Streetwise
Lauren Rudd
Sunday, September 12,
2010
Some
Fundamental Economic and Financial Issues
Regular readers of this column are aware that I recently
underwent knee replacement surgery, a relatively straight forward procedure.
However, with my luck a few complications resulted in many hours of inactivity
with my leg propped up on a pillow. I mention this only because it gave me time
to think about a number of fundamental financial and economic issues.
For example, suppose that we did not have Medicare, a program
some candidates currently running for Congress have advocated abolishing,
substituting in its stead the use of major insurance carriers in combination
with some sort of tax credit or voucher system.
Interesting idea except for one minor detail; insurance
companies are not interested in writing policies except on healthy people. Case
in point, I have been unable to purchase health insurance at any price due to a
bout with cancer eight years ago, despite having been cancer free during those
succeeding eight years.
While my surgery was somewhat “elective,” although made worse
by the eight years I had to wait until I became Medicare eligible, what if it
had been of a more critical variety? Two weeks of medication, not covered by
insurance, cost nearly $2,000. Think of the impact that expense would have on
someone who was unemployed or in a low income bracket; you know the ones that
received a miniscule benefit from the Bush tax cuts.
Then there is the seemingly endless torrent of abuse directed
at President Obama because he has been unable to magically solve in a year and a
half a series of economic problems that were years in the making.
Yes, I understand your frustration. I have seen it in my
students and at organizations at which I am asked to speak. However, the economy
is improving. Furthermore, many of those who complain the loudest would be
better served by expanding their level of knowledge in the areas of basic
economics and finance.
According to one survey, a third of all adults have no
non-retirement savings, while a quarter of all adults have no savings for
retirement. One in five will never be able to afford to retire. The Great
Recession has undoubtedly increased those percentages.
As a nation, we cannot afford to raise another generation
that's skidding toward financial disaster. Becoming a greeter at Wal-Mart should
not become a sought after form of employment. However, if you really want to put
off retirement until you can “Call in dead,” then by all means forego any form
of an investment program.
One of the great retirement myths, assuming you can retire,
is the Pollyanna expectation that just having a portfolio, even if it is
unattended to, will save your bacon. Believe that and there is trouble in the
Land of Oz.
Compounding is indeed a powerful force.
It can, over time, transform a small amount of money into a considerably
larger sum. However, those who vacillate in their efforts to save may find the
time portion of the equation so drastically reduced as to be ineffectual.
Allowing discretionary consumption to take precedence over investing is
disastrous.
Failure to account for market volatility and a cyclical
economic environment was a bitter pill for many, no argument. However, those are
not reasons to abandon your investment program. The key is to never disregard
the precept of asset allocation.
Some optimists continue to assume that one day their below
average income will exceed their above average spending. Great, we call that the
ostrich approach, one that lends itself well to the work-until-you-die
lifestyle. Do you want Wal-Mart’s apply-by-phone number?
Oh, while you are deciding about the need for starting or
adding to an investment program, keep in mind that the upper range estimate of
out-of-pocket medical expenses in retirement for a 65-year-old couple is
$235,000 to $376,000. Those figures double for a couple with above average
prescription needs and only Medicare and Medicare supplements. You might want to
think about buying a larger piggy bank.
