Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Playing The Cards As You Are Dealt Them

{Hand your Dealt}
Hand your Dealt

A century ago it began to be usual to expect to earn a living for most of your life, certainly for most of your life after you finish school. But at the turn of the Twenty-first century, it is becoming more accurate to say that life is divided into thirds, one for school, one for work, and one for retirement. It seems hard to believe this trend can continue much further, with two thirds of the population either in school or just loafing. Sooner or later there is surely going to be a revolution in the education industry, and a second one in the retirement entitlements of fairly healthy people who could be working but are not. At the moment, planning consists of devising strategies for coping with uncertainties about just where the boundaries will fall for individuals or couples; that's the topic on the table. But it is impossible to avoid mentioning that the largest unemployed labor pool is soon going to be the group from age 65 to age 85, and it is this group which is going to have to supply the unaffordable manpower required to care for a huge future population aged 85 to 105. At the other end of the working-years border, the education industry seems already starting to force the issue. College tuitions have been raised to approximately double their actual underlying cost, with the surplus internally redistributed as scholarships to more than half the students. That increases the pool of students able to afford college, but it only conceals for a few more years the recognition that we are graduating more students than the workforce can absorb, and must eventually stop doing it. After all, very few of our Founding Fathers went to college, while Benjamin Franklin the greatest overachiever of them all, only finished the second grade.

At the moment however, the greatest opportunity for individuals to re-align their assets with their life expectancies, is to retire later or to go to college less, thus stretching out individual earning years by as much as ten percent. Our society could pour more money into medical research, but once we have achieved a cheap effective cure for cancer and Alzheimer's disease, the demand for research will soon experience a cooling of public enthusiasm. And individuals have the ability to make appreciable reductions in their living costs by re-defining what is a luxury and what is a necessity. This essay confines itself to planning the finances to match revenue to need, as currently defined by public opinion.

Let us assume a young person begins to work at an average age, accumulates as much after-tax assets and as much tax-sheltered retirement income as possible, retires at an average age, and lives for an average life expectancy. Since these times and amounts cannot be precisely predicted, they should be conservative. Thirty years of retirement is more than most people currently get, but may even be an underestimate of what the average person can expect. Thirty years of no earned income will require a nest-egg of two million dollars at retirement time if annual expenditures of $100,000 are expected. That's pretty generous, but half that amount is not certain to provide luxury living at $50,000 a year, and still requires a million-dollar nestegg. Cutting that in half a second time confronts people with $25,000 income based on half a million in savings. Most people cannot expect so much assets to accumulate, and most people would have a marginal existence on $25,000.

It simplifies planning somewhat to narrow the time-spans. If a person is within ten years of his life expectancy, he can probably safely spend every penny of his savings if there is some sort of insurance or cost averaging annuity for his age group. Above a certain asset level, this would take the form of an average terminal-years fund, plus a contingency fund. However, there would assuredly be hardship cases who cannot manage such a minimum and would require a subsidy. Estimating in advance just what proportion would require subsidy is difficult, but the magnitude essentially will determine whether this approach is feasible or not. If not, we would essentially be in the position of a third-world country, taxing the working population to pay for this subsidy, and thus crippling the economy. Long before this was tolerated, the education industry would have experienced some harsh treatment designed to force a larger proportion of students back into the work force.


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