By Dave Gardner
By 2020, one in four Americans will be 60 or older, and as these individuals face an unknown future with the specter of Social Security and Medicare changes, plus volatile markets and defined contribution pensions, shrewd retirement planning has never been more important.
Christopher Scalese, president and founder of the Fortune Financial Group, explained that any scenario which seeks to produce the income needed for retirement must accept that a gap will exist between financial needs in retirement and Social Security/pension income. Inflation also must be considered, as well as the probability of change to the Social Security and Medicare systems.
Retirement planning is an evolving scenario. Many baby boomers have generated personal debt because of live-for-today attitudes, thereby complicating conservative investment approaches which are preferable for older people.
The Scalese retirement formula calls for 60 to 70 percent of investments to be made in fixed and guaranteed assets, with the remainder in market-based products. Clients are expected to participate in investment decisions, although Scalese outsources these mechanics to the specialists at Fidelity investments who offer varying portfolios.
“It’s important to match each client’s risk tolerance with a corresponding portfolio,” Scalese said. “I expect that we will be doing an increasing amount of client hand holding, almost like a psychologist, to help them relax with the market’s ups and downs.”
Financial education is increasingly vital for investors as market situations evolve and government regulation ebbs and flows, according to Lou Ingargiola, president of Ingargiola Wealth Management Group. His process for retirement planning involves an analysis of current assets and liabilities, followed by a determination of the monetary costs needed just to awaken each day.
In many scenarios the daily living costs are deemed excessive for retirement and a plan is then created for reduction. Northeast Pennsylvania has a surprising amount of retirement dollars and Ingargiola emphasizes to these prosperous clients that they must also have a “purpose” in retirement and stay active.
He questions whether a client can continue in their career, even at a part-time level, until infirmity or death. Perhaps, above all, the reality is that intentions are not actions, if a client saves nothing they will have nothing to spend in retirement and they must become a saver before becoming an investor.
“We urge them to save ’til it hurts, with a 10 percent minimum of gross income,” Ingargiola said. “Younger investors can assume more risk, and everyone should have a world view of equities while understanding that course corrections are vital.”
Future of Medicare
Lynn Evans, president and CEO of Northeastern Financial Consultants is skeptical about the death of Medicare. She said “unknowns” with these programs are often appearing in the news, complete with dire predictions that the twin entitlements systems will be bankrupt by a certain date.
“We’ve been hearing spoiler alerts galore over the years, and nothing happens, so I’m not worried despite the new political climate in Washington,” Evans said.
Even with her confidence in Social Security and Medicare, traditional dollar amounts once thought to be needed for retirement are no longer valid. Interest rates, investment returns and social programs are all operating within volatile markets, and when the possibility of entitlement programs changes are added in, retirement forecasts should not try to predict the distant future with any degree of detail.
“No one really has any idea what’s ahead on the national stage, and when you mix in the possibilities of illness, Alzheimer’s disease and perhaps a need for long-term care, a reasonable forecast for retirement spending is only five years into the future. No program can predict farther than this,”she said
Retirement planning has also become somewhat of a quandary for employers seeking to attract and retain talent. Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry, described how employers have historically designed employee benefit programs that recognized the existence of Medicare.
He said none of his professional peers expect wholesale changes to occur with Medicare, but some revision is a probability because the program needs to evolve financially.
“Overall, for human resource managers, this is a time of increasing uncertainty,” said Barr. “President Trump is vowing big changes with international trade, mandates and the overall future of the business environment. This type of uncertainty is bad for business, but so is the certainty of what is not wanted.”
Joseph Jennings, wealth director at PNC Financial Services Group, preaches a retirement gospel of consistency and discipline. The process of retirement preparation is a marathon and not a sprint, and clients are urged to save early and often while using information from software that indicates financial positions versus needs for potential changes.
Jennings’ position is that Medicare’s future is a wildcard, with no factual projections of change but lots of speculation. His organization advises clients to wait and see what reality actually surfaces as Washington hashes out differing views on entitlements.
Investment guidelines adhered to by PNC include a client’s individual time horizon, risk tolerance and the reality that retirees should expect longer life spans than ever before. Quality of life expectations are established, as well as predictable medical expenses with a recognition that these will escalate during the final two years of life.
Clients are urged to avoid speculation and deal only in high quality stocks and bonds that match risk profile. Caution is especially urged with stocks that have the potential to perform like lottery tickets.
“Discipline and consistency with a focus on fundamentals with course corrections are at the core of our program,” Jennings said. “These are proven combinations.”
Two of NEPA’s most experienced and recognizable economists issued differing forecasts about the future of Medicare and Social Security. Justin Matus, Ph.D., associate professor and director of MBA program for the Sidhu School of Business and Leadership at Wilkes University, forecasts that Social Security and Medicare won’t disappear but will undergo tweaks and adjustments which history proves have been ongoing.
He pointed out that human behavior is largely emotion based and that rumors of the demise of the twin entitlement programs, which are firmly within the aging and eventual death cycles, are sure to produce waves of negativity. Emotional behavior with retirement prospects is also somewhat age-based and because many Millennials experience little fear of death or aging, they largely live in the moment while largely rejecting purchases of cars, homes or retirement planning.
“These kids want experiences which are short lived and I’m not yet sure where their heads are with time horizons,” said Matus said. “Many are buried with student debt, which is another reason why they are not yet worrying about retirement and opening 401(k) plans.”
This contrasts with the behavior of the X-Y Generation, which seems to be living either in prosperity or hard times. This generation envisions Social Security only as a financial wall and a segment of a retirement plan.
Baby Boomers on the other hand often grew up with Great Depression-era parents who preached the value of saving. This behavior rubbed off on many boomers and even if they now hold high debt they are more like their parents than not and will reap the benefits of interest rates rising if that occurs.
Matus is also concerned about the prospects of Washington relaxing the regulatory system that was reinforced after the 2008 financial crash. He fears that a careless easing of these many “regs” would allow predatory lenders to once again prey upon gullible people, which could deter solid but rate-stagnant saving and encourage risky investment.
“All of this retirement planning is taking place under a growing cloud of unknowns,” Matus said. “Ahead for many people could be student debt and property tax bubbles, along with the threat of property reassessment.”
Satyajit Ghosh, Ph.D., professor of economics and finance at the University of Scranton, offered an assessment that the unknowns now being presented by President Trump and his Republican Congress are making retirement forecasts risky at best. President Trump vowed to protect senior entitlements, but a campaign mode is different from governing and Congress certainly wants an entitlement overhaul as well as system privatization with details yet unknown.
“Making these systems private with huge returns sounds terrific, but it also exposes people to risks and forecasts that go out the window,” Ghosh said. “When people don’t work with accurate information, they make bad decisions and I believe that the election proved this.”
Medicare reform is in a similar situation, with Congressional conservatives now advocating some sort of a fixed subsidy for people to buy private health insurance. Ghosh believes that this change would not be cost effective for seniors because patient costs for insurance would rise steeply.
Another legislative concern voiced by Ghosh involves the upcoming enforcement of the Retirement Account Fiduciary Standard in April. This regulation will require vendors of investment products to provide advice in the best interests of investors and while Wall Street scorns this type of inhibition on its salespersons, Ghosh said the regulations are crucial because without good information investors cannot make wise decisions
“After the Sandy Hook shootings, the majority of Americans wanted gun controls improved, but nothing was done in Congress,” Ghosh said. “I have no faith in Congress complying with the will of the people. Lobbying for private programs will be huge and when you put all of these forces together it does not bode well for the elderly.”