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.