Monday, July 6, 2009

You’ll Most Likely Live Longer Than You Think

What a couple of weeks we’ve had. All of a sudden it seems like everybody is passing away – from Ed McMahon to Farrah Fawcett to Michael Jackson and Billy Mays. In light of all these people’s deaths, I wanted to bring some interesting statistics to your attention.

Centenarians (those aged 100 and beyond) are the fastest growing segment of the American population. In April 2008, Carl Bialik wrote a column in the Wall Street Journal titled “Hallmark’s Census of Centenarians” in which he reported that Hallmark – you know, the greeting card folks – sold 85,000 one-hundredth birthday cards in 2007. Yeah, some people might have received multiple cards, but Hallmark is not the only place you can buy birthday cards for 100-year-olds. From whichever angle you look at this, I believe it is an unprecedented statistic.

This shouldn’t be a huge surprise, though. You don’t have to be a sociology expert to realize that humans are living healthier, hence longer, lives. Chances are decent that you have a gym membership, even if you don’t use it as often as you should. Or perhaps you are all about the organic, fat-free, cholesterol-free, caffeine-free foods, as well as yoga, meditation, and other good-for-you stuff.

Well, thanks to the healthy living habits and advancements in medicine, the US Census Bureau reports there were about 51,000 individuals age 100 and beyond in the year 2000. In 2010, that figure is projected to increase to 131,000, and to reach 1.1 MILLION by 2050! Mortality experts are telling us that a baby girl born today has a possible life expectancy of 137 years!

Most of us are in the habit of gauging our life expectancies based on how long our parents lived or what’s happening around us. I’ve met a few folks this past week who seem to suggest that age 50 seems to be the norm now. Statistics and facts show differently. The healthy living stuff is working!

Not too long ago, life insurance companies assumed that rarely would anybody live beyond age 95 – which is why life insurance policies endowed at age 95. Quite recently, the mortality (life expectancy) table was updated so that life insurance policies could now endow at age – take a wild guess – 120! What could possibly be the reason? And there is already talk of increasing it to 140!

Okay. I’m hoping I have successfully convinced you that you’ll probably live longer than you thought. So now what?

In the past, people had about 45 years to work and save money for retirements that lasted for about 10 to 15 years. Today, we have those same 45 years for working, but we are looking at 20 to 30 years of retirement, meaning it’s a totally different ballgame. And you definitely want to be sure that your nest egg will last as long as you do.

Here are 4 things you CANNOT afford to do with your nest egg:

1. Stop saving because of the condition of the stock market.

I understand that it sucks when the market is down. But to quit funding your retirement because of that is dangerous. I’ll bet stock market and 401(k) advisors are liking me right now … until they read my next statement.

As we have always taught, the stock market is not the best place to accumulate retirement wealth. In other words, if you are using an accumulation vehicle that causes you to question its validity and ability to help you retire – to the point that you decide to quit for a while to prevent losses – you are not in the right place.

Our clients do not have that problem because they do not lose a dime when the stock market tanks, yet they make money – based on a stock market index – when the times are good. They know at the very least that the money they are saving is guaranteed to be there, so there’s motivation to save as much as possible instead of stopping to play it safe.

2. Keep losing the money you put into the stock market.

What I’m trying to say here is that you hurt your chances of a nicer retirement each time your account takes a hit. Although some so-called experts would have you believe that if you invest in the stock market with a “long-term” view, your retirement will somehow turn out great, my position is that long-term – whenever that is – is equal to the aggregate of the results that have occurred over shorter periods. If you keep losing in the short term, guess what has to happen when the long term hits?

We do not invest our clients’ serious cash in the stock market, and guess what? They are doing just fine. Actually, they are doing great, better than most Americans. In spite of the market’s cataclysmic drop, our clients have not lost a penny of their investments’ values. How would you have felt if your account earned 5 percent interest last year while the S&P 500 lost over 30 percent? By the time you recover to your break-even point – and no one knows how quickly that will happen – where do you think our clients’ accounts will be? Much larger, of course. I’m sure you get the point.

3. Park your money at a place where your NET (after tax + fees) return is less than the rate of inflation.

Usually, when most folks who have their money invested directly in the stock market “pull out,” they instead invest in cash instruments like CDs and money market accounts.

These vehicles traditionally earn lower returns, which net out – in most cases – to a negative, compared with inflation. That’s not good from a financial perspective, but they usually feel great because they got out and prevented even bigger losses.

My take? Employ a strategy that guarantees you won’t lose money due to market risk, and that will allow you to earn returns linked to a stock market index – because it’s great when the market is performing well. Such a move allows you to lock in your gains, from year to year. That’s what we put together for our clients because it makes sense, it’s proven and time-tested, and above all, they can sleep at night.

4. Use qualified plans like 401(k)s, 403(b)s, and the like which simply postpone your tax liability to retirement, or whichever time you make your withdrawal(s).

It simply is a very, very bad idea to cut a deal where Uncle Sam decides how much he wants to keep in the future (tax rate) before you get to spend the remainder.

I’m not a fortune teller, so I cannot tell you what the tax rates will be when you retire. But realize that your financial advisor or 401(k) expert is not, either. Just take a wild guess whether tax rates are likely to be lower, the same, or higher in the future. And bear in mind that Uncle Sam HAS to pay for the humongous budget deficit, as well as the unfunded liabilities of Social Security and Medicare (which we will discuss in detail at a later date).

Let’s end with this exercise:

Assuming a 33.3 percent marginal tax bracket (for easy math) and an interest rate of 7.5 percent (again for easy math), how long do you think a $1 million nest egg would last with a net income of $75,000 (meaning we’ll need to withdraw $112,500 to pay $37,500 in taxes) annually? If you do the math, that $1 million would be totally depleted in 14 years.

On the other hand, if it were income tax-free (like what we implement for our clients), in 14 years there would still be $1 million left. Because netting $75,000 would require a withdrawal of $75,000 – income tax-free!

1 comment:

  1. Samuel this is really good1

    Donna Waldron


Chime in with your comments or questions: