The game of long-term financial planning has changed. There are many reasons for this change: the inevitable impact of our government’s massive debts, the high likelihood that the stock market will continue its ten-year-plus underperformance for at least another decade or more, also that the economy will be weaker than normal for a long time to come, that the current historically low interest rates cannot be maintained, and that the dollar will unavoidably become much weaker at some point have all combined to change the game.
Provided below are the new rules you need to follow to protect yourself against these game changers.
Social Security and Medicare. It is unlikely that these programs will continue to provide anywhere near the same level of support as they have been. For openers, you must assume that both of these programs will be heavily indexed, which means the more you make each year, the less you’ll get. Medicare is indexed now. Make enough money and you pay twice as much or more. Going forward, the cut-off numbers—and your benefits—are unavoidably going be a lot lower as the government cannot come anywhere near to meeting its obligations. A similar structure is bound to be the future of Social Security as well.
Also assume that the government will increase the degree to which they understate (lie about) the real level of inflation, and by a lot. Assume that the understatement of inflation alone will cut your Social Security income in half within twenty years. Bottom line, if you expect to be receiving a pretty good income from other sources, do not assume any money from the government in your planning. If that is not the case, assume you’ll get about half of what you previously expected.
Do not invest in other than very short-term fixed income until the rates are a lot better. Interest rates are at historically low levels and at some point must unavoidably rise, and by quite a bit. When they do, the value of fixed income investments, like bonds, bond funds, CDs, etc., will drop, and by a lot unless they are very short term in nature. For now, like it or not, the least damaging solution is to go out no more than about twelve months or so.
Invest only in underpriced stock markets; sell when fairly priced. It used to be that the smart approach was to invest in fairly priced or underpriced markets and sell only if the market became substantially overpriced. If you believe, as I do, that the markets will continue their underperformance for at least another ten years or so, the strategy needs to shift to buy low and sell at a “fair” price. For my best estimate on current market valuations and when to act, see my Market Evaluations. You can also sign up to receive Smart Alerts to be notified when markets and my investment advice shifts.
Invest outside the U.S. The rate of economic growth in the rest of the world has been blowing away the rate of growth of mature economies such as ours—and that trend is highly likely to continue. This means that when the time is right to invest, invest overseas or in large U.S.-based companies with the majority of their growth now coming from overseas. When the time is right I will provide specific suggestions in my Market Evaluations and Investment Advice section.
Invest in commodity stocks. Rising inflation driven by a declining dollar is likely to hurt, and a lot, at some point in the not too distant future. At the point that this starts to unfold, commodities such as oil, grain, etc. are likely to offer better inflation protection than most other investments. At that time I will again provide specific investment suggestions in my Market Evaluations and Investment Advice section.
Plan on working longer. Unless you expect to have a lot more money than you’ll ever need, plan on working a good bit longer, either full time or part time. For most people this is not only smarter financially, it’s also likely to end up offering a better quality of life as well.
Don’t put your assets in a will. Putting your assets in a will means that your heirs will not only lose a chunk to our current system of will processing but it will also tie up your money, perhaps for a year or more. There are better solutions, such as setting up the ownership of your assets as JTWROS (joint tenants with right of survivorship) or simply naming a beneficiary on your financial accounts. If you have a million or more, consider setting up a revocable living trust as well. Should you still have a will? Yes, of course you should, but not for the disposition of financial assets.
The bottom line is to recognize that times have changed and that smart planning requires that you recognize and deal with this new world. The new rules outlined above should go a long way toward helping you do so.