The world was supposed to return to normal when the pandemic ended, but instead we now are faced with wars in Europe and the Middle East…an increasing military threat from China…unprecedented rhetoric during a highly divisive US election…stubborn inflation and interest rates…concerns that artificial intelligence (AI) might disrupt numerous economic sectors…and fears about the future of the Social Security system.
How can we plan for the future when so much seems unsettled? Our Bottom Line expert Bryan Kuderna, CFP, author What Should I Do with My Money?, takes a close look at some of the key issues…
Factor #1: Expect declining retirement entitlements—but mostly for those still far from retirement. Social Security is supposed to be the safe and dependable component of a retirement plan, but it doesn’t feel all that secure lately. There soon won’t be enough working-age adults paying into Social Security to cover the costs of the retirement-age adults receiving money from it. If no action is taken, retirees could see benefits cut by about 20% as soon as 2035.
The aging population and associated rising health-care costs are projected to also push the cost of Medicare from 10% of federal spending in 2021 to 18% by 2032. The cost of long-term-care bills covered by Medicaid are expected to increase from $130 billion in 2020 to $179 billion in 2030 and $466 billion by 2050, after adjusting for inflation. Meanwhile, this nation’s debt has more than tripled in the past 15 years to more than $34 trillion, putting the US in a poor position to cover the escalating costs of these massive programs.
This is creating tremendous uncertainty for retirees and people planning for retirement. What to do…
Prepare for the problems with Social Security. Those preparations will depend in large part on how old you are. It’s likely that the government will take steps within the coming decade to prevent benefits from being slashed by 20%. Those steps will probably include some combination of increasing the age at which people are eligible to receive full benefits…increasing payroll taxes…raising or eliminating the cap above which income does not face Social Security taxes…cutting benefits for high-income retirees…increasing the share of Social Security benefits subjected to income taxes…and/or reducing the program’s cost-of-living adjustments. Each of those changes would create financial pain—but most of that pain would be felt by people who are still a decade or more away from retirement age. A payroll tax increase would be a far bigger hit for someone who is mid-career than someone who is about to retire.
Also, consider that when the government last increased the age at which people qualified for full retirement benefits in 1983, the change didn’t affect anyone who was older than 45 at that time because of how the changes were phased in. Social Security’s problems are greater now than they were in 1983, but it’s unlikely the government would impose massive benefit reductions on people who are already retired. Medicare’s financial issues also seem likely to be covered largely by payroll tax increases, though certainly some increases in premiums or other out-of-pocket costs are probable, especially for high-income retirees.
Add it all up, and while retirees and near-retirees should expect slightly lower benefits and higher taxes and costs from these programs in the future, they probably won’t endure anything life-altering. Younger generations likely will face notably higher tax burdens during their working lives, later retirement ages and/or reduced benefits and increased costs in retirement.
Factor #2: A new technology is about to change the world—but that’s because there’s always been some massively important new tech arriving. The tricky part is identifying which new tech that is…and the companies and stocks that will reap the benefits. AI might seem like a safe bet to be this world-changing new tech now. But keep in mind: Not that long ago, electric vehicles might have seemed like an obvious choice, with Tesla stock being the best way to take advantage. Yet EV sales have been sluggish and Tesla stock lost about 40% of its value in the early months of 2024. What to do…
Put a portion of your portfolio into rare-earth minerals or semiconductors. There are ETFs that invest in these. Most modern technology requires semiconductors and rare-earth minerals, so this is one way to gain exposure to the next world-changing tech. Also consider exchange-traded funds (ETFs) and mutual funds that focus on AI or information tech. If you are selecting a stock and are risk-averse, consider major players like Microsoft and Apple, which are likely to gobble up AI rising stars.
Factor #3: Family businesses are becoming more difficult to sustain. These days, only 40% of family businesses reach a second generation…13%, a third…and 3%, a fourth (and beyond). The business world changes so quickly today that it’s difficult for any company to keep up…and young adults often don’t want to take over the family business. What to do…
Confirm that the kids or grandkids are interested in taking over if you own interest in a family business. If not, the best way to sustain your business beyond your retirement might be to sell it or select a leader from outside the family. Succession planning is critical to maximizing the value of a company at the time of sale. Business owners should carefully craft buy/sell agreements and consider appropriate life insurance and estate planning to preserve family wealth when the family doesn’t keep the business.
Caution: This might not be the best time to sell a business—if you can wait until interest rates subside, private equity activity likely will rebound, improving your odds of a solid sale price.
Factor #4: Older generations control the wealth—and that wealth is power. Traditionally, working-age people have held the lion’s share of the nation’s wealth and power. In 2024, Americans age 55 and up control an astounding 72% of the nation’s wealth. What to do…
If you are able, use your estate plans to assist your descendants and shape your family’s future. Once your own future is secure, plan for future generations using life insurance, trust/estate planning and gifting opportunities. Example: Set up trusts that create incentives for your grandkids to pursue productive careers…or establish a safety net in case they face financial challenges.
Factor #5: When it comes to investing, America is still #1. The US is facing some economic challenges these days—but the economic outlook everywhere else is worse. What to do now…
Keep most of your portfolio in the US stock and bond markets despite concerns about this nation’s economic outlook. America still offers a better combination of growth potential and relative safety than anywhere else. The largest companies in the world today are all American—Microsoft, Apple, NVIDIA, Alphabet (Google) and Amazon.
Consider putting a modest share of your savings into US Treasury Bills as a cushion against volatility. T-Bills were yielding more than 5% as of July.
If you want international diversification, consider taking a targeted approach rather than a diversified international mutual fund or ETF, which is likely to invest largely in Western Europe and Asia’s leading economies—all of which are facing challenges. Instead, seek out ETFs that invest in nations with long track records of stability and free market capitalism and relatively low tax burdens and whose populations are not aging rapidly. These include Switzerland, New Zealand, Singapore and Ireland. There are ETFs available that invest in each of these countries.
