Important information to heip you plan for your future!
Through Adversity We Find Opportunity
Doug De Groote, CFP®
If you are planning for today, it’s too late. The day is already here. What you will be left with is a series of reactions that are not under your control, but instead are dictated by the forces around you. Planning should be about tomorrow and the years to come.
Jim Rohn said it best, “If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much.” Yet, a study published in the USA Today, titled “Record number in government anti-poverty programs” dated 8/30/2010 noted that one out of every six Americans gets government aid and that number will increase to one in every five by as early as 2014. Another article from Investors Business Daily titled, “Government Income Support Surging”, and dated 9/2/2010 says that 30 cents of every dollar in personal income comes directly from the government. What will that number be when the Baby Boomers retire? Unemployment used to be paid for 26 weeks. It is now extended to 99 weeks. As I write this, unemployment continues to rise. This is a very simple math problem: with more people becoming dependent on the federal government, there will be fewer taxpayers to support the system. The burden will increase dramatically for those who pay taxes.
The infamous boxer Mike Tyson put it bluntly, “Everyone has a plan until they get punched in the face,” maybe the most relevant quote as we compare the state of the economy today versus what most of us grew up with.
Just the Beginning
For some time I have been discussing our economic point of view, bringing attention to the difficulties that we face in our economy and in economies around the world. The list is long, including too much debt, cities and states in trouble, pension short-falls both public and private, rising taxes, and few opportunities for growth. The trends were evident for all to see, and unfolded as if almost on queue.
We are now almost through 2010, the relief rally in the equity markets is most likely behind us, the grim reality of the true nature of our situation is sinking in as people realize that unemployment will remain stubbornly high and stimulus spending is not a magic bullet.
On the national stage we are hearing conversations that were unthinkable just a few short years ago. Public pensions are out of control, it is a virtual shouting match in cities and states around the country. Many cities are finally confronting their budget woes. States are beginning to say “No” to special interest groups. Yet Washington is slow to change and, “they have a plan for you”-Lower benefits and higher taxes.
A looming Threat to Retirement
There is no doubt the public pension plans have over promised and will under deliver to an ever increasing baby boom generation quickly moving towards retirement. As a society, we will continue to wrestle to gain control of what will be for many a great recession as we start a long struggle to get public pensions in line with our new economic reality. According to an article written by Hibah Yousuf for CNN/Money dated 8/19/2010 Taxpayers are on the hook for $3 trillion in unfunded pension liabilities. In New York City alone its pension costs will double by 2016 to $12 billion. Just for the New York City Police Department, every dollar they contribute the taxpayer contributes nine dollars. While we are all honored and thankful for the service of our police and fire departments and yes, they definitely deserve every penny, the math just does not add up. This is going on in cities, states, and counties all over this country. In Colorado, the legislature voted to reduce the cost of living increase from 3.5 percent to 2 percent for the Public Employees Retirement Association. The retirees sued! So much for “We love our grandchildren!” As governments look to control their pension costs, this battle will take place over and over again. In California, government employees get larger retirement programs than private sector workers. Currently 80 percent of California’s budget costs go to employee benefits. California has a huge unfunded liability for these future payments. Even with reform, they will require a bailout. Would these government employees take a little less to make the system work? You saw what happened in Colorado! They only reduced the annual cost of living increase and they got sued. Even with reform, according to CNN/Money, taxpayers could be on the hook for $3 trillion just to bail out state pension plans.
Government Pensions: The General Accountability Office (GAO) issued a report recently that says that state and local governments face a $10 trillion gap over the next two decades. This shortfall means the ratings for these entities will decrease, causing their borrowing costs to increase. This also means States and local governments will be forced to cut services. Currently cities and local municipalities have been fortunate enough to address the situation through the sale of assets. What will happen when there is nothing left to sell? What is even more disconcerting is that the GAO feels that many of these cities and states will face default.
Cuts in Health Care: You say what? Every one is suppose to get it. As Lee Corso says, “Not so fast my friend”. Will, you will get it just a lot less than before and most likely according to some one else’s plan. Many states are now asking for state employees to start picking up the cost that they never had to pick up before. This is coming under fire and many state employees are going to court over it. According to the Wall Street Journal article by Jeanette Neumann dated 8/27/2010, many states are turning to actually cutting health care coverage and forcing state employees to start paying for a portion of it. The problem with health care is that it is very difficult to actuarially determine long-term costs of coverage as treatments evolve and people live longer than previous generations. As you can see only 9 states have more than 10% of non-pension (mainly health care) benefits actually funded.
Pay serious attention to what is happening to pension and non-pension benefit programs because the WORST is yet to come.
A New Reality
From the smallest decisions we make in our personal lives (do I go to Starbucks or McDonald’s for my latte) to the sweeping changes at the federal level (mandatory health insurance for all), we are witnessing a massive shift. Your new reality may very will be a double dip, an L or just plain difficult as we see our economy head for what could be a great winter. The rules of how we operate in our personal lives, communities, and states, at work and as a nation, have changed from a perspective of growth to one of conservation. While each of us would like to conserve as much of what we have as possible in terms of our wealth and standard of living, we also would like to preserve or even to expand what we receive in terms of services from our governmental agencies. Unfortunately these two ideas are at odds, and for many who have not planned or prepared, will end up caught at the flashpoint of where these notions collide and will see their taxes increase and incomes decline. This undoubtedly will affect businesses both large and small. For many of us this means our new reality and most likely toughest lesson to learn is that as we go through this difficult economic season we will have to get used to the idea of less.
Debt: Currently for every dollar we bring in as revenue to the federal government we are spending $1.34. Our country is $13 trillion in debt. That is $120,000 for every taxpayer. According to Nathan Slaughter of Seeking Alpha, we will be $20 trillion in debt by 2015 and $25 trillion in debt by 2020. The debt increases by $3.9 billion a day, or $2.7 million dollars a minute! No one can survive budgeting like that unless you can print money.
As for the average American, we are changing our habits and cutting back where we can. Yet, we as Americans have been the world’s greatest consumers lifting economies around the world and providing economic incentives to deliver the goods and services we need. Unfortunately we too borrowed from the same play book as many governments including ours. We benefited from the low cost of money and borrowed more than we could afford. Currently almost $1 trillion of consumer debt is seriously delinquent. Bankruptcies and delinquencies rates are increasing. This crisis has caused dramatically reduced interest rates which benefit the government and banks. Meanwhile, the losers in this scenario are savers, underfunded pension plans, and crippled endowments. According to the GAO, within 10 years, the interest on ONLY the debt, Social Security, Medicare and Medicaid will require 93 cents out of every tax dollar collected. Forget politics and do the math.
To compound the problem, we continue to borrow from our future. While the credit markets and banks have cut off many Americans and have reduced lines of credits on homes and credit cards, Americans have found another way to meet their short-term financing. According to a recent report from Fidelity, hardship withdrawals on 401k’s have increased dramatically. The report states that 22 percent of the 11 million retirement funds they analyzed had outstanding loans. This is alarming news and will ultimately shift the burden of retirement and self reliance to that of society if we continue down the same path. This will leave many Americans vulnerable in retirement and subject to “some one else’s plan”.
Where do we go from here?
Taxes and Increase Demand for Social Services: As the baby boom population ages and a new retirement reality sets in, you can bet that many states will face an increasing demand for services, more law suits from public employees, and higher taxes and fees at the local and state level. While property values have declined and tax revenue from property taxes have fallen significantly, the easiest taxes to raise are those that affect the smallest number of people, yet, state and local governments especially in California will continue to push for higher gas taxes which affect every one. You can bet that taxes on businesses will rise; ultimately back firing as this will create a culture of deception and increase class warfare. Average Americans will likely be caught at that flash point of falling income and rising taxes.
Opportunity Abound
Planning for the Future Not Reacting to Today: The next several years could be marked by fewer growth opportunities, so conservation and streams of income are important. Taxes will be marching higher, so charting a course of tax minimization today can pay handsomely tomorrow. The best time to buy an asset such as a house, boat, or even car, should come as the economy slows, yielding great deals. And there is the possibility of higher interest rates in the not so far off future on corporate debt and municipal bonds as investors think twice about the credit quality of these borrowers.
You are a Business: Start now and plan for your success. You need to understand your current financial situation. This includes your resources, strengths, opportunities, threats current cash flow, and liabilities. Dream big and look at the wonderful opportunity in front of you. Because you have planned and are prepared, you can seize the opportunity when it arises instead of reacting to the noise of every day events. You will benefit from the deleveraging of debt around the world and here in the U.S. As a Certified Financial Planner (CFP®), we take all our clients through a self discovery process to help them determine their true north and what is really important to them and the risks they are willing to take to achieve those goals. Determine a base-line. By creating a base-line as a point of reference, you and your team can determine the success of the current plan and to make sure you are accomplishing all the items needed in order to realize your goals. Most importantly: constantly monitor. With a plan and the proper discipline, one can continually monitor and measure success and areas of risk as they pertain to their plan. With your new found clarity and understanding of your plan and how it provides a road map while also acting as the guard rails along the road to protect you from getting off course during what could be an extremely difficult period. By understanding where you currently are financially and what your goals and values are, you will be in a great position to adjust your plan as needed while gaining true financial control over time.
Once you are armed with your plan and it is validated by your true values and thorough understanding of who you are and the goals you wish to achieve, you are on course to achieve real financial control. If you do not have a plan or are uncertain of the action needed to find your true north, I strongly urge you to contact a financial planner to help guide you through this process. The clarity and confidence it provides will truly set you free to be the best you can be.