The oldest baby boomers are now 65! Those that can afford to, are beginning to retire. Others who cannot afford to retire are continuing to work, but one thing might ring true to both camps; they are beginning to draw on their retirement funds, much of which has been invested in the stock markets for the past thirty years! This thought, raised in a recent industry article that I read, caused me to think about the next significant paradigm. The article went into much greater detail, but I wanted to discuss the main point along with my own spin on the subject. The baby boomers have had significant impact in many ways over the years and there appears to be one more on the horizon!
If you think about the general mindset of most Americans, you will probably agree that when it comes to their savings and investments, most leave that to the money managers. In and of itself, that is not a bad thing as long as you understand that you lose control of your money when you put someone else in charge! In one of my recent posts, I used the words of my partner, that people just follow the crowd when it comes to their saving and investments.
The S & P 500 Index was used to illustrate a few points in the article. It shows that very few Americans owned stock in 1950; less than five percent. The index and the number of Americans holding stock or stock funds changed very little over the next thirty years. In 1980, ownership was about twelve percent. In the 1980’s, qualified plans were introduced and the baby boomers, the oldest of whom were in their middle thirties, were encouraged to invest their retirement savings. With perhaps a vague understanding, many thought they would lessen their tax liability by making contributions, so they did! As more baby boomers were introduced to qualified plans, (about half of us were now employed in careers) a large number of us followed the crowd! Money began to flow in to the fund managers.
The S & P 500 Index closed on December 31, 1999 at 1469, due in part to the fact that there were now better than 50% of Americans owning stock or stock funds. The economy was doing well and large numbers of the seventy-five million baby boomers were contributing to plans. There was a continuous flow of new money coming to fund managers to purchase additional stock. That trend continued and the index moved a little higher through 2007, closing at 1565 on October 9, 2007. Although it is unclear if contributions slowed immediately, it is clear that the banking crisis among other disconcerting news caused great volatility for the next two or three years. The S & P 500 Index closed on August 26, 2011 at 1177, approximately 19% lower than its close in 1999! And if you examine the charts through that time period, you will see that the Index had been below the 1999 close for a great majority of the time! As mentioned, the bad news along with a troubling economy has affected the markets. Looking ahead from here, we add the new paradigm to the mix, the baby boomers.
The oldest of the baby boomers are no longer in the accumulation phase of their financial lives. Those who have done well, have retired and have begun to draw on their funds. For the next twenty or so years, the baby boomers will continue to be eligible for retirement and whether they do retire, remains to be seen. But one thing is certain. They too, will begin to draw from their retirement funds. Even those who do not need the money will have to take their required minimum distributions. That cycle will start in a few years! The bottom line… more money coming out of the markets than will be going in as more and more of the baby boomers reach retirement age! Money managers will face new challenges. They are going to have to be more aggressive to produce adequate return on investments for their remaining clients to stay in the markets. Do you think this will have an effect on the market’s performance?
The burden on government is also growing because of the increasing numbers of baby boomers collecting social security and medicare benefits. There are simply not enough Americans to neutralize the effect that the baby boomer’s will have on social security and medicare benefits. And, it doesn’t appear that in our lifetime, that will change! So what can we do? What should we expect? Change is certainly in our future!
If the baby boomers do have such an effect on the markets, the future may mean lower returns on your investment and more underperforming mutual funds! It also might indicate that after taxes and fees, your savings may not be enough to carry you through your retirement years.
One can also expect changes to Social Security and Medicare. Those plans, when enacted were meant to be a supplement for people in their last few years, based on life expectancy of 67 years! The government cannot sustain those programs without considerable cutbacks or changes to eligibility as well as additional taxes. The article I read suggested that even a thirty to forty percent increase in taxes would not be enough to pay the government’s costs for these programs!
So, plan for significant tax increases at some point in the future. They will probably not come as one large increase, but in smaller increments over a longer period of time. Plan also for reductions in social security and medicare benefits. Since the government can no longer sustain those benefits as we know them, there will be changes, especially for those who are younger and have perhaps ten or more years before retirement. This means that if you examine your long term financial plan and if you make adjustments now, there is still time to insure a financially secure retirement. For those who are at or near retirement and even those approaching the age of required minimum distributions (time to pay the taxes you deferred!), there are ways to limit your losses (wealth transfers), and maximize your financial strength. You can insure that your money will last your lifetime or will pass to your heirs without any unnecessary taxation.
Most importantly, you must be in control of your money, not the banks, money managers or the government. Get a complete analysis of what you will need to accumulate in order to maintain your standard of living in retirement. A dollar twenty years from now will not have the buying power it has today! Make sure you understand the difference between saving and investing. Make sure your strategy examines things like taxes and interest you are paying unnecessarily or unknowingly. Determine what savings plans will afford you liquidity, use and control of your money. Having control will give you an unlimited number of options that should include guaranteed tax deferred growth, no loss of principal, tax free withdrawals, tax free retirement income, guaranteed no loss of principal, and no market risk. Remember, savings are not money you can afford to lose. So maintain control and eliminate the risks that so many Americans are currently taking when they look for larger rates of return on their savings and investments!
If your 401K or mutual funds have underperformed the market indexes, you can probably expect more of the same. If you think it is time to take control of your finances, we agree! Let us help you learn the strategies used to grow wealth and enhance your current standard of living. We will show you alternatives to conventional planning for college funding and retirement. Show us what you are doing now, and we will in turn, show you a better today and a financially secure tomorrow!
Contact Jim Dierking or visit his personal web page or the company web page for more information.
No comments:
Post a Comment