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By: Michael Brickey, Ph.D., ABPP
excerpted and updated from Defy Aging
The way to make a man rich is to decrease his wants.1
–Ossie Davis
Life begets life. Energy creates energy.
It is only by spending oneself that one becomes rich.
–Sarah Bernhardt
Note: Millions of Baby Boomers and future generations will be living to 100 and beyond. Managing finances is a vital skill for living well into your hundreds. This article addresses the financial realities of living a longer, healthier, happier life. It is not only an important issue for your own life, but also for counseling clients.
Wake up to a different world
When the U.S. Social Security system started paying benefits in 1937, the average life expectancy was 63. Forty workers were making contributions for every recipient. Most people contributing to the system weren’t expected to live long enough to receive benefits. It was not intended to provide a comfortable retirement, but merely a modest financial safety net or as Franklin D. Roosevelt put it, “some measure of protection . . . against poverty-ridden old age.”2 The U.S. life expectancy is now at 78 years and climbing. In 2012 Social Security starts taking on the 76 million member Baby Boom generation, which turns 66 (the full benefit age for Boomers) between 2011 and 2030. The “Baby Bust” generation (Generation X) that follows only had 44 million members to help fund Social Security for Baby Boomers and earlier generations. (Note, however, that Boomers span 18 years and Gen X only 13 years.)
Roosevelt picked age 65 from the German model. Ironically, the German model was based on a political ruse by Otto Bismark. Aspiring to be prime minister, he realized that his rivals were all over 65 and successfully championed legislation to institute a mandatory retirement program.
Social Security stretched its funds by gradually raising of the retirement age to an age more consistent with Americans’ health and longevity. Currently, only people born before 1938 are eligible for full Social Security benefits at age 65. For those born between 1943 and 1954 the full benefit age is 66. For those born after 1960, the full benefit age is 67. The age may be raised even higher for future generations.
People can wait until as late as 70 before drawing benefits and be rewarded with a larger monthly benefit. Social Security benefits are actuarially calculated so the total payouts are comparable for those who retire early, at full retirement, and at 70. Consequently, people in poor health might do better financially by taking early retirement, while people who expect to live into their hundreds usually would do better with waiting until age 70.
Other considerations include tax consequences, retirement benefits, and a spouse’s income and retirement benefits. While previously uncommon, more and more people over 62 are finding themselves with children under 18. These children are eligible for dependent benefits if the parent receives Social Security retirement benefits. This also may apply to stepchildren, grandchildren, step grandchildren, and adopted children who are primarily supported by the person receiving Social Security retirement benefits.
Politicians might try to help the funding problems by phasing in a means test on Social Security. With a means test, wealthier citizens and possibly middle income Americans would not receive Social Security or would only receive a portion of the full benefit. The same effect can be achieved by increasing the portion of Social Security benefits that are taxable. Tax code definitions of income can be critical to how much Social Security you receive (or can keep).
In 2010, high income workers do not have to make Social Security contributions on earnings over $106,800. That amount increases each year with increases in the national average wage index. With Social Security and Medicare underfunded, politicians are likely to make adjustments to contribution formulas, benefits, and/or the taxation of benefits. Overall, it is best not to count on Social Security.
Congress’ repeal of the Social Security earnings penalty in 2000 encouraged workers over 65 to continue working. (The earnings test penalized employment by reducing Social Security benefits by one dollar for every three dollars earned for retirees 65-69. This was in addition to having Social Security contributions deducted from their earnings. Once they turned 70, the disincentive no longer applied.) Those who take early retirement have a disincentive to work in that after $14,160 in earned income, Social Security retirement benefits are reduced one dollar for every two dollars earned.
Of the 76 million Baby Boomers, about a third are investing and saving. Another third live from paycheck to paycheck and will probably have to work well into their seventies. The other third or 25 million have family assets of less than a thousand dollars3 (excluding asset appreciation on property or stocks). Many Boomers will become financially comfortable from inheritances when their parents die. But many Boomers will be working well past 70 whether they want to or not.
Social Security will receive contributions from many people over 65 who are still working. As the population gets older, the political power of older people will grow. Politicians know that a much higher portion of citizens over 65 vote than those under 65. Citizens under 40 have an especially low voting rate. AARP (previously known as the American Association of Retired Persons) has 40 million members and growing. In the US, it is second only to the Catholic church in membership. It dwarfs the AFL-CIO with its mere 16 million members. Fortune magazine ranked the AARP the most powerful lobbying organization in the U.S.4
The plan
Most people spend beyond their means and worry about money. Even many rich people leverage their investments and are vulnerable to bankruptcy if their investments fare poorly. Money is important. Poor people have three times as many physical and mental health problems as people who are not poor. The truly wealthy, regardless of how much or little money they have, do not worry about money. The key to real wealth is to be happy living below your means.
The book, The Millionaire Next Door, provides hundreds of role models of people who are millionaires but choose to live modestly. These millionaires define material wealth in terms of net worth, not consumption habits. They know a fifty-dollar watch tells time just as well as a Rolex. Sam Walton (of Walmart fame) drove an old pick-up truck. Research5 in the U.S. and twelve other countries has consistently shown that people who focus on material success experience more depression and anxiety and have lower levels of vitality, self-esteem, and self-actualization than those who focus on relationships, self-awareness, and contributing.
Our plan for living long posits that you will probably be earning at least some income in your seventies, eighties and nineties and possibly beyond (this can be passive income). Thus, you don’t have to save enough for fifty years of income by the time you are 65. You do, however, want to have substantial retirement savings by 65 as your funds will need to last a lot longer than most people anticipate. As you continue to earn money and add to your savings, you will be in good shape financially well before your hundredth birthday. You want to keep your cost of living modest so you don’t have to be a workaholic to support your lifestyle and so you can afford to take time off to learn new skills, travel, or take sabbaticals. You also want to have contingency funds for unexpected problems.
Working past what used to be deemed retirement age isn’t just a matter of earning money, it’s also about having new challenges and feeling you are contributing. Living below your means enables you to be wealthy enough to change jobs or careers anytime you no longer find a job interesting and rewarding. If you love your work, you might want to stay with it for decades. If you become bored with your work, however, the price for staying with it is too high.
Few things age people faster than plugging away at jobs they don’t like. Some highly respected careers tend to foster burnout because of the tedium or repetition. Many attorneys eventually become tired of studying the legal minutiae. I can’t imagine being a dentist and filling teeth for a hundred years. On the other hand, some careers offer a strong sense of purpose and fulfillment and are less likely to foster burnout, e.g., professors, psychologists, clergy, and artists. It is what you find interesting and makes you want to get out of bed in the morning that is important.
If you need to change careers, it is time to consider what you really want to do. You might be able to capitalize on previous experience so you don’t have to start at the bottom of that career ladder. If further education is needed to acquire new skills or credentials, having savings makes it possible. People who think of their careers as lasting forty years often feel pressure to be constantly advancing their careers. If, however, you believe that you will probably be doing some kind of work for a hundred years, the pace is different. Instead you can believe:
It will be safest to have your savings and income diversified, e.g., home equity, stocks and bonds, annuities, and retirement programs including Social Security. Interesting financial tools include annuities and reverse home mortgages.
Annuities promise to pay you a set amount of money for the rest of your life. They often are not a good investment as they typically have a large sales charge up front. If you expect to greatly outlive the insurance company’s life expectancy tables, however, they can be a great deal. I also like the way the incentives are aligned – the longer you live, the more the benefits exceed your investment.
With reverse home mortgages the bank or mortgage company (or individual) pays you a monthly income until what you owe approaches the market value of the home. At that point you probably would need to negotiate a regular mortgage or sell the home. The arrangement is primarily beneficial for people who only expect to live or at least live in the home for another decade or two at most. When she was 90, Jeanne Calment arranged a variation on this theme that is fairly common in France. An attorney agreed to pay her $500 a month (“en viager”) for the rest of her life and he would own her apartment in Arles when she died. She lived to 122. He died at the age of 77 after paying over $184,000 (far more than the apartment’s value). His widow continued paying after his death.
Many people live beyond their means and survive from paycheck to paycheck. This fuels stress; for example, fears of what would happen if they lose their job or experience large unexpected expenses. People who want to live long would be wise to live within their means, invest in themselves, and anticipate the unexpected, including the need for periodic educational pursuits for career changes.
A longevity budget
I would suggest the following financial formula:
People who know their careers are secure and have no interest in changing careers might not need to set aside as much in funds for retraining.
Investments
People who plan to live well into their hundreds can take advantage of retirement benefits and annuities which pay for the rest of your life, no matter how long you live. These funds can also lower anxiety about “outliving your money.” Personally, I have always disliked life insurance as you are in effect betting that you won’t live long. Annuities and retirement benefits with monthly payments as long as you live, however, reverse the incentive and reward long life.
Since change is inevitable, it is not wise to count on any one institution lasting a hundred years. Instead, have income diversified in case one source becomes defunct.
Predicting what the stock market will do tomorrow challenges the skills of full-time, highly paid experts. Knowing how to be financially healthy for the next hundred years is even more difficult. People who are wealthy can diversify their wealth and obtain good advice on how to make sure their money lasts a lifetime.
When it comes to investing, some people are lucky (e.g., their company gave them stock over the years and it did fabulously), some have a knack for investing, and many are lambs ready for slaughter. It’s important to know where you are in your evolution as an investor. Not everyone is suited to do well in the stock market for a variety of reasons including lack of interest, lack of technical knowledge, and, most commonly, lack of emotional discipline and fortitude.Research suggests:
Term insurance usually is a better financial decision than life insurance. If you believe you will live well over 100 years, the only reason for having term insurance is if you have young children or a dependent spouse and want to provide for them if something happens to you.
To these observations, I would add the following advice:
Resources
The Millionaire Next Door by Thomas Stanley and William Danko provides role models of hundreds of millionaires who earned their wealth and chose to live below their means. Stephen Pollan’s Die Broke sounds irresponsible but is actually a very conservative call to sanity for Baby Boomers. He advocates working for yourself, paying cash, eschewing credit cards, and working all your life. The die broke part? Well, you can’t take it with you. If you are serious about speculative stock market investing, The Disciplined Trader makes a convincing case that 80% of investing is psychology and personal discipline and provides a unique insight into the mental discipline it takes to succeed.
1 Davis, Ossie. (1992). In Phillip L. Berman & Connie Goldman (Eds.), The ageless spirit, (pp. 66-67). New York: Ballantine.
2 Roosevelt, Franklin. (1935, August 14). President Roosevelt’s statement when signing the Social Security Act of 1935.
3 Research and Policy Committee for Economic Development. (1995). Who will pay for your retirement: The looming crisis. Edited by the Committee for Economic Development.
4 Birnbaum, Jeffrey. (1998, December 7). The influence merchants, Fortune, 138, 134-152.
5 Kohn, Alfie (New York Times News Service). (1999, February 7). Psychologists prove adage: Wealth can’t buy happiness, Columbus Dispatch, Insight section. (The article was based on numerous studies by psychology professors Richard Ryan and Tim Kasser.)
6 Kuhle, Jaemes L., & Pope, Ralph A. (2000). A comprehensive long-term performance analysis of load vs. no-load mutual funds, Journal of Financial and Strategic Decision, 13, pp. 1-11. http://www.studyfinance.com/jfsd/pdffiles/v13n2/kuhle.pdf