Investments for the Rest of Us: Rethinking Retirement
Retirement, the most commonly expressed goal of those saving and investing for the future, is undergoing a rethink. Medicare is rapidly becoming insolvent and Social Security, worse than being underfunded, isn’t funded at all. If we are to live the last third of our lives with any dignity, and perhaps some pleasure, we have to take matters into our own hands.
Workforce participation is the lowest it has been since the Great Depression. Not only are we losing productive workers, these same workers are joining the rapidly expanding group of government-dependent citizens. Medicare, welfare, unemployment, food stamps, disability payments — there is no end to the “assistance” our government will offer. For those who need the benefits, these programs can be a lifesaver. But for the taxpayer, the load just keeps on growing.
This is the future you look to retire in. To those who think I am being too negative, I am not making these numbers up. The stock market hitting new highs is a distraction from the real problem of our generation: national insolvency. The solution is to increase assets and retire debt, but not exactly how you think.
The challenge facing today’s retirees is how to have enough income to live out the final third of one’s life. Obviously, the easiest way is to keep working, maybe a little less each year. If you don’t feel like working, find someone who will work for you. Invest your money with someone you know and trust who owns a business. Lend it to them or simply buy part of the business. But act fast since investing locally for a direct return is becoming more and more attractive.
Another option is to get a retirement loan. My idea of a retirement loan, which only works amongst people you trust, goes like this: let’s say you’d like a little more retirement income and your nephew has a great job and is looking for an investment for his future. Your nephew could lend you a sum of money, say $20,000, a portion of which goes into a trust to pay a life insurance policy that will pay off at your death. The amount of insurance is calculated to pay off your nephew while also providing him a fair return. You get to keep the difference between the premium and the total amount of the loan, providing a supplement to your retirement income. Granted, the retirement loan is a bit complicated and requires the services of a qualified financial advisor who understands life insurance. But for families and very close friends, it can be a solution few ever considered.
Of course, there’s always the old fashion way: save more. Assuming you are in a position to put more money away, the question becomes where to put it. If you’re like most people, you’ll think first of your 401(k) plan. But you might want to think twice. One of the biggest benefits of a 401(k) plan is saving taxes now with the idea that you’ll pay them later at lower rates. While this still makes sense for many, increasingly, you have to consider that you are most likely saving taxes at the lowest tax rate you will ever see only to pay them at a much higher rate. If you believe, as I do, that the government is going to be forced to raise taxes significantly, and might even have to change the tax status of some of our most beloved investment plans, you might want to consider an inservice withdrawal.
An inservice withdrawal gives you the opportunity to withdraw money from your plan without terminating your participation. If available, the withdrawal can allow you to plan your tax liability to the best effect. You can also begin diversifying into the type of assets that will reward you in the years to come.
Saving more, whether through your 401(k) or outside of the plan, requires that you change your approach. The era of the inflated paper asset is coming to an end. Stocks, bonds and other derivatives or real investments are currently having the last hurrah for most or our lives. Hard assets, commodities, land, businesses and real money, like gold and silver, are soon to shine. Guaranteed income from companies you’re confident will be there can also be a good choice.
The bottom line: develop a plan. Think income and inflation. Inflation will make everything you buy more expensive. And the income you need must increase to keep pace. Ever wonder why you work harder yet live less well than your parents? That’s inflation or, said another way, your dollars aren’t worth as much as they used to be.
Those are a few ideas for the asset side of the ledger. Now let’s look at the debt side.
Short of a revolution, there’s pathetically little we can do about government debt. So, you’ll have to concentrate on your own debt. Here’s a short rule: debt that is not making you more than it is costing you has to go. Housing debt used to cost so little and properties increased in value by a pretty consistent amount that housing could be considered good debt. Sometimes, it still is. But we can no longer take for granted that housing debt is in your best interest. You have to spend some time to make that determination. However, housing debt used to invest in income-producing assets just might be.
Let’s say you can borrow against your home for 3.5 percent and you have an opportunity to invest that in a solid investment yielding 8 percent. Depending on your tax bracket and your longer term plans, that might make sense. But it’s not for everyone.
The self-employed have even more options, which is why everyone should find a way to make their hobby into a business. Having a business is one way to reduce the debt side of the ledger, the government’s debt that is. Anytime you can legally reduce the amount of taxes you pay, you shake off some of the burden your government has placed on you. If you hate what the government is doing with your money, make sure you do not give them any more than you have to.
Time is running short. Your government looks at you as part of the serfdom that works the land for its benefit. It is up to each of us to open our eyes and see the world around us for what it is. The real American dream of life, liberty and the pursuit of happiness is not dead; the shadowy interloper of self-serving avarice simply distracted us for awhile. Now that we can see it for what it is, a monster bent on destroying everything in its path, we can join the battle.
I’ve given you a few weapons. Now it’s up to you to pick them up.
David F. Brochu is president and CEO of KLEOSSUM advisers, an independent investment advisory firm for individuals and group retirement plans located in Tech Village in Conway. For more information call (603) 733-4290, or visit online at http://www.KLEOSSUM.com.
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