Forces that Shape Your Future

by Ed Morrow CLU,ChFC,CFP(r),CEP,RFC(r) 

Four massive forces that you cannot change are now shaping your future.  They are solidly in place and they will not go away.  They are like the tides that ebb and flow, like the sun that rises and sets, like the seasons that change every year and the moon which alters its “shape” causing it to dim and brighten every month.  They are happening and they will continue to happen. You cannot change these forces, but you can modify your behavior to reduce the damage.  Farmers plant crops at certain times of the year, workers arise in the morning and return home in the early evening.  Sunbathers will wear protective clothing, hats and creams. Let’s examine these forces first with an overview, then looking at each in detail.  We will evaluate how to determine their impact on you personally, and on all the members of your family.

The Cost of Living is Rising

People Are Living Much Longer

Medical Treatment Costs are Rising

Employers and Governments Cannot Solve This 

This sounds depressing.  However, as Bill Nelson, LUTCF, RFC^® of Dayton Ohio repeatedly says, “If you are going to receive Bad News when would you prefer to get it?  Now, when you might deal with it – or much later when you can no longer affect the results? 

Rising Cost of Living.  It has been happening for a long time.  To some extent, this is because we all have new standards of living – much higher than our parents and grandparents.  How much did your grandparent pay for cable TV, Internet connection, cell phones, designer clothes, convenience and fast foods and fancy four-wheel drive automobiles? 

My two grandfathers were not typical.  Each had both an undergraduate and graduate degree.  One was an attorney and the other a physician.  Each, in their own profession, was highly regarded.  But they lived modestly.  They did not have chauffeured limousines, nor did they live in multiple homes, or vacation on yachts and visit tropical resorts.  They did not have expensive artworks or stock portfolios – and of course no TV, cell phones or computers.  Each of them died with out debt and with only a very modest inheritance for their widows.My father’s mother survived her husband by 22 years, passing on at age 83.  My mother’s mother survived her husband by 24 years, passing on at the age of 103. 

Each of my grandmothers was widowed for more than 20 years.  During their widowhood, the cost of living more than doubled.  Had they not held some appreciable assets (securities and real estate) they would have become destitute. 

The Future.  For some the passage of decades brings financial improvements, for others it condemns them to a life of dependence on the government or on their family.  However, the family structure is changing worldwide.  Children do not live in the same suburb, city or even the same country as their parents and grandparents.  The idea of “moving in” with family is no longer an eligible option. 

You will Experience Cost of Living Increases.  This is not exactly the same as inflation.  Some aspects of your cost of living increase faster than inflation - such as medical costs and insurance.  In other respects, it is new lifetime standards – such as internet, cell phones, TV and transportation and more meals in restaurants that increase your living costs. 

What Can You Do? Fight to maintain the lowest standard of living possible.  Do not become prey to advertising that urges you to spend hard-earned wages for luxuries.  Do you need a bigger car with 4-wheel drive?  Do you need a three foot wide TV; Do you need… all those other items displayed in glowing color on your TV screen.  Does Wal-Mart (and other major stores) drive your needs – or do you use the improved pricing of those stores to reduce your cost of living?  My guess is that despite the lower cost, you are buying more goods and services – some of which are not truly necessary. 

How soon can you address this problem?  Now!  It will require time to shift your standards, but you can, and should, start now. 

People are Living Longer!  That is great news.  They are also living more physically fit.  None of my grandparents exercised, neither did my parents.  And neither did I for many, many years.  Was this wise?  Of course not!  But I am exercising regularly now, and you should be doing so as well.  Exercise makes the body feel better and will permit you to enjoy your extended retirement with greater strength and vigor. 

Living far longer is causing dramatic alteration in lifestyle.  Because you are healthier and stronger, and because most work today is less dangerous and less exhausting, persons are expected to work longer.  Gradually, the expected retirement date is moving from age 60, past 65 and is now approaching age 70.  Despite moving retirement to age 70, persons are still living much longer after retirement.  This requires much more capital.  If the life expectancy for a couple is that one of them will live to age 95 – that does not mean that both will be gone then.  Life expectancy means, “You can expect that in a certain number of years one half of the persons your age will have died and one half are still living.” 

A joint life expectancy means that the odds are that one of the retirees, and possible even both are still living long after the single expectancy date.  This counters the conventional understanding. 

Belief:  If I am age 65 and my life expectancy is 20 years, then I should plan for only 20 years, until my age 85, because I’ll be dead by then.” 

Reality:  Of all persons now age 65, one half will still be living at age 85 and of the remaining survivors, some may live to 90, 95, 100 and perhaps even age 110! 

Impact:  You must calculate your income capital needs well beyond your life expectancy. 

Medical Costs are Rising Sharply.  To some extent, this is good.  Modern medicine is currently the primary factor in the vast improvement in both the length and quality of life.  Some of this is research that has reduced epidemics and provided simple detection and prevention of ailments that used to be fatal.  Sanitation and the quality of food has improved dramatically – all providing longer life. 

But treatment is expensive – and the rate of increasing costs far exceeds the rate of general inflation.  We are referring to medicines, equipment, therapy, surgery, hospitalization and the cost of personnel – employees in clinics, hospitals and physician offices.  As age increases, so does the need for medical treatment.  

According to the National Coalition on Health Care in 2008 medical costs increased 6.9%, twice that of inflation.  The average premium for a family of four was $12,700 and for a single person, $4,700.  In the past half century healthcare increases have been more than twice that of general inflation, according to the Kaiser Family Foundation - and there is no end in sight for that trend.    

Cumulative Compounding.  Every current and future retiree is facing a future of increasing cost of living and increased period of living.  This is not being offset by dramatic increases in investments, nor will it be balanced by more financial support from employers and governments.   

Worldwide, employers are realizing that they cannot offer an ever-increasing retirement income.  Furthermore, they cannot support full medical treatment for all citizens – children, workers, unemployed, and retired. 

You Might Ask, Why Not?  The reason is that the percentage of workers contributing labor and taxes is dwindling – in comparison with the pool of persons to whom some would shower with free support and medical care.  The demographic studies are overwhelming – the tax base is shrinking! 

Where is the Relief?  It must come from the individuals and families who have the foresight and ability to provide their own financial security.  This involves complex projections and tax analysis – beyond the practical ability of the consumer, although not beyond their understanding. 

If Your Net Worth is not Growing, Then Your Future is in Peril! 

Part of the solution generally requires that more be invested.  This will require more careful spending.  It also necessitates quality health insurance, and a balanced investment plan.  Another element is to fully recognize the personal life expectancy, not just that of society in general. 

Longevity is a Moving Target. The following table totally disregards the genetic make-up, prior health record and current lifestyle.  However it points out how the issue of Life Expectancy is a moving target.  The longer you live, the greater your life expectancy.  For example, suppose you are now 45, and your Life Expectancy is 83.  At age 85 you are feeling rather proud of yourself, you have exceeded your expectancy - you are part of the half that lives longer than the average.  Now your target is age 92.  You check again at age 90 and you still can anticipate an expectancy of 5 more years.   

Except these are numbers from current actuarial studies – they do not take into consideration that future decades will bring more medical solutions to prolonging the length and quality of life.