect our personal retirement wealth. Demographics have
been basically ignored in most financial planning. This will create
major flaws in any future financial projections, and could leave us
exposed to many financial hazards. Not only will it be difficult to
achieve the goal of preserving our own financial future, we must also
provide for the government’s ever increasing financial future. Even
with very clear warning signs, the government continues in its record
levels of spending. The debt of the nation continues to spiral upward,
out of control, for future generations to figure out. Let’s face it,
the only power our Federal Representatives have is their ability to
spend our money and we have given them a blank check to do it. If I
could tell you the exact day that your retirement account will suffer
its greatest losses, would you want to know that day? Then, in having
that information, if you could do something now to prevent those losses,
would you do it? You see, the day you retire and start receiving income
from these accounts is the day your retirement accounts will suffer
their greatest losses due to taxes.
Another
victim of the changing demographics could be the housing industry. The
idea that the value of homes will always increase is wrong. People today
often miscalculate the increased values of their homes. They don’t take
into consideration the cost of maintenance, improvements, insurance,
and taxes that are paid while they live there. The average homeowner may
experience only a 2% or 3% growth rate of return, even though the value
of their home may have increased by 40% in a ten year period. The
numbers can be deceiving. As an example let’s take a couple who
purchased a small starter home ten years ago. The purchase price of
this home was $110,000. Today, ten years later, the home is valued at
$150,000. Overall the couple believes that the value of their home
increased over 30%. They would also agree that while they lived there
they also spent another $5,000 on the home for improvements and
maintenance. In reality the annual rate of retire in the growth of the
value of their home for those ten years was
2.69%.
Remember this doesn’t include the cost of the property taxes and
insurance. The inflation rate alone generally averages between 2.5 –
3.0%. Yet this couple had been led to believe, by everyone, that
buying their home would be one of their greatest investments.
Getting Older
After
all, a 6,000 square foot home requires a lot of maintenance and upkeep,
not to mention the increasing cost and upward-spiraling property taxes.
If the aging population sells their larger homes and builders continue
to build larger homes at a record pace . . . who will buy them? The
younger generation?
In
3,000 days, with two-thirds of the now working population being 60
years old or older, we will be dealing with a smaller number of new
buyers. This young group of buyers will also want to build new homes for
themselves. This will create an overabundance of larger homes in the
marketplace. The rules of supply and demand may take over. Too much
product and not enough buyers equal lower prices. The government and the
banks will have to get more creative when it comes to buying a home.
After all, this is a source of revenue for both of them. Having this
information, it may not be in your best interest to pay your house off
as fast as you can. This could cause major unintended consequences in
the future. The key is to maintain liquidity, use and control of your
money. Owning a home is the most misunderstood American dream. You
should look at home ownership very carefully, and understand your
options. If the experts giving you advice could be proven wrong, would
you want to know about it? Your dream home could be a financial
nightmare.
These
are a few of the many demographic changes that could affect your
finances in the near future. Following a natural and logical course of
events, these things we discussed will most likely happen. Their effect
on your current financial planning could leave you exposed to financial
loss. Your exposure to these losses is a matter of choice, not a matter
of chance.
©2006 Wealth & Wisdom, Inc. All Rights Reserved. (revised 2012)
11 Maselli, Frank. Seminars The Emotional Dynamic. PowerSpeak, Inc., Franklin, Massachusetts, 1996.
2 http://www.census.gov.
3 http://www.cdc.gov/nchs/fastats
4
Remarks by Alan Greenspan, Saving for Retirement, at the 2002 National
Summit of Retirement Savings, Department of Labor, Washington, D.C.,
February 28, 2002.
5 Speech on Retirement Savings, Alan Greenspan, February 28, 2002
6 Id.
7 Id.
8 Id.
No comments:
Post a Comment