By: Paul A. Werlin, President, Human Capital Resources, Inc.
The world can be a beautiful place, but it can also be pretty scary. We always need to be vigilant and on the lookout for dangers to us and our families. Sometimes, the danger is clear, walking alone on a dark city street, or having a tire blowout at 60 mph. But other times, we may ignore real danger because we may believe (wrongly!) that they will not happen to us, or we just pretend everything will work out fine even if we do nothing to protect ourselves. This is too often the case when it comes to savings, investing and insuring our lives and health.
For many people, retirement seems so far away, and so they think they have plenty of time to start saving and investing and building that nest egg. Or they believe Social Security and Medicare will take care of them. But the fact is, far too many people have totally unrealistic expectations about their money and what might happen in the future. So, let’s look at the stark, and a little frightening reality.
Bank CDs are one way to put away “safe money”— FDIC insured and get a good return, right? Well, safe yes, but think twice about that return. Give the bank $10,000 for a 10-year CD and get back (wait for it) $10,669.34 a whopping 0.65% return. And don’t forget you will pay taxes on that $669 because it’s taxable interest income. Low interest rates like we’ve been enjoying for the past several years are great for borrowers, but not so great for investors and savers.
The US has been fortunate to have had low inflation over the past several years. But many of us can remember when that wasn’t always so. How damaging can inflation be? Keeping our $10,000 investment in CDs, if inflation averages just 4% over that same 10-year period you’d need $14,802 to buy the same $10,000 in goods and services. You’re actually losing $480 every year in purchasing power.
I think the biggest problem many face is really coming to terms with what they need to retire. Many think that when they retire their expenses will drop dramatically, and their savings and government benefits will more than cover their needs. But according to recent Bureau of Labor Statistics data, “older households”—defined as those run by someone 65 and older—spend an average of $45,756 a year, or roughly $3,800 a month. And the average Social Security benefit is only $1,543 per month—$1,300 a month and more than $15,000 a year short.
I would be remiss if I didn’t bring up the cost of health care. Everyone knows costs continue to climb, but did you know that medical debt is the number one cause of bankruptcy in the United States? While the U.S. spends significantly more money per capita on health care - $10,586 - quality health care is unaffordable for an estimated 46 million Americans. Earlier this year, Fidelity Investments, one of the industry’s top financial services firms, released its 20th annual Retiree Health Care Cost Estimate and found that a 65-year-old, opposite-gender couple retiring this year can expect to spend $300,000 in health care and medical expenses throughout retirement! For single retirees, the 2021 estimate is $157,000 for women and $143,000 for men. That’s a lot of money.
But you don’t need to be frightened or ignore these facts. What you do need is to get started. Get professional help to come up with a smart plan to deal with these realities. Doing nothing is not the answer. Taking that first step, and then building, adapting and shifting with circumstances is the way to deal with these issues. Remember, even a journey of 10,000 miles starts with that first step.