It is well-known that the number one fear among human beings is public speaking. The number two fear is death. It is my contention — and I don’t have any data to support this, yet — that rapidly moving up the ranks are “snakes” and “outliving one’s money.”
One version of the American Dream has morphed from “Doing better (achieving higher socioeconomic status) than your parents did” to “Retiring younger than your parents did.” The trouble, though, is that people are born more recently than their parents, and — as life expectancies have improved — can expect to live longer than their parents will. Living longer with a goal of retiring younger could spell trouble for today’s dreamers.
Has the American Dream become the American Nightmare?
When I was born — in the 1970s — the average life expectancy was 72 for males and 74 for females. But today, having made it this far, the Social Security Administration’s actuarial calculator tells me I am now likely to last until 82 rather than 72. If I were a female that number would now be 86. The longer I’m around, the longer I’m likely to stick around. This sounds like good news, right? Well….
Either way, there is a growing gap between the age at which we’d like to stop earning money (retirement) and when we’d like to stop spending it (death). Some additional headwinds for millenials:
1. The number of companies offering pension plans to employees has been dropping faster than Paula Deen’s list of sponsors.
Just fifteen years ago, 90 of the companies in the Fortune 100 offered some sort of pension plan to their employees. Today, that number is 30, and 19 of those are merely a “hybrid” pension (not necessarily a guaranteed income stream for life). Read more here. The onus of one’s retirement responsibility has shifted squarely from the employer to the employee. And how many of these employees are prepared for that level of responsibility?
2. Social security, once a reliable source of future income, is now the butt of jokes.
I have recently run financial plans for people who asked me to leave Social Security income out of their projected future income, just in case. Additionally, provided Social Security is still available when you need it, the age at which you may begin collecting benefits is being pushed back.
3. Calculating the true cost of today’s education requires an education.
Generally speaking, the overwhelming majority of today’s young people attend or plan to attend college — of course, some go on for even more advanced (and expensive) degrees. In addition to the added expense of staying in school longer, this means the individual is cutting into some of his/her prime earning and saving years. And everyone knows these costs are not only increasing, but actually accelerating as demand trumps supply. So, as a trend, we are delaying our working/earning, and we are borrowing — at an increasing rate — to do so.
Enough about the problem, what’s the solution?
The solution, I believe, is two-fold. Younger investors need growth (equity exposure) and they need to maximize the power of compounding interest, which can be done via tax-deferred investment vehicles. Money in a taxable savings or brokerage account earning interest, or invested in low-interest-bearing securities, is not a long-term plan. The promise of returning your principal at some point in the distant future is no longer worth what it used to be — 100 cents in the future is not worth the same as a dollar today. A dollar today represents an opportunity for the return of much more than a dollar in the future. And if I can invest that dollar in an IRA or 401k, I remove the ongoing obstacle of capital gains and ordinary income taxes until I take it out.
“The most powerful force in the universe is compound interest.”
It is my opinion that the risks associated with principal protection — opportunity cost; loss of purchasing power due to inflation; and low returns — currently outweigh the risks of investing in a diversified portfolio of domestic and international stocks (especially when coupled with real estate, commodities, and other alternatives). No one concerned about his blood pressure enjoys the stock market’s volatility, but learning to get more comfortable with it could be a key ingredient to long-term financial success.
You’re working hard for your money, why shouldn’t it work hard for you?
Have a great week!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main
(310) 496-2822 – Fax