Financial Literacy

As an older adult, I have witnessed several people enter adult care facilities after a long life. The type of facility that they enter depends upon how financially successful they had been.

The first tale is a man forced to deplete his life savings when his spouse needed full-time nursing care at a relatively young age, for the rest of her life. (Even if he had long-term care insurance, it would not have helped because these insurance plans only last 2-5 years.) Due to this massive expense beyond his control, he unfortunately entered retirement with no savings. So he lived solely on social security and earned spending money from handyman work for neighbors. When he could no longer care for himself, his only option was a state nursing home facility. He shared a noisy room with 1-3 other patients and was dissatisfied with his daily experience and critical of the medical care that he received.

The second tale is man who retired with a pension and social security. When it was getting difficult for him to maintain his home, he could afford to move into an apartment at a private assisted-living facility. This facility cooks all meals and is a comfortable place for independent living. As he became accustomed to his new routine, he wished that he had moved into this place many years earlier. At this facility, as it is needed, he can move into more advanced levels of medical care.

The third tale is a man who was very successful and planned early where to spend his twilight years. He moved into a spectacular private adult facility that is so desirable that there is a waiting list. At this facility, residents rave that the services and amenities are equivalent to a 5-star hotel or a very high-end cruise ship.

Needless to say, there is a colossal gap between the level of medical treatment and general care at the state-run facilities and the best of the high-end private facilities. Which level of care is your current financial plan heading toward? It isn’t too late to revise it and learn about the state and federal rules about elder care support for you and the people that you care about.

Washington is continuing to bash income for retirees every front.

First, the U.S. Federal Reserve has been artificially keeping interest rates near zero. This has left retirees earning almost nothing for the last 8 years. So instead of prudently putting their money into bank CDs and quality bonds, they must speculate to earn any investment income. Then, Medicare deductions from social security payments have been ratcheting up sharply for years. Cost of living adjustments for social security have been nearly nothing and will be zero for 2016 – even though food and healthcare keep rising. Now, Washington just made a budget deal that forbids the “File and Suspend” strategy of maximizing your social security benefits.

When your country is broke then: government benefits shrink, rules change, and people face even more financial struggle. I’ve been telling others since 1993 that, “Social Security and Medicare will begin falling off a financial cliff by 2015, it is simple arithmetic. So expect shrinking retirement benefits, it will become more important than ever to save on your own.” Since 1993, the only change in the government debt arithmetic is that it has gotten worse. There is a new medical program called Obamacare that is an additional unfunded liability that will cost well over a trillion in the next decade.

As predicted, retirement benefits have already been shrinking: tiny or no cost of living increases; the monthly charge for Medicare has skyrocketed for high-earners; moving back retirement dates along with changing qualification rules. I predict more rule changes to ratchet down retirement benefits in the future, again, it is a necessity of simple arithmetic of overspending.

As always, your retirement is up to you to fund it, grow it, and protect it. As government finances continue to deteriorate, it will continue to reduce benefits and increase taxes on retirement accounts.

This week, President Obama opened his new retirement account called a MyRA. This is not a good savings vehicle because your money can only go into a single poor long-term investment – a particular fund of government bonds. The U.S. Treasury administers these accounts and they are for people with jobs that don’t offer employer retirement accounts. In promoting these accounts, the U.S. Treasury actually makes fraudulent claims: It carries no risk whatsoever (but the fine print says your interest is not guaranteed plus the government is already insolvent); There are no fees (but there are imbedded fees in all government bond G funds like this one). Plus, you are kicked out of the plan if your account ever accumulates to a meager $15,000. Please avoid the MyRA account.  

I define a ticking-time bomb as: an unavoidable financial event on someone’s time horizon that they continue to ignore until it blows up their finances.

Examples include, putting an expense on your credit card that you had plenty of time to save up for, taking out a loan for a car or vacation, or the big expenses like: college, wedding, home, or retirement.

Some other very common ticking time bombs include:

1. No emergency fund for being out of work
2. Having a variable-rate mortgage
3. No maintenance fund for predictable repairs
4. Student loans larger than any potential salary
5. Spending all of a lump sum when a chunk must go to income taxes
6. No prenuptial agreement to protect your assets
7. Hiding debts from your partner
8. Not adjusting your spending for a drop in income
9. Having children without mapping out all of the costs

In each case, these time bombs are created from making decisions without any financial literacy. Unfortunately, the consequence is always painful and undesirable choices that impact your physical reality. Each one of those time bombs listed, and many others, can be diffused. This is done by mapping out your financial life, to make better choices, long before these events occur to prevent blow-ups.

Retirement savings can be viewed as an account of money to pay your bills once you retire from working for a living. This retirement account, naturally, must have enough money to last your lifetime.

Two other retirement accounts may assist your lifestyle spending in retirement, pensions and social security. However, as pensions are being reduced, and social security was never much to begin with, your most significant account will consist of how much money you’ve set aside for retirement.

Once you have funded your own retirement account and begin spending it, there is a concept called a “withdrawal rate.” This refers to how much of your retirement account you can spend each year with a likelihood that it will last your lifetime. Depending on several assumptions, there is academic research that 4% per year is a robust withdrawal-rate starting point for you to consider. To make this easy for retirees, there are now funds that automatically do this for you and you can choose an annual withdrawal rate, from 2.5% to 5.0%.

You should be aware that a continual reduction of your retirement principal amount is exactly like landing a plane, you want a glide slope that will comfortably last your lifetime for a gentle landing. Too many retirees withdraw too much, too fast, and crash land too early with painful consequences. Even if money isn’t being withdrawn too quickly, a couple bad years in the stock market and it triggers a “sequence of returns” downward spiral of your money dramatically sooner that you had planned. Withdrawing less money in bad market conditions greatly increases the lifespan of your retirement funds.

The most successful retirement plan is one in which there is never any reduction of your principal balance. Your withdrawals are a maximum of your interest and dividend income. Even better, is to leave some interest and dividends to be reinvested so that each year your portfolio income is increasing. The glaring problem with this withdrawal strategy is that your account needs to be large enough when you retire so that the dividends and interest amount to a meaningful amount of money. The annual income in your retirement account needs to be large enough so that you don’t have to remove part of your principal balance in order to pay your bills. The greatest benefit of having an account large enough to do this is the financial peace of mind that you’ve eliminated any potential financial-crash landing from running out of money when you are least able to earn money.

I read a quote by Porter Stansberry this week, “Young people I meet today have a very unfortunate characteristic: they tie their feelings about their self-worth to their spending instead of to their net worth (their saving). They’ve confused trying to live rich instead of moving toward being rich. The most significant variable in getting rich is how much of your income that you save.”

I believe this helps explain why it is so difficult to get someone young to save and invest: all they observe about their peers and heroes is their spending. I never see brokerage statements posted on social media. Expensive trips, yes, rental-property portfolio, no. Spending is visible, tangible, and pleasurable, while saving is boring, invisible, and a deprivation.

I prefer to spend money on income-producing assets. Assets such as: securities with dividends or interest, property paying me rent, or other assets with a business that produces income. While other people are shopping in malls, I’m examining cherry-tree orchards for sale. While others are buying big electronics on payment plans, I’m receiving payment plans from secured real estate notes. While others are looking to buy a recreational RV, I’m evaluating an investment that leases RV’s to dealerships. One side is spending money and becoming poorer while the other side is investing money to become richer. The consumer side is killing their money while the investor side is putting their money to work so they personally don’t have to actively work as hard.

Which camp are you closer to: the spending addict or the asset addict? I’m not saying that any or all spending is poor choice, it is just that in my experience, along with Porter, that spending is far overvalued while saving and investing are underperformed by the vast majority of people.

Americans traveling abroad for cheaper medical treatment is still increasing. After the financial crash of 2008, Americans out of work or earning less increasingly turned to offshore facilities for cheaper medical procedures. There are world-class medical facilities in India, Singapore, Costa Rica, Philippines, and Mexico where Americans spend only 10-20% of what it would cost in the U.S.

The term “medical tourism” arose because people were saving so much by going abroad that there was plenty of money left over for touring around either before or after their medical treatment. As an example, dental procedures in Mexico (with American trained dentists) are roughly 20% of the cost in the U.S. One man in Alaska was quoted a price of $65,000 for extensive dental work that he needed. He then found a U.S. dental school where students would do the work for $35,000; but then he actually had the work done in Mexico where his cost was only $3,000.

There are many procedures that are cost prohibitive for people without insurance or their insurance has high deductibles, or their insurance doesn’t have specialists in the area. Medical tourists have been able to save $150,000 for cardiac surgery; $80,000 for double knee-replacements; or $700 for a tooth cap.

Prestigious medical institutions have expanded abroad to expand their brand. For example, Harvard Medical School and Mayo Clinic have posts in Dubai, India, and are looking to expand in other countries as well. These efforts help raise the level of world-class healthcare for locals and medical tourists.

If you are interested in offshore medical treatment, the best place to start is a medical tourism agency because they are experts and it is free (they are compensated by the hospitals). Below are the questions you’ll want answered up front:

• Different countries have different areas of expertise, what is your procedure and who is the best for that?
• Has the facility received an ISO quality certification?
• Aftercare and emergency treatment – if something goes wrong, where do you get emergency care?
• Background checks on doctors and patient recommendations?
• Several price quotes from different facilities?

While many Canadians come to the U.S. to get access to procedures, Americans are increasingly going abroad to spend a fraction of the cost for their own procedures.