The Retirement Myth | The New Midlife Crisis by Ken McElroy

The average employee will struggle financially for their entire life.

The system is set up for them to lose, because their primary role is to pay for social services and entitlement programs. Think about it for a moment. The very poor are supported by the state, and the middle class is taxed the highest and pays for the services of the poor. The rich continue to get tax breaks for providing jobs.

The rich will always have a comfortable retirement, and the poor will always be supported by the state. For the people in the middle, the best hope is to find a job that offers a final salary pension plan and stick around for the rest of their lives. However, many companies have no loyalty to any worker, and many workers feel no loyalty toward their employer.

The majority of people are unprepared for retirement. According to AARP, the average retirement plan totals about $50,000, and half of Americans have $2,000 or less in their retirement account. The math is clear. This is not enough to support their retirement.

Work is the new retirement.

A recent Gallup Poll found that about 80 percent of Americans plan to work during retirement. Most plan to work part time, although some say they may need to work full time just to make ends meet. The market volatility of the past few years has negatively affected many Americans’ earnings, savings and investments. It has also diminished their confidence about being able to retire comfortably.

In the coming years, tough decisions will need to be made. There has never been a more important time to be financially educated about your future. In order to stay ahead of price increases or currency inflation, you must make sure that your hard-earned money is earning more than it is losing. If your savings account is earning one percent per year, and the annual inflation rate is three percent, you are going backwards at a rate of two percent annually. Over 10 years, this represents a 20 percent reduction in your purchasing power.

For example, if you had $10,000 in your savings account for the last 10 years, that savings today would only buy $8,000 worth of goods and services. You will still have $10,000 in your bank account, but it buys you less because prices have risen over those 10 years.

Economic inflation, like death and taxes, is a fact of life. Inflation is when the general level of prices in a given economy rises over time, which, in turn, causes the amount consumers pay for goods and services to increase. The net effect is that the buying power of consumers decreases because they are able to buy fewer goods with the same amount of money.

Inflation will gradually erode the purchasing power of your savings, so you must earn more to make up for the inflation. To beat inflation when investing for the long term, make sure that your investments have a higher rate of return than inflation is taking away.

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man,” said Ronald Reagan, former U.S. president.

One challenge we all have is trying to figure out what the actual inflation rate may be. If we calculate the inflation rate the exact same way the government did prior to 1990, the inflation rate is averaging around 6.5 percent, which is basically double the currently reported official rate. However, if we measure inflation the same way the government did back prior to 1980, the inflation rate clocks in at a mind-numbing 11 percent. And to confuse us even more, the Everyday Price Index estimates the 2011 annual inflation rate to be at 8 percent.

To make matters worse, The Federal Reserve Open Market Committee (FOMC) recently announced its goal to devalue the dollar by 33 percent over the next 20 years. Lowering the purchasing power of the currency is robbing those who save cash, because cash is losing value. This is precisely why Robert Kiyosaki says, “savers are losers.”

The other side of the coin is that it takes money to make money. Yet getting into debt can be counterintuitive to what we all have learned growing up. I still remember my parents saying “get a good job and stay out of debt.”

Modern life requires many of us to borrow money at some point or another. But knowing the difference between good debt and bad debt can make a big impact on your financial health and chance of success.

If you borrow money and spend it on something that is going to go up in value, that’s good debt. If you borrow money and spend it on something that is going to go down in value, that’s bad debt.

For many Americans who lived through the Depression or whose parents did, a fear of personal debt is embedded in the deepest recesses of their minds. For people like this, debt is distasteful and something to be avoided whenever possible. The rules were different then. Today, the government is spending more than it earns and they don’t need to pay it back.

The U.S. national debt is currently rising by well over 4 billion dollars every single day. There is no way that the U.S. government can ever repay their debts. These debts have become far too large to ever be paid back in today’s dollars, when you consider the current $15 trillion in debt and the $50-100 trillion in promises to Social Security and Medicare.

The point almost nobody seems to get is that an over-borrowed family owes money to someone else, but that U.S. debt is, to a large extent, money we owe to ourselves. The U.S. debt currently amounts to $520,000 per household.

The rules of debt and saving money changed on August 15, 1971 when the U.S. changed its policy on its promise to pay gold for dollars. Before that day, the dollar was as good as gold, and the years of modest inflation would be followed, in time, by declining prices. As a consequence, over longer periods of time, the price level was unchanged. Under this system, a dollar was still worth a dollar.

Debt is leverage. Everything you use it for will be magnified, good or bad. If you borrow money for a liability like a car that will eventually be worthless, you are magnifying your cost in a negative way. Bad debt creates a liability that takes money out of your pocket.

Great wealth is founded on the use of good debt. You can use good debt to enhance your situation and increase your net worth. And you should avoid bad debt altogether.

The wealthy use good debt to “hedge” inflation in multiple ways. Primarily, they use fixed rate debt to buy “hard” assets that will rise during inflationary periods. Hard assets are investments with intrinsic value such as oil, natural gas, gold, farmland, natural colored diamonds and commercial real estate. Typically, hard assets are an excellent inflation hedge.

Tough decisions are ahead. Most everyone has conflicting opinions on what is an inflation-hedged asset. Do your homework and look at how people have done this in years past. Don’t be a pioneer, and most importantly, don’t get lured into an investment if you don’t understand it.

Your financial future is something that should command your attention, because many Americans are not adequately organizing finances for their education, healthcare and retirement. As William Arthur Ward said, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

You need to adjust the sails on your financial future based on the new rules of today.

About The Author

Ken McElroy

Ken McElroy is the co-partner of MC Companies in Scottsdale, Ariz. He is the author of the best-selling books, The ABC's of Real Estate Investing, The Advanced Guide to Real Estate Investing, and The ABC's of Property Management. McElroy is also a contributor for The Real Book of Real Estate by Robert Kioysaki, and The Midas Touch by Donald Trump and Robert Kiyosaki. McElroy's fourth book, The Sleeping Giant, is dedicated to the new class of entrepreneurs who are emerging in today's economy. For editorial consideration please contact [email protected](dot)com.

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