A host of experts are predicting what the future will bring. Ken Dychtwald, a leading “age wave” expert, characterized the 10 physical, social, spiritual, economic, and political crises we will face as we age in the 21st century in the following list. (You can learn more at www.agewave.com.)

1. A Pandemic of Chronic Disease
2. Mass Dementia
3. The Caregiving Crunch
4. Coping With Death and Dying
5. “Gerassic Park”
6. An Inhospitable Marketplace
7. Changing Markers of Old Age
8. Financial Insecurity
9. Age Wars
10. Elder Wasteland

Let’s hear what Dr. Dychtwald has to say about one of these issues, #5. What about “Gerassic Park”? As Dychtwald writes,

All future-oriented public policy in America, including policy regarding Social Security and Medicare, is based on the assumption that there will be no meaningful breakthroughs that will affect longevity or biological aging. So what happens if we wake up tomorrow morning and there is a breakthrough?

Might it be a “Gerassic Park” in which, instead of cloning entire humans, we find a way to clone organs? What if we learn to manipulate the body’s immune system to increase longevity? Can we imagine a future without cancer, a world without Alzheimer’s or heart disease? It is possible…. The biotechnology century is coming; we should expect the unexpected.

–Dr. Ken Dychtwald, “THE 10 PHYSICAL, SOCIAL, SPIRITUAL, ECONOMIC, AND POLITICAL CRISES THE BOOMERS WILL FACE AS THEY AGE IN THE 21ST CENTURY,” American Society on Aging (www.asaging.org)

I see medical breakthroughs each day. That is why, as a Certified Financial Planner, I am bound to do planning for my clients assuming a life expectancy of 120 years.

You may think that living 120 years is far-fetched. When I was in my early teen years, as my grandfather retired at age 65, it was expected he would be dead by age 70. Over the past 50 years, with medical advances, the Insurance Institute states that a married couple reaching age 65 can expect one of the spouses will easily live to the age of 95.

Better plan for at least 30-40 years of retirement funding.

Discipline or regret!

“In the cold northern wastes there is a mountain a thousand miles long, a thousand miles high. Once each thousand years a small bird flies north. This small bird flies north to sharpen his beak on the cold hard stone of the mountain. When the mountain is thusly worn down, one second of eternity shall have passed.” –Tibetan Poem

In my 40-year career I have watched the herd mentality hit investors. Here is my point. Going back to 1871, the average rate of return for the stock market has been around 12-13%. Like a pendulum on a clock there are periods when the returns are greater than 13%, and, other periods with returns much less. (From a technical standpoint, the S&P 500 has a standard deviation of +/- 21%. So around 70% of the time you could expect returns of +34% to -8%. We could take these calculations out to three standard deviations but that is not necessary for this discussion.)

During the 1970s the S&P averaged a 5.9% return each year for those 10 years. In the 80s and 90s, it averaged around 21% each year (the low tax rates and high tech days). So you knew in advance that the years 2000-2010+ were going to be bad years…just to average things out. Well, it happened. Like all forces of nature, the market moves in cycles. Even though the public sees doom and gloom today, the markets will start the next trend line upward soon.

So how do you save and invest? Wade Pfau wrote a great paper, “Safe Savings Rates: A New Approach to Retirement Planning Over the Life Cycle.”

We all know about the safe withdrawal rate, namely, you should never take out more than 4% of your retirement account value annually in order to assure you will never outlive your income. Pfau assumed a 30-year accumulation period followed by a 30-year withdrawal period. Going back to 1871 he found using a 60/40 mix (60% stocks and 40% bonds) that one needed to save 16.67% of gross salary each year, adjusted for inflation. (So, if inflation went up 3% this year…next year would require 19.67% savings to make headway.) Now if your income went up every year by the exact amount of inflation, then, your rate would stay at 16.67%.

This formula plan would assure that you would have enough funding to live on 50% of your final year’s income level. Unfortunately, most Americans live on 91-95% of their final year’s salary in retirement…so, you will have to increase the rate of savings above 16.67% per year. I always suggest a person save at least 25% of gross income. That way, if you place your monies in a tin can in the back yard at a zero rate of return, you will have 10 years worth of money when you retire.

Read the article and insert the 25% under a 60/40 mix, and you will see the plan will amply fund your lifestyle.

In the past 25 years, medical breakthroughs, such as stents, have extended people’s lives without debilitating surgery. Weekly, you see in the media celebrities or the “average person” living well into their 100’s. In fact, the fastest growing segment of Americans are those living past age 100.

So how do you plan financially for this event? You work from age 25 to age 65…a mere 40 years to accumulate enough money to live 35 or 40 years after retirement. Funny, if you save 10% of your gross income in your working years, and, assuming no rate of return (common today in bank accounts) for the 40 years of work…you will have, at 65, four years’ worth of monies after retirement. If you save 25% of your gross, with the same factors, you will have 10 years of living expenses available at retirement. Both scenarios assume no inflation.

The authors of a new study, The Problem With Living Too Long, from the Institutional Retirement Income Council, report half of all females who are aged 65 today will live to almost 88. Thus, if you, as a 65-year-old female, guess you will live to be 88, then, that gives you only a 50/50 chance of not outliving your income. Statistically, a quarter of those women will live five years past age 88 and 10% will live to age 98. So, if you want a 90% certainty of how long you will live…better use age 98.

You are playing with loaded dice if you say, well, I’ll be dead at 85 and so I only need to plan financially until then. How will you pay your bills when you live longer? Are you going to call on your kids to fund your lifestyle? (They probably will be retired themselves.)

The better choice is for people to work longer, save more, or live on less now. This funding requirement should not be a surprise to anyone. You have had your entire lifetime to plan for your retirement.

Sit down with a professional advisor…this week, and have them map out at least a “rough and dirty” template as to the path you are on. I have done scenarios over the years where people have only a projected 5-30% of what they will need in retirement. They are in shock since they never thought about it. (Must be because they are too concerned over who will win on Dancing With the Stars.)

Start now…a small change can produce tremendous results.

The chart below will give you an idea of what you can expect:

THE LIFE EXPECTANCY GAMBLE
10% of all 65-year-olds will live into their 90s

65-year-old males:

50% will live to 85.99 — 25% will live to 90.78 — 10% will live to 94.74

65-year-old females:

50% will live to 87.97 — 25% will live to 93.17 — 10% will live to 97.64

65-year-old joint life expectancy*:

50% will live to 91.07 — 25% will live to 95.07 — 10% will live to 98.80

Source: Actuarial Consultants Inc. Data is based on 2013 mortality rates for people who do not hold annuities using IRS projections based on July 2000 tables from the Society of Actuaries.
*At least one spouse will live to the age indicated.

You can deal with this issue like the “ant or the grasshopper.”

Ah yes…discipline or regret.

Assume a retiree’s home is paid off. They can go to a bank and obtain a reverse mortgage loan against the property. Depending on the person’s age, their health, and the property value, the lender will provide funding to the retiree. The amount may be, say, 50% of the appraised value of the property. There are no payments due to the bank. The principal and interest accrue. Once the person dies, the bank will take the property and sell it. The outstanding mortgage may be 80-90% of the home’s value at the person’s death, so, the bank can still make some money once it sells the home. On the other hand, the surviving spouse or heirs could pay off the loan and take ownership.

A recent article in the September 2011 issue of Investment Advisor magazine showed AARP suing Fannie Mae and Wells Fargo over reverse mortgages.

HUD had established original rules that “…a borrower or heir would never pay more than the home was worth at the time of repayment.” In 2008 HUD changed the rules…. The heir must pay the full mortgage amount even if it exceeded the value of the home. AARP sued and HUD returned to the original rules.

A new suit has come up, by AARP, toward Fannie Mae and Wells Fargo. These institutions are failing to give notice to surviving spouses and heirs of their rights to buy the property for the lower value. These institutions are foreclosing and seeking to evict an heir who is attempting to pay off the current fair market price on an underwater home.

Thus, a stranger could purchase a reverse mortgage home for the fair market value where an heir could not.

A simple solution to not getting caught in this trap is to start early funding for your retirement. Sit down with a Certified Financial Planner no later than your early thirties to get a plan in place to actively fund your plan. Day after day I have a large number of people, around the age of 58, who earn $100,000 per year or more, and have less than $50,000 saved for retirement, call into the office, looking for a quick solution. With only $50,000 that will fund the first six months of their retirement. Sad….

As always, discipline or regret.

Medicare provides open-ended, unfunded promises to pay benefits, bank-rolled partly by a dedicated payroll tax and mostly by general-fund taxes and borrowing.

In contrast, insurance companies employ actuaries and underwriters to estimate future expenses and charge appropriate premiums to ensure that money is available to provide the benefits promised.

But in Medicare, the insurers are the taxpayers, with the government administering the program. Medicare has no assets other than future obligations of taxpayers. Medicare’s trustees report that the program faces $38 trillion in unfunded future liabilities ($330,000 per U.S. household).

Medicare’s dire financial condition is due to its design and operation. Medicare payroll taxes are far too low to fund the benefits promised. And fraudulent claims account for 20% to 30% of Medicare expenditures. Medicare’s payment methods allow abuse by way of repeated charges for unnecessary procedures and supplies. Private insurance companies experience far lower losses from fraud and abuse.

Cutting payments to hospitals and physicians is no solution for the financial woes of Medicare. The program already pays less than the costs of hospitals and many physicians — who then try to shift the unreimbursed costs to privately insured patients. That is one of the major causes for the alarming escalation in the price of private insurance, which has been rising 12% a year. Many physicians refuse to accept new patients if they are on Medicare. Cutting payments to physicians will further limit access to their services.

Medicare specifies 467 medical conditions for which it will pay. Unfortunately, Medicare doesn’t allow much payment for a primary-care physician spending quality time with a patient to evaluate his condition, decide on treatment, or make appropriate referrals to specialists.

Insurance companies and Medicaid follow Medicare’s lead. Consequently, primary-care physicians earn about half the average for other physicians, and they work about 80 hours a week. No wonder the number of primary-care physicians is shrinking, as they leave that field in order to retrain in a specialty or to retire early….

According to advice to the U.S. government from the International Monetary Fund, Medicare benefits cannot be paid over the long-term future unless benefits are cut in half or taxes are doubled. Such benefit cuts would greatly damage health care for senior citizens and such a tax increase would thrust an unsupportable burden on younger people.
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Better prepare to pay substantially more healthcare costs out-of-pocket for yourself and your parents.

I hear people say, “Paul, I feel that we will need only about 75% of our current income to retire.” The actual national average is 91-94% with many spending 103-105% of their final year’s pay. For some reason people leave out a factor for income taxes (which are set to rise in a little over a year) and inflation. That is why they think they only use 75%.

Here is the real item they have left out – health care costs. An average married couple with children pays approximately $300-400 per month for health care. The “street” cost for a Blue Cross/Blue Shield policy is around $1400 per month. That means, your company is making up the difference. (Say Thank You!) Group health insurance has been set up on a socialistic system. That is, the young and healthy workers are paying for the older, less healthy individuals in your company.

If you want “good” health care when you retire, you probably will not go with Medicare. By the way, watch for the bankrupt Medicare system to raise rates and cut benefits shortly in order to survive. (Ah yes, another government program that does not work.) At age 65, a married couple with a private health plan can expect to pay $2000 to $2500 per month with a $2500 deductible. That is $24,000-30,000 per year for the insurance plus the deductible and out-of-pocket costs for medications. Did you add that into your budget for retirement? I think not! So, a couple now earning $100k per year, guesses they will only need $75k. Gross up to pay for taxes and they are up to $95k to $100k. Then add in the new health care costs, more travel and gifts for grandchildren. It is not unreasonable for them to need over $100k.

Most people probably will take Medicare. You know – where the government says it will take care of you. (One of my favorite quotes is: Be careful of those who want to take care of you…for your caretaker will soon become your jailer!) The quality and quantity of service is lacking, to say the least.

Another thing to add to your retirement budget will be long-term care coverage. If you have not started the purchase of this coverage, well, it gets real expensive starting at age 55-60. Oh, you say, you will pay for it on your own instead of buying the insurance. Costs today for care in a nursing home or at-home care averages $6,000-10,000 per month ($72,000-120,000 per year). Remember, a married couple can expect one of the two people to need nursing home services for at least five years. (That is $360,000 to $600,000.) Today’s costs can wipe out your finances. Where will it come from as people are living longer? These costs are going up at a rate of 15-20% per year.

Stop putting your head in the sand and develop a plan for you and maybe your parents, also. Unfortunately, most Americans have been brainwashed to not take responsibility for themselves. Sit down with a professional advisor, face the truth, and get to work on providing a comfortable future for yourselves.

Discipline or regret.

The Treasury wants to widen the pool of potential purchasers of Treasury debt. This will include impossible mandates (where they can do such things) and huge offering incentives (where they cannot get what they want). The rumblings do NOT look good for common folks like you and me.

One proposal is to require 401(k)s to hold a certain percentage of their assets in Treasuries at a risk of losing their tax free status. Another is encouraging pension plans to increase their portfolios with more Treasuries. Here is another… allowing companies with overseas cash to bring it home under a “tax holiday” as long as the majority goes into Treasury debt.

Under such plans (1) your 401(k) returns would be less over the long term, and (2) pension plans would need to increase their holdings from the present 6% to 16%, which would force companies to contribute more, costing companies more and forcing them to cut other costs (jobs).

Thus, Uncle Sam is trying to create demand for Treasury debt via the carrot and the stick. The good part… (hmmm) the U.S. is borrowing money from its citizens to stimulate the economy, so these same citizens will pay themselves back with higher taxes. This becomes an Abbott and Costello routine or a chicken and egg game.

As stated in this blog countless times, get out of your 401(k)s, or, stop contributing at least. Get into a non-qualified program that will grow tax free (not deferred); you take it out tax free and, when you die, it transfers income tax free.

1. My Retirement Paycheck

Regardless of how much consumers have saved for retirement, My Retirement Paycheck helps them figure out how to pay themselves through retirement with the assets they have. This holistically-focused site covers eight interrelated issues that affect users’ retirement assets and decisions, and provides resources for common retirement questions.
Visit www.myretirementpaycheck.org.

2. Smart About Money LifeValues Quiz

Talking about money with loved ones –and facing your financial influences—no longer has to be taboo. The Smart About Money LifeValues Quiz helps individuals discover how their attitudes and behaviors affect how they manage their finances and how to start the conversation with important people in their lives. Learn more about this tool for individuals and educators at www.smartaboutmoney.org/lifevaluesquiz.

Try the quiz in smartaboutmoney. You will find your results interesting if you are honest.

(1) For instance, a research paper from the pre-crash era found that 59% of workers expected to get a traditional pension when they retired. Unfortunately, 41% reported that they or their spouse were currently in a pension plan! This shows how a person’s expectations for retirement do not match with reality (no, the solution is NOT to watch more Reality TV).

(2) Many people that came into my office approaching retirement with $500,000 in an IRA or 401K felt they are “set for life”. Assuming present tax rates stay the same and using a 33% tax bracket, then, that account today, after taxes, is only worth $335,000. Using their current income needs, after tax, say, of $80,000 and a simple 3% Government Bond rate of return, that
money will be gone in less than 5 years after retirement. Hello Wal-Mart greeter!

(3) People counted on their homes, prior to the housing bubble burst, as their retirement nest egg. Unfortunately, if they sold the home at 65, took all the cash to live on, they never thought about where would they reside…under a bridge? Many had said to me, well, our house has doubled over the past 10 years. We can take that money and downsize to a smaller home. They forgot to add in that the smaller home they plan to move into, over the past 10 years, also doubled, so, they will not have as much as they imagined for retirement. Ah, yes, another money Myth-conception! (The housing boom gave many Americans a daily reminder of their investing savvy, of which they had nothing to do with the bubble, and created widespread overconfidence).

(4) Finally, I never tell people how to live or how to spend their money. I only ask them to analyze each “want” item (want versus need). How many “Starbucks a day” do you need versus want. How much vacation or shoes do you “need”. No, I am not a killjoy – rather – pause and think.

If you bought one Starbucks instead of two a day, at a $4 savings:

• $4/day for 6 days is $24/week.
• Over 1 year is $1248/year
• Over a 30 year period (age 35-65) at a 7.2% rate of return (tax free) would be a total of $121,845 lost, which equates to about $8800/year in lost income during retirement.

Oh yes, what do you have to show for that extra “Starbucks” you had at, say, age 42? It does not have to be “Starbucks”. You get my point.

Discipline or regret!