We’re running out of money.
On Tuesday, the government released a report crunching the numbers on Medicare and Social Security. The takeaway: Medicare will become insolvent in 2026.
That’s just five years from now…
Longtime readers know I hate Big Brother programs. Poor management and petty disagreements in Congress push these programs to the brink of collapse. And everyday Americans pay the price.
Medicare is the largest health insurance program, insuring nearly everyone 65 and older. President Lyndon Johnson signed it into law in 1965. But despite hikes in premiums paid by participants and a Medicare tax paid by most workers, Medicare’s trust fund is dangerously low.
More than 62 million Americans use Medicare for their insurance. Medicare only pays for roughly half of total health costs. Most folks have supplemental plans, but about 10% of Medicare participants only have Medicare to help them.
This fear of losing this safety net means it’s time to take our finances into our own hands. Don’t depend on anyone or any agency to take care of you.
In my monthly newsletter, Retirement Millionaire, I have covered three secrets of the rich. These secrets reveal how to build real wealth and avoid dependence on government-run programs that could go under just when we need them most.
I’m going to share one of those secrets today. It’s very simple: Invest for the long term.
Imagine you work hard and aggressively set aside 20% of your earnings in cash for 30 years. After that Herculean effort, you’ve saved up… six years of income.
Not too impressive. Twenty percent is a high savings rate… But it won’t do squat to set you up for retirement if it sits in cash.
If you don’t invest the money, it’s barely worth saving at all.
Why do you need to invest? Because real freedom comes from income. And income comes from invested savings.
In his book, Money: Master the Game, Tony Robbins gives a great description of the goal of saving and investing this way:
The core concept of successful investing is simple: Grow your savings to a point at which the interest from your investments will generate enough income to support your lifestyle without having to work. Eventually you reach a “tipping point” at which your savings will hit a critical mass. This simply means that you don’t have to work anymore – unless you choose to – because the interest and growth being generated by your account give you the income you need for your life. This is the pinnacle we are climbing toward.
Remember, saving and investing are about having the freedom to do what you’d like to do.
To reach Robbins’ “tipping point” and the income that comes from it, you have to invest.
“Investing” takes on a lot of forms. Regular newsletter readers might immediately associate the term with buying and selling stocks. And that’s one common and effective form of investing. But the term applies to any activity that uses capital to create more capital…
If you own a small business, you can invest in advertising. Investing in education can build your skills and boost your income. Even investing time in learning on your own can help you get ahead.
Your car or a good set of boots aren’t investments, though people like to use the term. Owning a home is an investment, but a particularly illiquid one.
But for many folks, the primary means of investment is through public markets – stocks and stock funds.
Lots of people let a variety of hurdles prevent them from being successful investors – the jargon, the account types, the fees, and the number of stocks and funds to choose from… making it easy to put off getting your finances in order until next year.
Whereas starting to save is often a problem of priorities, learning to invest is a problem of inaction. You need to overcome that fear and inertia and invest today.
The good news is, the simplest and most straightforward investing plans are ideal for beginners – especially when adjusted for fees and risk.
Even if you lack a passion for learning about investing, you can still devise a simple plan out of three principles that we’ve covered in Retirement Millionaire…
1. Invest in index funds. There are two types of funds. Actively managed funds have a portfolio manager who tries to find the best investments and beat the market. Index funds simply track the market.
Hiring high-priced experts may sound like a good idea… But it turns out, active managers are terrible. According to Forbes, in 2020, 60% of actively managed funds failed to match or beat the S&P 500. A 2017 study by Morningstar found that only one in five large-cap funds beat the market over the past 10 years. Dozens of other studies have shown the same.
You don’t need funds with active – and expensive – management. Index funds perform better and cost less.
2. Avoid fees and taxes. One of the reasons index funds work better for individual investors than “actively managed funds” is the fees involved. Fees and taxes only take a little bit of your money at a time… but can add up to tens or hundreds of thousands of dollars over the years.
Investment funds charge annual management fees. For expensive funds, this can be around 2% of the account value. But index funds can charge as little as 0.18%. Use cheap index funds and tax-advantaged accounts like 401(k)s and IRAs when you can.
3. Make consistent investments at regular intervals. We’ve all heard to “buy low, sell high.” But how do you know what’s low or high? Investors have a million ways of trying to answer that question. But one simple way to take the calculations out is to invest a consistent bit of money at regular intervals, like once a month or quarter.
As a result, you’ll necessarily buy more shares of a stock when markets are cheaper and fewer shares when markets are more expensive. Taking the calculations out by keeping your investments consistent lets the costs average out, which practically forces buy-low-sell-high success. (If you want to sound smart at your next cocktail party, you can call this a “dollar-cost average” strategy.)
The entire concept of building wealth and freedom requires that you earn a return on your savings. Outside of a lottery prize or other financial windfall, a working individual can’t save enough to become free.
And if your spending comes out of your savings, you’ll never enjoy it. It’s only when you hit the crossover point – when the income you generate can cover your spending – you can truly enjoy the freedom that wealth can bring.
What We’re Reading…
- Something different: Will the IRS start spying on bank accounts?
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
October 26, 2021