Britain is in danger of having its debt that the government sells (its version of Treasuries), downgraded to third world status. Like us, the British government has been spending money it doesn't have in an attempt to jumpstart its economy. And now, credit ratings agencies are calling into question their ability to honor these debts.
Why is this a scary thing for us? Britains' debt load by next year will be about 66% of their output of goods and services. America's debt load by next year, with all the deficit spending, will be almost 71%, a level of debt considered outrageous even in war time.
But forewarned is forearmed. We still have time to turn this around. The problem is that we're dependent on the kindness of strangers to keep our economy cooking these days. Communist China, for example, now holds over $1 trillion of our debt. But how do we really keep ourselves cooking? Simple. We don't spend money we don't have. Yes, it's complex with all the bailouts and promises flying around. So how do we come up with money? We could tax ourselves every which way -- or maybe, we conclude that government should be required to do less.
It's become normal in wealthy western culture to depend on government to "have your back." It previous times, we relied more on neighbors, relatives and charitable organizations to lend a hand. Maybe it's time to get back to that model. Executive producer Christa talks about a charity she saw on Oprah called Good News Garage that fixes cars for the needy to help enable their job search. Clark likes this. While it would be great if government was able to provide for all, right now it just can't afford that. So if you are doing reasonably well, now is a great time to give back and help out others. Clark supports a constitutional amendment that would require governments to balance their budgets. Sounds quaint, but it's a realistic step towards changing our relationship to government, and how much we expect from it. Clark thinks we as a country have gotten a little bit lazy. If we don't want to be downgraded to third world country status, we need to get it in gear.
Many employers match what employees contribute to a 401(k) plan up to a certain limit. Well, Clark extended the same offer to his teen daughter about 4 years ago. He calls it "the daddy match" and he puts a dollar into her Roth account for every dollar of her pay she saves.
It's no secret that getting a teen to start saving early will help insure their financial security later in life. Clark loves pointing to a chart that shows a teen who starts saving at 15 and puts aside $2,000 for 7 years will have more than $1 million at 65. That's assuming a return on investment of about 8%, of course. Money has a strong ally in time. Most financial models show that your money doubles in value every 9 years.
Syndicated financial writer Humberto Cruz recently crunched the numbers and found that a 20 year old who puts $2,000 in a Roth for 10 years will have just under $500K at retirement time. And that's with never having to save again! If you wait until you're 30 and save at the same rate, you'll only have $370K at 65. So the message is clear: The earlier you start saving, the better off you'll be.
The same thinking applies to your car purchase. The Wall Street Journal reports that if you buy a Toyota Camry instead of a BMW and invest the money you saved, you'll have about $26K after 10 years. Do it all over again 10 years later and you'll have about $100K in 20 years. This is proof that an isolated decision today can make a huge difference down the road.
CLARKONOMICS: Have you heard about the new documentary I.O.U.S.A.? Don't expect this flick to be a Hollywood blockbuster or to sell millions of tickets. In fact, Clark jokes that it's a true sleeper hit -- emphasis on sleeper!
I.O.U.S.A. is the brainchild of Warren Buffett, Pete Peterson and other wealthy folks. As the title suggests, it focuses on how we as a nation have wracked up debts that we can't pay.
This film describes in nauseating detail how we as a country can't afford the Social Security, Medicare and Medicaid that we've promised our citizens. The math simply isn't going to work, especially as we live longer life-spans.
The takeaway for you is that you are the only who can provide for your retirement -- particularly if you're under 40. So you can either start saving money now, or face the fact that you may not get to retire. Not retiring is not the worst thing in the world; retirement itself is a relatively new concept in human history.
If you can save as little as a dime on every dollar you make, you'll put yourself in good stead for retirement. Do you have an employer match through your 401(k)? Make sure you're putting in at least enough to pick up the match.
Members of Generation X don't think they'll ever be able to stop working, according to a survey from the BetterInvesting organization. Most adults age 27-42 have saved minimally at best for their retirement. In fact, 40% have saved almost nothing at all! Here's the upside: Gen X is not in denial about the dwindling of Social Security. They know they should be saving for retirement -- they just haven't done it. Well, the first step to getting better is to admit that you're ill!
If you don't save, you'll probably have to continue working until you drop. That's so unlike the scenario that faced most baby boomers -- a generation that really lived it up in the golden years. But at the current rate, Gen X won't even have the option of retirement. It goes without saying that Clark wants Gen X to reduce debt and save along the way.
It all begins by buying only the things that you can afford on a day-to-day basis. That's means no 0% in-store financing. We're at a unique juncture in American history where we have the permission to borrow ourselves into oblivion. But that's a choice. And if you make it, you may have to work your whole lifetime and never stop.
Clark is very impressed with young people who open a 401(k) when they first start a job. Years ago, few people even knew what a 401(k) was!
But a new study from Fidelity reveals that just under half of all 20somethings and 30somethings cash out their 401(k) accounts when they change jobs.
That's like snatching defeat from the jaws of victory.
As regular listeners know, retirement savings need time to grow. That idea is well illustrated in Clark's retirement chart.
Know that the money you cash out of your 401(k) gets hit with penalties of about 40%. So Clark's special challenge to younger people is for them not to cash out. Instead, think about rolling your money over to your new employer's 401(k) plan.
RIP-OFF ALERT: If you've spent a lifetime working for one employer and built up a sizeable nest egg, you don't want to be targeted by a 401(k) predator.
401(k) predators are those stock brokers or insurance companies that promise great wealth if you move your 401(k) from your ex-employer over to them.
One stock broker got $320,000 from a retired factory worker and reduced it to $57,000. The broker did so by running the money through bad investments with giant commissions. The factory worker had to come out of retirement and work as a school janitor for $9/hour to avoid impoverishment.
This is an extreme example, but so many people like this are profiled in Business Week. Clark was recently speaking to a man who took his retirement savings to a broker he knew socially. The result? An 80 percent loss of his money.
There are many fine, reliable, honest and decent people in the brokerage industry. The problem is that brokers don't have "fiduciary duty" to you. That means they're not required to put your interests first. Instead, they're allowed to put you in high-commission investments that are generally "suitable" for you and get away with it.
The Business Week report also shows that those free lunch and dinner seminars where they push trashy annuities are terrible rip-offs.
If you need some investment advice, Clark prefers that you seek out a fee-only financial planner. They don't earn any commission from steering you to a certain product. You simply pay them for their advice.
So often, Clark gives general "one size fits all" advice about your retirement savings. But FinancialEngines.com can be used to analyze your specific situation. This website takes a very granular look at your retirement plan. Using Monte Carlo simulation, it generates a worst case, best case and intermediate case scenario for your money down the road.
Meanwhile, FinancialEngines.com recently surveyed 1 million people to get a better idea of how we're planning for retirement. Unfortunately, 70% of us have our money fouled up in a 401(k) plan with too little or too much risk.
In addition, some 40% of us have huge money tied up in employer stock. Clark says that should be more like zero percent! But people trust the company they work for and take the path of least resistance when making investment decisions. The downside is there's great risk having all your eggs in one basket. If you think not investing in your company stock is disloyal, throw them 10% at the most and call it a day.
Diversification is the key. You have to spread your money out to lower your risk. A lot of people make the mistake of taking all their money and putting it into a stable fund or a guaranteed fund. Those options may sound like a sure thing, but they basically tread water.
Clark prefers that you have money in the Total Stock Market Index, where you own pieces of thousands of companies. Sure, it's not as "sexy" as putting it all into a single company and letting it ride. But investments should be about long-term security, not the dazzle factor.
The 3 remaining presidential candidates are all afraid to talk about Social Security and Medicare going broke. It's cute for people running for office to talk about how they'll make government efficient and lower taxes. But unless you address head on what's eating up the federal budget, you're not being serious about what you're doing to help the country.
People who are under age 35 shouldn't be faulted if they have more faith in the Tooth Fairy than Social Security supplementing their retirement. But the bigger issue is Medicare, which is now projected to end up in the red by 2019. Social Security, meanwhile, is expected to go in the red around 2041. Why should young people care about something that will happen 33 years from now? Simply put, the feds are going to tax you and employer very heavily to pay for older folk's Social Security and Medicare. If you're younger, you're getting ripped off completely because the money you're paying in won't be available to you.
Younger people have got to save for retirement because they won't have a check coming from Uncle Sam every month during their golden years. Somebody needs the courage to face up to American citizens and tell them what they don't want to hear -- that we don't have money to do all this. Clark feels younger people should be allowed to opt out of Social Security and opt in to a mandatory retirement savings withdrawal. What we can't do is allow people to opt out of Social Security and not save for the future.
Why is it so hard for McCain, Clinton and Obama to own up to the facts as they are and get a plan together? Politicians only tell us only what we want to hear. Maybe most Americans aren't willing to hear the real story. What do you think?
Note: Clark is broadcasting remotely for his Christmas Kids 2007 initiative. You can donate online.
While Clark's helping you play Santa for needy children, a new report suggests that we aren't playing Santa to ourselves and our own retirement needs. People left to their own devices don't save. Or they may begin a 401(k) and then spend the money when they switch jobs. If you are younger than 45, Social Security won't be able to help you in a meaningful way. Meanwhile, there are very few pension plans around anymore. So you are your only line of defense! Many employers now have mandatory enrollment in their 401(k) plans, but the amount they deduct may be so small that it won't help in the long run. Clark's executive producer Christa began saving a mere 2 percent of her salary when she was 22. Then at one point when she changed jobs and got a higher salary, she made the leap to saving a whopping 15 percent! Her advice is to start saving now, don't wait for tomorrow. One of the most disturbing findings of the new study shows that people in their 20s have a real problem saving. That's scary considering that your 20s should be one of the easiest times to save. Most people don't yet have a family or other heavy financial obligations at that point. The sad reality is that if you don't save for retirement, you'll have to work until you die or you're physically unable to work anymore.
If you're retired or over 50, you probably have nothing to worry about when it comes to Social Security. But people who are under 35 are more likely to believe in the dodo than Social Security. The math simply doesn't work out; there are not enough people to pay into the system to make it sustainable. Yet very few politicians are willing to say this to the American public. Fred Thompson is one who has. Thompson is proposing that Social Security be indexed to prices instead of wages. Right now, Social Security increases in lockstep with the average wage of the average worker. So this begs the question: Is the purpose of Social Security to keep people from starving or to give them a certain level of comfort in retirement? The truth is that we can only do the former. So why not offer young people mandatory private accounts instead of Social Security? Thompson thinks this should be voluntary. But Clark believes young people will voluntarily choose not to save if given the option. Then they'll still have to lean on the government in their golden years. Even though Thompson is running a lousy campaign, Clark salutes him for being one of the only candidates with the courage to tell the ugly truth about Social Security.
Speaking of campaigning, Clark was recently upset when The Washington Post reported that video production companies are shooting canned ads for the 2008 race. Template ads are already being used by law firms and some retailers. Each firm gets exclusivity in its own territory for the ads. But this latest report really shows that things have sunk to a new low. Politicians are taking advantage of you and your good nature by running fill-in-the-blank ads.
Do you want a free pass to financial trouble? Try being among the more than 50 percent of Americans who does not have a will! In a surprising twist, Forbes recently revealed that 1 in 3 wealthy Americans doesn't have a will either. What's going on, people? Clark wants to guilt everyone into having a will. Did you know that if you have minor children and don't have a will, the state can take your kids away at the time of your death and decide who gets them? They could go to a stranger or a relative who can't get their life together. Likewise, the state can decide who gets your money if you die and don't have a will. It could go to a family member you don't like, while your spouse may only get 10 cents on the dollar.
If you made a will years ago, you may need to dust it off and update it. You can do this yourself if your financial situation isn't too complicated. You can also go to a site like LegalZoom.com or try the highly respected WillMaker software. But you should go to a specialist if you have substantial money to protect. Retirement savings really need close attention. The beneficiary designation on your 401(k) or IRA accounts will trump whatever you have in your will. So check those designations carefully! One final note: California may be the exception to the rule that living trusts are not useful and should be avoided. That's because the Golden State has a very corrupt probate system. Some lawyers have even been able to arrange guaranteed revenue for themselves as a percentage out of someone's estate. If you own real estate in California and live elsewhere, you may want to hold it in a trust to avoid these corrupt probate courts.
Did you know that half of all American families haven't saved for retirement? Of those who have, 25 percent have stockpiled living expenses for one year of retirement. The problem is that we have not adjusted to the changes in retirement savings since Social Security is weakening and employer-provided pensions are going away. The average Social Security benefit is $11,000/year. Very few people can live on that alone. So the bulk of retirement savings has got to come from you. Over the last year, employers gained the right to automatically enroll you in a 401(k) plan and even step up your contributions every year. Laura Tyson, the former chairwoman of the Council of Economic Advisers, recently wrote in a Wall Street Journal editorial that someone forced by their employer into a 401(k) plan will save an additional $200,000 to spend in retirement. Meanwhile, 75 million adults work for companies with no retirement plan at all. Of those millions, only one in 10 saves for retirement. But Clark thinks we need to move away from depending on the government to provide for our retirement. Congress is planning to make small employers establish an IRA auto-deduction policy for their employees. That way the employees of small businesses will automatically be saving for retirement. The bottom line is that we need to be more self-reliant. Clark believes that having the discipline to save for retirement builds the character of our country.
Have you heard of a “social contract?” It’s an agreement that used to exist at companies where workers spent their entire career at one company and got a pension when they retired. Somewhere along the line, companies decided they weren’t going to honor those agreements. As a result, taxpayers end up paying for pension benefits of companies that shirked their responsibilities. And that is causing problems at companies where bankruptcy is a possibility. The airline and auto industry are two that are on the line, for example. And some companies may not make it, meaning the pension goes away. It’s a time when the only entity you can trust with your retirement is you! Many people think of their pension as the cake they get at retirement. Clark wants you to think of it as the icing on the cake. Every dollar you save on your own is a dollar you have to live on when you retire, and that is a guarantee. No one can take that away from you. If you’re under age 50, social security is not going to do it for you. So, if you’re not in a 401k, a SEP or a SIMPLE, get in one today!
The reality today is that many of us will not be able to retire “cold turkey.” The AARP recently conducted a study on this issue and has reported that many more people are going to experience “phased retirement.” Basically, that means you work gradually less until you’re fully retired. It helps some people adjust better to retirement, and 4 out of 5 people said they would prefer to do it, according to the AARP. And, the Wall Street Journal has more news on retirement. The Treasury Department is now floating a proposal that would allow people to work in a phased retirement capacity and still receive a portion of their pensions. That’s a great idea, in Clark’s opinion. Just because someone is beyond doesn’t mean he or she is useless on a job. Pilots, for example, get better over time. So why not let them work part of the time and everyone benefits.
If you are in your 20's or 30’s, there is no way that the government is going to be able to pay you the social security benefits that they are promising they will. The social security program has no credibility with individuals in their 20’s and 30’s. Why should they have to pay you social security if they don’t believe in it? If Clark had it his way, he would force people under 35 to put 10% of their salary in a personal security account, instead of going towards social security. You would not be able to touch your PSAs until you retired. People older then 35 would remain in the current social security program.
