The Retirement Myth: The New Mid-Life Crisis

Ken McElroy Uncategorized Leave a Comment

retirement_mythThe average employee will struggle financially their entire life. The system is set up for them to lose. Their primary existence is to pay for social services and entitlement programs. Think about it for a moment. The very poor are supported by the state, the middle class is the highest taxed and pays for the services of the poor. The rich continue to get tax breaks for providing jobs.

The rich will always have a comfortable retirement, the poor will always be supported by the state. For the people in the middle, the best hope is to find a job that offers a final salary pension and stick around for the rest of their lives. Many companies have no loyalty to any worker nor the worker to the company.

The unengaged majority are unprepared for retirement. The average retirement plan according to AARP is about $50,000 and half of Americans have $2,000 or less in their account. The math is clear, this is not enough to support their retirement.

Work is the new retirement.

A recent Gallup Poll found that about 80% of Americans plan to work during retirement. Most plan to work part-time, although some say they may need to work full-time just to make ends meet. The market volatility of the past few years has negatively affected many Americans earnings, savings, and investments. It has also diminished their confidence about being able to retire comfortably.

In the coming years, tough decisions will need to be made. There has never been a more important time to be financially educated about your future.

In order to stay ahead of price increases or currency inflation you must make sure that your hard earned money is earning more than it is losing. If your savings account is earning 1 percent per year and annual inflation is 3 percent, you are going backwards 2 percent annually, over 10 years this is a 20 percent reduction in your purchasing power.

For example, If you had $10,000 in your savings account for the last 10 years, that savings today would only buy $8,000 worth of goods and services.   You will still have $10,000 in your bank account but it buys you less because prices have risen in that 10 years.

Economic inflation, like death and taxes, is a fact of life. Inflation is when the general level of prices in a given economy rises over time, which in turn causes the amount consumers pay for goods and services to increase. The net effect is that the buying power of consumers decreases because they are able to buy fewer goods with the same amount of money.

Inflation will gradually erode the purchasing power of your savings, so you must earn more than the inflation. To beat inflation when investing for the long term, make sure that your investments have a higher rate of return than inflation is taking away.

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” – Ronald Reagan, former US president

One challenge we all have is trying to figure out what the actual inflation rate may be. If we calculate the inflation rate the exact same way the government did prior to 1990, the inflation rate is averaging around 6.5%, which is basically double the currently reported official rate. However, if we measure inflation the same way the government did back prior to 1980, the inflation rate clocks in at a mind-numbing 11% and to confuse us even more… the Everyday Price Index estimates the 2011 annual inflation rate was 8 percent.

And to make matters worse, The Federal Reserve Open Market Committee (FOMC) recently announced its goal to devalue the dollar by 33% over the next 20 years.

Lowering the purchasing power of the currency is robbing those who save cash because cash is losing value. This is precisely why Robert Kiyosaki says, “savers are losers”.

The other side of the coin is that it takes money to make money. Yet getting into debt can be counterintuitive to what we all have learned growing up. I still remember my parents saying “get a good job and stay out of debt.”

Modern life requires many of us to borrow money at some point or another. But knowing the difference between good debt and bad debt can make a big impact on your financial health and chance of success.

If you borrow money and spend it on something that is going to go up in value, that’s good debt. If you borrow money and spend it on something that is going to go down in value, that’s bad debt.

For many Americans who lived through the Depression, or whose parents did, a fear of personal debt is embedded in the deepest recesses of their minds. For people like this, debt is distasteful and something to be avoided whenever possible. The rules were different then. Today, the government is spending more than they earn and they don’t need to pay it back.

The U.S. national debt is currently rising by well over 4 billion dollars every single day. There is no way that the US government can ever repay their debts. These debts have become far too large to ever be paid back in today’s dollars if you take the $15 Trillion Debt and the $50-100 Trillion promises to Social Security and Medicare.

The point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves. The US debt per is currently $520,000 per household.

The rules of debt and saving money changed on August 15, 1971, when the US changed its policy on its promise to pay gold for dollars. Before that day, the dollar was as good as gold, the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. Under this system, a dollar was still worth a dollar.

Debt is leverage. Everything you use it for will be magnified, good or bad. If you borrow money for a liability like a car that will eventually be worthless, you are magnifying your cost, negatively. Bad debt creates a liability that takes money out of your pocket.

Great wealth is founded on the use of good debt. You use good debt to enhance your situation and increase your net worth. You should avoid bad debt altogether. The wealthy use good debt to “hedge” inflation in multiple ways. Primarily, they use fixed rate debt to buy assets that rise during inflationary periods.

Based on this philosophy, one of the strategies that my partner, Ross McCallister and I are using to “hedge” inflation is by borrowing fixed rate debt at historically low prices. In the last several years we have borrowed hundreds of millions at or below 5 percent!

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