If you are retired and depending on fixed income investments and Social Security to sustain your lifestyle, you are very likely not better off than you were four years ago.
We recently interviewed a group of retired and financially savvy elders. What they had to tell us was disturbing.
Following are excerpts from those interviews woven into one narrative that is being played out tens of thousands of times across the United States. There is also some good financial advice for seniors in the recorded passages. Here is how the story goes:
“I have been retired for over ten years. I worked hard all my life to save enough money that when combined with my Social Security income – and a little frugality, I would have enough to live comfortably in my golden years, and still be able to financially aid my friends and family if circumstances dictated. Until 2008, I was doing fine.”
The stock market
“After the 2007 market crash, I held onto my stock investments even while their value dipped some 35%. It was very scary, but I had faith that the market would come back in a reasonable time. Additionally, many of my value stocks paid relatively good money in dividends, and I was getting a little additional perk from those dividends because of favorable tax treatment.
The market slowly came back to where my losses are not too painful. My dividends held up, and several actually increased. Now there is a movement afoot in Washington to reduce my income by changing the tax rules regarding dividends and capital gains. If that happens, I may take my money out of the stock market and put it where it will be safer.”
Fixed income investments
“After my retirement and as part of my plan, I faithfully laddered CDs to compensate for swings in interest rates. I owned 10-year, 7-year, 5-year, and 2-year instruments. Before 2008, my CDs were paying upwards of 5% on average.
I had also purchased several corporate bonds and bond funds. Again, the average yield was in the 5% range, which was enough to beat inflation and sustain my retirement plan.”
US I Bonds
“The government allows each citizen to purchase $10,000 per year of US I Bonds. Part of the I Bond interest formula is based on inflation, so they currently pay a little more than most CDs – few CDs pay more than the inflation rate, and all pay less after taxes. When I have money available, I buy part of my annual allotment of I bonds.”
“Listening to select advisors, I found small ways to boost income yield as my old CDs matured. Of course, I was not able to replace them at anywhere near the original average interest rate, but I was able to maximize my income by buying longer term instruments, and I bought them from credit unions instead of banks. I also purchased some guaranteed annuities from insurance companies. Notwithstanding these moves, my cash flow has begun to decrease.”
“In the near future, I will not be able to live off my investment interest and Social Security alone. I will have little alternative but to dip into my principal, and must also consider a reverse mortgage on the reduced equity in my home – an asset whose value has not rebounded. I have no mortgage on my house. I had hoped to will my home to my children when I died. That is no longer likely.”
“I am now too old to go back to work, and therefore cannot replace my savings, and I am having great difficulty preserving them. All my years of sacrifice and saving for retirement are no longer enough. I don’t know what I will do if I run out of money.”
We heard similar stories from many of the seniors we interviewed.
Enter the government programs
Government “stimulus” and “easing” has done nothing for our elders. These failed programs have kept the lifeblood of retired seniors (interest rates) at record lows.
Today’s money rates may help those who are still working, wanting to buy a car, looking to borrow for a house, or to obtain a loan for other purposes. However, the low rates are a catastrophe for those depending on interest income to live. The plight of our elders has been universally disregarded.
Few, if any of today’s money market, CD, or safe bond income instruments keep up with inflation. The easy money policy is like death by a thousand cuts for seniors trying to survive on safe fixed income investments.
To add misery to pain, the government plans to take $716 billion out of Medicare – and away from those who can no longer work – to help finance health care for millions of uninsured, many of whom are young and fully capable of working.
Seniors by definition need more medical care than any other group. There will be millions more patients competing for appointments to see the same number of doctors – perhaps fewer doctors. How will those doctors chose their patients? Will Medicare recipients end up at the back of the line?
With our out of control government spending, the Fed will do whatever is necessary to minimize the interest the US pays on its debt. Once again, these moves keep interest income rates below inflation rates and thereby hurt disadvantaged seniors.
To make matters worse, many seniors are moving safe money investments into speculative ventures in a risky attempt to increase yields. Such moves can have dire consequences in an economic downturn.
The massive borrowing and accumulation of national debt will eventually lead to the further deterioration of the credit worthiness of the United States. Eventually, even the Fed will not be able to print enough money, or control the interest rates we must pay to continue borrowing for our growing entitlement programs. We are going to face a financial crisis – the only question is when.
Seniors and the stock market
Even in old age, it pays to be diversified.
The Bogle formula (Vanguard founder) is to keep the percentage difference between your age minus 100 invested in the stock market, e.g. if you are 80 year old, 20% of your invested assets should be in stocks or equivalents as a hedge against inflation. Many financial planners who advise seniors recommend the formula to their clients.
Consequently, the money that seniors do not have invested in fixed income generating instruments, they often have in mutual funds and ETFs that spin off income in the form of dividends and capital gains.
To the further detriment of elders, the present administration wants to eliminate “risk” advantages by increasing the tax rates on dividends and capital gains. As much as the government would like us to believe, it is not only the wealthy that will be impacted by these actions.
Tax the rich
If the government took all the income from the so-called one-percenters, there would not be enough tax generated to get us out of our current financial mess– there simply are not enough one-percenters.
The real money is, and always has been, with the tens of millions of middle-income Americans and retired seniors. It is only a matter of time before the middle-class and retirees must be tapped to feed the interest payments on the growing deficit.
Much of today’s redistribution of wealth works on “income” considerations, but how long will it be before a “means test” is added to the spread-the-wealth formula?
Let’s say you have saved all your life and have amassed a reasonable nest egg – but it does not generate much taxable annual income. A taxpayer’s net worth might be considered an equally fair method of determining the amount of Social Security and health care benefits to which they are entitled.
If taxpayers are not found “needy” by government regulators, they might be required to share their Social Security benefits with those less fortunate until they too are in need of help. At which time, assistance will presumably be available for them from the government. Is the end game for all Americans to be dependent on the generosity of government appointees?
Even the possibility of the above situation challenges the current “wisdom” to wait until age 70 to start drawing Social Security benefits. What if the government, desperate for taxes, decides to means test Social Security just before your 70th birthday. If you are judged to have too much assets or savings, you might forfeit years of benefits. Had you elected to take early benefits, they can’t take away what you have already collected.
Some officials would have us believe that saving for a “rainy day” for the benefit of family and friends is not prudent, but greedy. It is always worth reminding our legislators on election day that it is taxpayer money that they are talking about. You earned and saved throughout your life. You should have a great deal more to say about how your money is spent.
The scenario is not far-fetched. Remember when Social Security benefits were not taxed? There are already “means tests” for advanced senior health services. The odds are that is just the beginning of the government’s outreach.. if we allow it.
God help the elders, because the road ahead looks perilous. Unfortunately, short of a miraculous change in Washington about the attitude toward seniors, little can be done to greatly improve the situation.
Be sure to vote in November.
The opinion contained herein is provided for informational purposes only, and should not be construed as financial, tax or legal advice. Before you act on anything you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax adviser. There are many roads to financial prosperity, get to know all your options.