It has never been more difficult to maintain one’s financial stability during retirement. Wages have not kept up with inflation in regards to consumer goods and property prices. Even the state of Social Security is in jeopardy. With an aging population and lower birth rate, future generations will likely not be able to support those heading into retirement. As a result, it’s more important than ever to take control of one’s financial future. This is to ensure there are sufficient economic resources to provide a decent quality of life in one’s golden years.
Another major concern for future retirees is the state of Medicare. Estimates show that Medicare spending will double in the next decade. In 2019, a total of $630 billion was spent on Medicare. By 2029, this number will grow to just over $1.3 trillion. With an aging population and low birth rates, the amount of coverage Medicare will offer will almost certainly fall. As old age is heavily associated with medical issues, this poses a massive problem for those whose economic resources don’t allow them to pay for items Medicare doesn’t cover.
It is important to understand that this projected increase in spending is only over the next decade. Medicare can be reasonably assumed to have an exponentially higher come retirement age for those under the age of 40.
A background on retirement and finances
Following World War II, people spent on average five years in retirement. Currently, people can spend between 25 and 30 years in retirement. This is a huge change in the way Americans look at retirement between the post-war and current ideologies of fiscal security.
If one plans with an old view of retirement, they will not find themselves in a favorable position in their later years. This is especially true in many parts of the US where property prices have made it unaffordable to own a home. This is a major factor that many people overlook as a result.
In decades past, homeownership was commonplace and easy to achieve. These days it is becoming less and less so. Those who do not have a house of their own will be forced to pay rent to live, which is not incorporated in the traditional view of retirement.
It should be clear that one cannot take retirement for granted. There is no room to rely upon social programs such as Social Security and Medicare for well being. It is up to the individual to make sure they have what they need for a comfortable and fulfilling retirement. The first step in taking action is knowing what one is up against. Here we will look at 7 wealth threatening items one needs to be aware of.
It is often the case in life that we are our own worst enemy. Personal spending habits or attitudes towards finances can have a major impact on one’s retirement. The most obvious example of this is not saving or spending without discipline. There is also the unavoidable reality that our cognitive abilities decline as we age and our insurance premiums increase as well. These cannot be avoided. The only thing one can do in this case is to try and live a healthy lifestyle in order to minimize future medical issues.
When it comes to investing, we can often be stubborn and develop an emotional attachment to the investment choices we make. Many people have a hard time cutting their losses on poor investments. They find themselves emotionally invested in a stock or investment vehicle and don’t pull out until it is too late.
Poor returns on long-term investments
Savings alone simply will not be enough for retirement. One needs to invest. Generally speaking, investment risk is mitigated by long term investment periods. Investing in hopes of a large return over five years is considerably risky whereas investing over a 25 or 30 year period is significantly less so. Still, it is possible to have investments that simply do not perform well enough in the long term. A return of 6% instead of 10% compounding over 30 years is massive. Those who are under 40 should consider splitting their investments into vehicles with different levels of risk. One can always pull the plug on a high-risk investment that goes bad while still having the comfort in knowing that their long term, low risk, investments will still yield returns.
It is also necessary to stay vigilant. Learning basic economics, such as how the Monetary system works and how it impacts economic conditions as well as market cycles, is a necessity for anyone who wants to stay vigilant over their retirement investments.
Predatory creditors and opportunists
The world is not a perfect place if it was there wouldn’t be the need for this type of article. As people grow older they become targets for creditors, scammers, and conmen. This is because the elderly have usually fallen out of touch with the current technological and cultural environment. Although it wasn’t always the case, in modern times being an older member of society usually means one is viewing it from the outside. This is what scammers prey on. Many people have been conned out of a large chunk of their retirement resources.
There is also the issue of predatory creditors. “The older one is the less amount of time they will have to pay back a loan. This makes the loan riskier for the lender and results in raised interest rates.” writes a finance writer at Academized and Thesis Writing. A comfortable retirement should not involve debt.
Lower than expected withdrawal rate
The general rule of thumb is that one should not withdraw more than 4% of their retirement account each year. This is a rule that most people plan on but studies have found that in reality, the average amount people withdraw is closer to 2.8%. This is a marked difference and one has to seriously consider what kind of lifestyle they want to live. “For sake of example, let’s say an individual has $100,000 in their retirement account. The 4% rule would result in them withdrawing $4,000 per year. The 2.8% reality would mean only $2,800 per year. This can be the difference between a well-planned retirement and one that leaves the individual wishing they had more.” writes Beth Karson, a retirement manager at Finance Writing Service and Big Assignments.
As mentioned in the introduction, wages have not kept up with inflation for the vast majority of consumer goods. Some items, due to improvements in the manufacturing process, have become cheaper, but this is the exception, not the rule. Anyone, young or old, can expect inflation to be a mighty foe in the future. This is especially true as governments are running larger and large deficits and spending more and more money. This increased spending requires an increase in the money supply, making each individual dollar worth less and with lower buying power.
It is easy to forget that prices will steadily increase, and planning for what items cost now is a poor strategy. Although the last few years have seen lower than average inflation rates, these are not expected to rise. One should plan for at least a 3% inflation rate year over year.
The Dodd-Frank Act
As a result of the 2008 financial crisis, banks were initially bailed out through the TARP program. They would later be offered access to easy money via numerous rounds of quantitative easing. In 2010, the Dodd-Frank Act was signed into law, which made it clear that should another financial crisis arise, financial institutions will no longer receive a government bailout. The responsibility would lie upon shareholders and anyone unfortunate enough to have their funds in a failed bank. For this reason, one must choose the right financial institution.
Taxes are likely to increase
While politicians on capitol hill spend their days arguing over the best way to allocate funds they always seem to agree on increasing government spending. Increased government spending means higher taxes. A good example of this is in regards to Medicare needing to treat more people in the future with fewer taxpayers. The only way to increase spending when fewer people are paying into the system is by increasing the amount.
Social Security used to be tax-exempt but this has been done away with for many income brackets. Taxes on social security payments can also be expected to increase as the system will find itself thoroughly tested in the decades to come.
Pending some large scale economic crash, it can be assumed that the government will continue to increase the deficit. Deficits work because the government can guarantee its creditors that it will be able to make interest payments on the loan. This guarantee comes in the form of income tax. To borrow more money the government will have to increase taxes.
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