A newer version of the platform is available. Please refresh the page.
Sign Up to Get information about Sales & Events Click Here
A newer version of the platform is available. Please refresh the page.
By Michael Brickey, Ph.D., ABPP
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
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 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 that follows only had 44 million members to help fund Social Security for Baby Boomers and earlier generations.
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. The choice of 65 is that arbitrary.
Social Security will be stretched and stretched and something has to give. One adjustment is the gradual 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. In 1960 the age becomes 67. Politicians might place 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 what is paid to lower income citizens. If this happens, legal definitions of income can be critical to whether you receive Social Security. Currently (1999 taxes) high income workers do not have to make Social Security contributions on earnings over $72,600. Politicians are likely to continue raising this ceiling. This only affects people while they are earning high salaries. Overall, it is best not to count on Social Security.
Congress’ repeal of the Social Security earnings penalty in March, 2000 will also encourage 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 earnings limit disincentive no longer applied.)
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 still 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. The AARP (American Association of Retired Persons) has 32 million members and is growing rapidly. It is second only to the Catholic church in membership. It dwarfs the AFL-CIO with its mere 13.3 million members. Fortune magazine ranked the AARP the most powerful lobbying organization in the U.S. 4
In the U.S. half of the nation’s health care dollars are spent on the last six months of people’s lives. For Medicare funds, the proportion of funds spent in the last six months is even higher. Often this care is for intrusive treatment, life support equipment, and hospital/nursing home stays that do not promote life but only prolong death. You might want to consider a living will that stipulates that you do not want extreme medical procedures performed if they would not give you a reasonable quality of life but only prolong death. Eventually, Medicare will have to make some tough choices about how to triage these medical expenses.
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 Wal-Mart fame) drove an old pick-up truck. Research5 in the U.S. and twelve other countries has consistently shown that people who focuson 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 for several decades of retirement income by age 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 financial shape 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 just 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 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 burn out 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, it is worth the investment. Part of the formula for living to be 150 is to be a lifelong learner. People who think of their careers as lasting forty years at the most 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:
I will probably want to have several different careers. This will make life interesting and allow me to live what would have been several lives for others.
I have enough time and financial resources that I can afford to start over with careers and start at the bottom if I think another career path is sufficiently rewarding.
I’m more interested in personal fulfillment, contributing, and enjoying my career or job than setting new sales records.
It’s like Frank Sinatra sings, “Let’s take a trip to Niagara–This time we’ll look at the falls.” 6
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 normally 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 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.
The basic tenants of the plan are:
A Longevity Budget
I would suggest the following financial formula:
Investments
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. Certainly people who are wealthy can diversify their wealth and obtain good advice on how to make sure their money lasts a lifetime. People who plan to live to 150 or longer can take advantage of retirement benefits and annuities which pay for the rest of your life, no matter how long you live. Since the one thing we can count on is change, it is not wise to count on any one institution lasting a hundred years. Instead, have income diversified in case one source becomes defunct. 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.
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 has consistently shown:
Mutual funds, advisory newsletters, and professional investors rarely do better than the Standard and Poor’s 500 stocks index–and that is before their fees are deducted. 7 Consequently, it is usually wiser to purchase an index fund than most mutual funds. The fees are lower as well. Another option is Stanton’s8 strategy of buying a portfolio of several stocks that are on his list of “America’s Finest Companies.” Criteria for these 400 companies include at least ten straight years of increased earnings per share. He updates the list each year.
Over time, no load mutual funds have performed as well as mutual funds that have a load, making no load funds preferable in most cases.
Most individuals who invest in stocks have results that underperform the market. If that is your experience, you would be wiser investing in an index fund or buy and hold blue chip stocks. These strategies also have the advantages of requiring far less of your time studying the market and fewer expenses (stock commissions, books, newsletters and newspapers). Many people, however, cannot resist the temptation to pick the next Google. If this is the case, set aside 10% of your funds for speculation and put the other 90% in an index fund or blue chip stocks.
A strategy that can limit your losses is to purchase a variety of sound stocks and put a “good until canceled stop loss” order on each at 10% below the purchase price. A stop loss order instructs the brokerage company to sell the stock at the market price if the stock falls to your limit price. This will ensure that if the stock (and possibly the market as a whole) plummets you won’t lose more than 10% (actually you also need to subtract commissions and lost interest and add in any dividends you received). If the stock goes up, you can periodically raise your stop loss price so that even if the stock goes down and is automatically sold, you still make a profit.
While hard to find, there are annuity stock funds or index funds that mark the value of the fund at the end of twelve months and guarantee your savings will never be lower than the highest year end figure. Caution is needed as some of these funds have deceptive formulas that only appear to offer this benefit.
Term insurance is a better investment than life insurance. If you believe you will live well over 100 years, the only reason for having a modest amount of term insurance is if you have young children or a dependent spouse or family member and want to allow for the possibility of adversity such as an automobile accident.
To these observations I would add the following advice:
If your investment strategy works for you, it is probably best to continue that strategy until there is reason to believe that the circumstances have fundamentally changed and invalidate that strategy–and eventually the circumstances will change.
If you are not willing to make a soul searching examination of your investment psychology and strategies, learn the logistics of investing, and put time into following your strategy, it is probably best to avoid speculative investing and stay with a conservative investment strategy, e.g., a balanced, conservative portfolio.
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.
References
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. Adair, Tom, & Dennis, Matt. (1941). Let’s get away from it all.
7. Stanton, Bill. (1998). The America’s finest companies investment plan. New York: Hyperion, pp. 63-66.
8. Stanton, Bill. (1998). The America’s finest companies investment plan. New York: Hyperion.M