August 22, 2019

The Way We Think About Financial Security Needs Adjusting

...or at least needs some serious rethinking. Historically low unemployment numbers (except for minorities), a stock market that regularly flirts with record highs, and an economy that has yet to show noticeable cracks due to tariffs would seem to say, "relax, come on in, the water's fine."

At the same time, serious questions are being raised about what lies ahead. There are a growing number of indicators that a recession is not unthinkable. Tariffs are starting to bite some segments of the economy. What has worked for the past few decades may not continue to produce the same results for us and those who follow us.

Long term, financial security, one of the keys to a satisfying retirement, is undergoing important adjustments. How are we to react? What financial planning linchpins do we have to reexamine, assess with fresh eyes, maybe adjust direction?

Let's consider five "basic" building blocks of financial health and see where we are:

1) Savings. Keeping money in a bank's savings account is rather pointless. The average yield is 0.06%. That means that $5,000 held in a bank earns $3.00 a year. The average household holds just under $9,000 savings in a bank or credit union, producing a pathetic $5.40 in interest. Online banks or money market funds average 2%, or $180 a year for the average savings account.

How about Certificates of Deposit? You can find an extra quarter to half a percentage point in interest if you are willing to lock up your money for a year or more. But, will that extra $45 really take care of business? Even with minimal inflation, at returns this low you are losing ground. Your money will be worth less next year than it is today.

The oft-cited finding that 40% of Americans would struggle to pay for a $400 emergency is actually a misleading figure. Based on how the question was worded, recent research suggests the percentage who would be unable to easily cover that size of an unplanned expense at closer to 20%. Of course, that raises the obvious question: how do 1 in 5 save for retirement if even $400 would cause a problem? 

Aggressive savings was one of the keys to my retirement planning. Bank rates were never great, but CDs regularly paid between 5-8%. Sure, inflation was higher, but by living well below our means, a 7% return on our cash was meaningful. Thirty years of saving 15% of our income was a solid foundation. I couldn't depend on that part of my plan today.

2) Home Ownership. The "American Dream" included owning a house. All of my generation (and the ones before) envisioned the home in the suburbs, white picket fence, and a 30 year mortgage. The route to happiness and financial stability included real estate.

Apartments were for college students or those scrimping and saving for a future than included a piece of land with a building on it.

That is not necessarily the case anymore. Younger folks are not nearly as likely to aspire to own a home. Besides the daunting barriers of saving enough for a down payment, one of the important benefits of owning a house has been severely restricted: mortgage interest deduction on our tax returns. With the doubling of personal deductions, the attractiveness of this longtime plus has lost its luster.

Also, and this is pure speculation on my part, is it likely that a culture where online ordering of everything, nearly instant shopping, and a decrease in marriage and child birth rates, lessens a desire to own? Having someone else take care of maintenance, retaining the freedom to move to follow a job or a lifestyle choice change all support a drop in home ownership as a necessity.

3) Stock Market growth. Over the past 50 years, the stock market has produced an average return of 10%. Over the past decade the rate is closer to 7%. Of course, inflation must be factored in, so subtract about 2% to get closer to an actual return. Virtually all financial experts (I am not one!) continue to tell us, over the long term, stocks are our best bet.

The problem? The periods of instability are also baked into the system. Recessions are a part of our economy. There have been at least five important recessions since the mid 70's in the United States. As I write this, there is a growing concern of world-wide economic slowdowns due to tariff battles, Brexit, and a more unstable political environment.

If these happen with regularity, why worry? Well, primarily because it becomes a timing issue. There are plenty of us who have yet to fully recover from the last big meltdown of 2008-9. If you are close to retirement when the cycle is going the wrong way, that creates a serious problem. During retirement, if you are dependent on a flow of investment income and it suddenly dries up, or drops precipitously, then what?

What can you do? One answer sounds great, but it isn't practical for most of us: save and invest enough to weather a recessionary cycle.  Lower your withdrawal rate (4% to ?) Realize that many of the dips are on paper. Unless you must sell at the bottom, things will recover in time.

For the rest of us, the only real option is to have the flexibility to cut expenses and change life styles to match reduced income with reduced spending. If you are downsizing things are easier if you don't own a home, though some equity in a piece of property might come in handy. Not selling what you do own in stocks or other investments during a big dip is vital. If you sell at the bottom you are locking in losses forever.

4) Health Insurance. I can't believe I am still writing about this. After so many years, many of us remain one health crisis away from bankruptcy. Too many of us shun necessary medical care, reduce required medications, or delay important procedures due to cost.

As an aside, I read about a new medicine for a serious disease that will cost $2 million for treatment. Besides the obvious ethical questions that pricing raises, there will be no insurance company anywhere (even Medicare) that will agree to fund that criminally high charge. 

Speaking of Medicare, the clock is ticking. Without changes in how the program is funded, the combination of an aging population, fewer workers to support each retiree, and ever-increasing costs without robust ways to negotiate savings at some point in the future there will be a reduction in benefits. I used to believe no politician would allow this to happen. That is no longer true. We are too polarized, too firm in our "us vs them" mindset to assume cooler heads will prevail.

I'm sure you have read the scary figure of $280,000. That is what the typical senior couple can expect to spend on health care costs from 65 until death. To put that in perspective, that is five times more than what the average 50 year old has saved for his our her retirement. Yes, Social Security will help (assuming its continued health...a subject for another post), but that is a major chunk of change.

What to do? Realize that saving for your health costs are every bit as serious as savings for any other part of your future. Make an investment in yourself by doing everything you can to delay the inevitable decline of our bodies and minds. Make friends with family members who will allow you to live with them (a joke, but maybe not!). 

For most of us, we can only do the best we can do in planning for our future. Unfortunately, in so many areas, some of our fate is in others' hands. My takeaway is to be optimistic that all your foresight and preparation will make your journey as pleasant and satisfying as possible. But, stay informed and remain open to adjustments. Too many other people have their hands on the steering wheel to ever fully relax.


  1. One of my kids owns a home, the other does not. Despite what people say, I still think the homeowner has more financial security going forward. You get $3 on your savings account? Good for you . . . I only get $1.50!

    1. I am a homeowner and have been since my late 20's. The privacy and feeling of controlling my own housing destiny are important to me. I don't know if I could ever go back to my early days of sharing walls and putting up with loud neighbors.

      The problem is with the generations younger than me. Affordability is a disappearing reality. Lifestyle choices are different, too. Ownership and being tied down are viewed differently. I believe there will be major impacts on the housing industry moving forward.

  2. I worry like crazy about my financial security and am way too conservative about taking care of money/investments. I applied to buy into a continuing care complex recently and their application form was over six pages long and included a financial and health assessment. They assure me that I've got enough money for whatever scenario their software comes up with. But the world is so unstable right now, I have trouble trusting that. They predict I'm going to live 8 years in my independent living unit, one month in their nursing home, and one month in their Hospice. Now that was a sobering thing to hear! The secretary who showed me that prediction was new and I question if she was supposed to share that. LOL

    1. I'm sorry, but the information from the secretary was TMI. I understand the company has to use projections to determine their financial viability, but the customer doesn't need that insight!

      I fully understand the financial insecurity. I suffered from it for the first three years of retirement. Then, after constantly running projections and burning up my calculator I accepted that we would be OK.

      Now, 18 years into retirement we have more money in investments than we did in 2001. Careful budgeting, separating wants from needs, but enjoying ourselves with responsible spending has worked very well.

  3. Savings
    This is always a tricky one. Risk tolerance, other income streams, and more often than we like to think just plain luck. Like you Bob we scrimped and saved during our working years (18% of our income, the maximum allowed where I live) to build a good-sized nest egg and, now that we are retired, I am not afraid to spend it. I am deferring Social Security pensions until we are 70 to have the maximum indexed guaranteed cashflow for life. This transfers longevity risk from my own savings to the government. For those that really want security they should also consider annuities for some part of their income mix. Annuities are often overlooked but they do offer the “never run out of money” guarantee that many retirees want. Like deferring Social Security whether or not this is the way to get the most money depends on when you are going to die. Of course, this is unknowable but don’t discount the peace of mind that if you do live a long time (longevity risk) you’ll have a guaranteed income.

    One statistic that I have quoted on your blog many times is that in the U.S most people have more money after 18 years of retirement than they did on the day they retired (just like you Bob). Don’t be afraid to spend the money you saved for you retirement once you are actually retired. It’s what you saved it for.

    [I live in Canada and the social security pensions here have been determined to be actuarily sound for at least the next 75 years, however, for U.S. residents I can’t imagine that no matter what happens the U.S. government won’t stand behind Social Security – there’s too many votes to be lost otherwise.]

    Home Ownership
    Perhaps this is one generation’s projection of values onto another generation. Home ownership worked for us so we project that onto our children. For them, maybe or maybe not. I have one daughter that owns and another that rents, both have secure housing that works for them. In Europe about half live in rented housing and this has been true for generations. There’s no reason that won’t work here just as well even though us “oldies” consider renting second class. It’s not and I have faith that young people raising families today will make the decisions that are best for them – there’s not just one way.

    Stock Market Growth
    Talk about unknowns. History is on the side of staying invested in stocks but in retirement you probably need to be more conservative than 100% in stocks. For me I am about 50% in stocks with 50% in more secure investments and of that I have 3 years of projected spending in guaranteed savings to hopefully outlast most downturns. Bank deposits don’t pay much but they are there when you need them and there’s a price for security.

    Health Insurance
    As I said before I live in Canada so I can’t really comment on the U.S. situation. I can say the system in Canada isn’t at all perfect but it’s pretty good. I only hope that somehow you are able to work out a U.S. solution that provides healthcare no matter your income to all U.S. citizens.

    1. As always, David, an excellent summary of the situation. We also have one daughter who owns a home with her husband, and another daughter who is single and prefers the rental lifestyle. She travels a lot and doesn't want to worry about maintenance or repairs. We will use the equity in our home (bought for cash) to buy our way into a continuing care community when the time is right.

      Health insurance remains one of America's oddest quirks (like sensible gun control). The Medicare for All idea isn't likely to go anywhere. There are too many privately insured people and way too much money behind the big companies for private insurance to go away.

  4. Lots of losses in the stock market are emotionally determined rather than financially driven. People tend to buy when the market is exuberant (and prices are high) and sell when the headlines are panicky (and prices are low). Even though the overall market has produced a healthy 10-12% return (averaged over many years and recessions and wars), the average investor's return is closer to 2% because they jump in and out at the worst times.

    One alternative to consider is a dividend strategy. Put together a portfolio of solid companies yielding 3.5% to 5% and (this is key) never reducing a dividend over the past 20 years. This would give you the 4% income to withdraw each year, even when the market goes down, without touching your principal. What many people don't understand about dividends is that, although they are quoted in terms of yield percentage, they are actually dollar commitments, usually on a quarterly basis.

    An example: Company XYZ 's stock is selling for $100 today and is paying $1 per quarter, or $4 per year, for a yield of 4% (4/100). Tomorrow, the market slumps and takes XYZ's stock down 20% to $80, but the absolute dividend of $4 doesn't change. The yield is now reported as 5% (4/80), so the investor's income stream isn't affected at all. XYZ, with an uninterrupted stream of dividend payouts, will be loath to break that streak. It happens occasionally but rarely. Meanwhile, you're not selling any of the underlying shares, which will eventually return to their original value or more, and bring the yield back to its historical average of 4%. And remember that recessions are much shorter than bull markets, so time is your friend if you stay invested.

    A variant of this is to buy companies that have been consistently *raising* their dividends for years. With this approach, you buy a company that's paying, say, a 2.5% dividend now with the expectation that the dollar payout will grow as the company increases earnings and profitability.

    To me, this is a safe and conservative way to ride out the ups and downs of the market and still take out the income you need to complement SS and pensions. The essential mental trick is to filter out all the business-media noise about China, the euro, Trump, and the crisis-du-jour.

    A great resources for those interested is a website called Simply Safe Dividends, which does all the spadework to find the right companies for investing, and then to track (and project) your dividend income from your specific portfolio.

    1. My financial advisor believes like you do that dividends are very important. You make a key point about the steadiness of dividends usually regardless of stock prices swings.

      Our drawdown has been at about 3.5% for the last few years. That should keep us financially solvent for as long as necessary and likely leave a tidy sum for our kids. At least that is the plan!

    2. Re: "Lots of losses in the stock market are emotionally determined"

      As a friend of mine once said: Everyone knows that the way to make money is to buy low and sell high but what people actually try to do is buy high and sell higher. Long term that usually doesn't work very well.

  5. We have been homeowners since I was 20 and my husband was 23. Our home is paid off but I am really tired of all the costs to maintain a home. I have already replaced windows and doors and a roof but will need another new roof in a few years. Both our sons live in a wonderful apartment complex right next to our home and live a maintenance free life! This is a life that at this point, I would like to have. So we are seriously thinking that in the next few years, we will sell our home, put the money made on it into an annunity and have tha pay monthly payment that we will use for our rent. We will not have taxes,HOA fess and any emergency bills as ALL appliances are included in the rent. I live in a townhouse now and have already picked out a nice apartment not much smaller than I already have and it is all on one floor. I am only 61 years old and have recently taken early retirement. I also just had knee replacement surgery and will eventually need the other knee done. So living in an apartment that is more easily accessible will definitely be a plus....I enjoy reading your blog!!

    1. One of my daughters is apartment hunting at the moment; I have seen several places I wouldn't mind living for exactly the reasons you mention.

      We bought a house with a large backyard for both dogs and grandkids. But, with the kids past the run around outside phase and the dogs just using the space for their business, I wouldn't mind not paying for all the lawn service and watering to keep everything alive.

  6. I think priorities change with time of life. At this point in life, I absolutely love our big property and beautiful garden. Rob enjoys the small maintenance tasks of home ownership which provide him with a purpose for how to spend his days. But I can imagine a time when all the work of home ownership and maintenance will become too much for us, and when that time comes, I don’t think it will be hard to go to a simpler living arrangement.


    1. I agree. Just from a simple financial standpoint, I imagine we will remain where we are until it is time to move into a retirement community. Downsizing now and then another move 8 years later would be not financially prudent.

      BTW, yesterday i started replacing door knobs with lever-type handles on all the rooms in the house. Betty is having a harder time turning a knob, so levers are the way to go. It takes 5 minutes to switch out one door, but I felt very manly and competent in doing them !