Savings and Debt

Bob thought he'd been exceptionally responsible. He'd put funds away every month for most of his adult life and proudly avoided investing in the stock market, believing his friends who did were essentially gambling. He's not alone in that. In Italy, the older generations do not even refer to investing in stock and bonds with the proper translation, “investire in borsa,” but rather more often use the term, “giocare in borsa,” which literally means “gambling on the stock exchange.”

Even if you think you have it covered, the harsh reality is that many of us, like Bob, simply may not be as prepared as we think. Even for those who have been saving for a long time and are ahead of the 31 percent of U.S. adults who have no savings or pension plan¹ it may not be enough. According to Bankrate.com, even 46 percent of the highest-income households ($75,000+ per year) and 52 percent of college graduates lack enough savings to cover a $500 car repair or $1,000 emergency room visit.² Did you know the cost of raising a child through the age of 18 in either the United States or Canada is more than $240,000?!? In the United Kingdom, that number is $342,000.³ A recent report by AMP and the National Centre for Social and Economic Modeling in Australia found that the cost of raising two children to the age of 21 in that country rose more than 50 percent between 2007 and 2013 is now about $720,000. No wonder people are having fewer and fewer kids in the Western world!

And it can be more, a lot more. Those are only the averages!

We'd point out that excludes the cost of college, let alone if they get into an Ivy League! According to the College Board, a “moderate” college budget for an in-state public college for the 2013–2014 academic year averaged $22,826, while a moderate budget at a private college averaged $44,750. Some quick math puts that four-year cost between $91,000 and $180,000, but that's just the education part—room, board, and other items are extra. That's a pretty penny if you only have one child; if you have two or more children, it could easily cost over $1 million to raise them into their early twenties.

Trust us, you are not alone in looking at that cost.

According to the Consumer Financial Protection Bureau (CFPB), more than 40 million Americans are working to repay more than $1.2 trillion in outstanding student loan debt, and we're sorry to say the conventional wisdom on this is wrong in the United States. What's the conventional wisdom, you ask? Well, the herd (we'll have more on who that is and why they tend to miss what's really going on later) view is that all these people struggling to pay off student loans are young people, primarily recent college graduates.

They're not.

A report by the New York Federal Reserve showed that in 2012, the last year for which there are records, 4.7 million people who owe money on student loans are between the ages of 50 and 59. Perhaps more of a surprise—2.2 million are age 60 and older!

Is it hard to fathom then that 40 percent of Americans past the age of 45 said they had thought “only a little” or “not at all” about financial planning for retirement? No—lest you think we are making it up, that was revealed in a 2014 Federal Reserve Board study.

According to the OECD (Organization for Economic Co-Operation and Development), the ratio of household debt to income in the Eurozone has gone from 77.2 percent in 2002 to 97 percent in 2013. In Italy, this ratio has risen from 37.7 percent to 65.8 percent in 2012; but that isn't nearly as bad as in Spain where debt has gone from 79.3 percent of household income to 122.9 percent by 2012. In the United States, in 2000 this same ratio was about 90 percent. It peaked at 133.6 percent in the fourth quarter of 2007 (no surprise, given all those crazy 0-percent-down mortgages being handed out left and right, coupled with the home equity credit lines that became ATMs for many) but has improved to now be about 108 percent by 2015.

For argument's sake, let's say that you've been a diligent person and you're socking some of your after-tax dollars every month as best you can, to chip away at that looming cost.

If at this point you understand that you will need to invest to ensure you meet your financial goals, you can skip to Chapter 2; just be sure to check the summary located at the end of this chapter.

State of Savings in the United States

If you are a data lover like us and want to know more about just how startlingly dire the situation may become, read on. We really geek out on the stats in this next section.

Congratulations!

We say that because saving money is a good thing, despite what the elected officials in Washington, D.C., would have you believe in our consumer-driven economy. How often have you heard how we need to get consumers spending? It's as if the key to a successful economy is to spend every dime you make, and then borrow some more! As thrilled as we are that you are taking steps forward, the reality is if that's all you are doing, then you have a much tougher road ahead of you—and one you may not see the end of.

There are two other big concerns that most people face. One is being able to afford the level of care required as you get older. According to a Harris Poll, nearly three quarters (74 percent) of respondents said they worry about having enough money to retire and two-thirds (67 percent) of respondents said they worry about being able to afford unexpected healthcare costs.⁴ Among those who are not yet retired, 7 in 10 worry about being able to pay for their healthcare costs when they retire. And worried is exactly what the findings of Age Wave, a think tank that specializes on aging, say you should do, because out-of-pocket healthcare costs in retirement may equal $318,800 if retirement lasts 30 years; $220,600 for 25 years; $146,400 for 20 years; $91,200 for 15 years; $50,900 for 10 years. And in case you were wondering, these estimates do not include the cost of long-term care.

And that brings us to the next big concern—the really big concern—having enough saved and invested to actually retire. Three-quarters of U.S. adults who are not yet retired say they worry about having enough money to retire, and 70 percent say planning for retirement is a key priority to them. One thing those still in the workforce are not planning to use is Social Security—only about a third say they have faith in Social Security being there when they retire. If you have such concerns, or even if you don't, we would suggest you point your web browser at USDebtClock.org to better understand the country's mounting debt and how much is attributed to entitlements such as Medicare, Medicaid, and Social Security. Perhaps Social Security will be around when you retire, but we would hate for you to be banking on that only to find out the program was significantly altered when it was your turn to collect.

Pundits say you will need 60 to 85 percent of your gross household income today to sustain the same lifestyle after you retire. A different perspective from Fidelity Investments says that, depending on factors such as your ability to save, your starting age to save, and retirement age, you'll need eight times your ending salary. Data from Sentier Research recently pegged average household income at $53,891; for reference, that is still 4.8 percent lower than it was at the start of the Great Recession in December 2007. If your ending salary was in that range, then at minimum you would need another $430,000 on top of the amount you would need to fund education needs and healthcare concerns. Odds are, however, that would not be enough given the impact of inflation, which saps the purchasing power of your saved dollars. If you are the sole breadwinner in the family, that means eight times your ending salary needs to be stretched even further—perhaps you need to be saving more than you think?

This is hardly an outrageous thought when you consider that these figures are the averages. Depending on your current lifestyle or the one you aspire to have, it could mean needing far more than that. For others who are earning below the median income, and per data from the Social Security Administration, roughly 50 percent of American wage earners fall into that camp, while 47 million receive food stamps and 47 million live in poverty, it means having to close an even bigger gap.

We've already mentioned inflation and how it cuts into purchasing power. Ask any retired person living on a fixed income how much beef they've been eating over the last year or two, given the more than 50 percent increase in beef prices! The same goes for the other parts of the protein complex: pork, chicken, dairy products, coffee, and more. As the standard of living improves across the globe, it means there will be more mouths looking for the same foods that you've enjoyed. Not a bad thing (do you really think others should not be allowed to enjoy chocolate or a nice cup of coffee in the morning?), but simple laws of supply and demand tell us that if global demand is climbing past a certain point, then supply is constrained and prices will rise. This is particularly true of the more complex proteins like beef. It takes a lot of feed to produce just one pound of beef versus the relatively smaller amounts required to produce one pound of fish.

Another easy factor to observe is that we are simply living longer lives.

If you don't see that when you are out and about in your daily lives—well we've got some data to share with you. According to a report from the Stanford Center on Longevity (SCL), in 1950 a 65-year-old man could expect to live to age 78, or an additional 13 years. By 2010, a man age 65 could expect to live to age 82, or 17 years longer. A woman age 65 in 1950 could expect to live another 15 years, to age 80, but by 2010 her life expectancy was 84.

The same report shows that the average length of retirement in 1950 was 8 years for men, increasing to 19 years by 2010. This is due to the combination of earlier retirement ages and longer life expectancies. (There are no comparable figures for women, since women didn't enter the paid workforce in substantial numbers until the 1970s.)

Another SCL report shows that the percentage of older employees in the workforce is back on the upswing. In 1950, 45 percent of men age 65 and older were still working. This percentage declined to about 15 percent by 1990, but increased slowly to about 22 percent by 2010. (It's worth noting that this figure encompasses all men over age 65, including men in their 80s and 90s. The percentages of men working in their late 60s and early 70s are much higher.)

Another important difference between then and now is that in 1950, retirement hadn't yet been glamorized by the media as the “golden years,” an extended period of travel and recreation. Most retirees didn't retire to pursue their hobbies and interests—rather, they stopped working because they were unable to continue. After retirement, they lived simply and modestly in the communities where they had worked and lived all their lives. And it bears repeating, the average length of retirement today is far longer than it was several years ago. The rise in the standards of living has been a blessing, of course, but it also has been accompanied by a rise in expectations—expectations that require a lot more funds to fulfill than in years past.

According to the Administration on Aging (yes, there is such an institution, and it can be found at www.aoa.gov), by the end of 2009 (that latest year for which data are available), persons 65 years or older numbered 39.6 million, roughly 13 percent of the U.S. population, or one in every eight Americans. By 2030, the AOA estimates there will be about 72.1 million older persons, more than twice the number in 2000. Keep in mind, the current domestic population according to the U.S. Census is 319 million people and some simple math tells us that as the number of retirees more than doubles from the current 48 million, we will be facing a retirement crisis.

Living longer lives is not a new concept. When we trace back to 1900, we find the percentage of Americans 65+ has more than tripled (from 4.1 percent in 1900 to 12.9 percent by 2009). In looking at the data, it becomes clear that it's not just more people who are 65+, but the population cohort itself is living longer. In 2008, the 65–74 age group (20.8 million) was 9.5 times larger than in 1900, while the 75–84 group (13.1 million) was 17 times larger and the 85+ group (5.6 million) was 46 times larger. This really put the data into perspective for us: A child born in 2007 could expect to live 77.9 years, about 30 years longer than a child born in 1900.

As a result of increasing longevity and the decline in the average number of children people are having, the domestic population is skewing older. That pace began to accelerate even further in 2011, when the Baby Boomer generation (those born between January 1, 1946, and December 31, 1964) started turning 65. Beginning January 1, 2011, every single day more than 10,000 Baby Boomers will reach the age of 65. That is going to keep happening every single day for the next 19 years and will add roughly 70 million to the 65+ category.

But what if you're a few decades or more away from entering your Golden Years and are a member of Generation X?

If you were born between the early 1960s and the early 1980s, then you're probably between the ages of 33 and 53 years old. Even more likely, between 2007 and 2010, you saw a drop in your wealth coming out of the Great Recession. Perhaps you lost your job for a while or thought you were going to…maybe you were one of the lucky ones who didn't have those concerns, but if you did, it meant falling behind in your savings and investing efforts. Unlike those at or near the door of retirement, Gen-Xers as well as Millennials (if you were born between the early 1980s and early 2000s) have time on their side when it comes to saving and investing for their retirement and other life goals.

Despite the time factor that affords the power of compound investing, more Millennials have opted to choose cash as their favorite long-term investment than any other age group, according to a new Bankrate.com. Per that report, 39 percent of Millennials surveyed said cash was their preferred way to invest money they don't need for at least 10 years—that was three times the number who picked the stock market.

The eschewing of the stock market by Millennials is likely to prove a costly mistake and raises the question as to where and how you are building your nest egg. If you are a diligent saver and have been putting money in the bank, the returns you are getting given the low interest rate environment won't help you much. Simply saving in a bank account is not going to get you where you need to be for an eventual retirement. Over the last few years, the Federal Reserve's easy money polices and artificially low interest rates have left you earning next to nothing in your savings accounts or with CDs. The Fed has begun raising interest rates again, but even if we get back to average interest rates on savings accounts and CDs, they will barely put a dent in the amount you'll need over the course of your life.

The Rules Have Changed

Consider that if you put away $250 per month over a period of 30 years in a savings account, you will probably end up with something around $145,000. If you could only sock that much away each month for a period of 20 years, you would have more like $82,000. As you can imagine, if you only had 10 years of saving like that, you would have even far less.

How would you feel upon realizing that you didn't prepare sufficiently—and by that we mean save and invest properly and you had to alter your lifestyle when you finally retire? Think that's far-fetched? A survey conducted by The American Association of Retired People (AARP) found that 60 percent of New Yorkers over the age of 50 said they were likely to go somewhere else in retirement. The same survey found 40 percent worried about paying rent or mortgages, 56 percent were extremely or very worried about paying property taxes, 51 percent worried about utility bills and most were looking for improvements in healthcare, housing, transportation, and jobs for older residents.

The bottom line is you need to grow your savings in order to meet the money needs you will have. In our view, one of the best if not the best way to achieve this is through investing in the stock market, but we need to warn you that the rules of investing have changed.

Although 2013 was a banner year for the stock market with the S&P 500 up more than 32 percent and 2014 saw the index rise another 11.4 percent, a longer view shows that the 15-year total return as of October 31, 2015, for the S&P 500 was less than 3 percent (see Figure 1.2).

Whether you are a mutual fund manager, hedge fund fat cat, or Wall Street trader, buy-and-sleep investing is over. As we have said many a time, whether it is when giving presentations at the MoneyShow, or speaking to groups at various American Association of Individual Investor chapters or at other conferences, gone are the days when you could buy a stock, an exchange-traded fund (ETF), or mutual fund and, much like crockpot cooking, forget about it until you are ready.

You don't have to be an aggressive trader—frankly, few can do that successfully for any sustained period of time—but, rather, you must be a proactive investor, and that means regularly updating your investment thesis, knowing how to weed through the heaps and heaps of information out there, and when necessary, jettisoning a position that is no longer viable. That in turn means knowing where and when to reinvest.

Given today's fast-paced world of tweets, texts, and barely-scratching-the-surface news reporting inside an ever-increasing deluge of information, the average individual investor faces the ever-growing challenge of having to cut through the clutter and decipher what it means…to understand how, where, and why they should be investing given the current environment and what lies ahead.

That means being able to read the economy like a professional investor, filtering out all the useless and misleading data, recognizing the investable signals, and identifying which company or companies stand to benefit. It also means identifying both cyclical and structural changes—like the Internet, mobility, social media, and other forces that have drastically altered business models. Think about Blockbuster Video, any record label, Borders bookstores, Circuit City, or Palm computing. They all faced a shift in their industries that they were not prepared for and where did it leave them, a footnote in business history. Psychographics (the how, where, and on what both people and companies are spending) and demographic trends (the evolving political landscape and significant regulatory implications) need to be understood in order to grow and protect your life's savings. This may sound overwhelming, but there is a way to stay focused on just those things that truly matter.

We mentioned several pain points earlier that have arisen from our living longer lives, but there are others such as the growing water crisis, the explosion in the depth and frequency of cyberattacks, severe swings in key input costs and commodities such as corn, wheat, coffee, beef, and other parts of the protein complex, and that's just getting started. As you'll see in Chapter 7, we love pain-point investing because it creates a situation that screams for a solution. An investor who is able to identify a company situated to fill that need can profit bigtime.

While any one of these factors can lead to a good investment, the intersection of these factors leads to waves of changes that companies must contend with—some will capitalize on them while others will be left behind.

The essence of Cocktail Investing recognizes the intersection of several powerful forces—economics, demographics, psychographics, technology, policy, and more—that, when combined, give way to a powerful force that shifts the what, where and how people and businesses are going about their daily activities. At the very core of these uber-catalysts, companies, be they business-to-business (B2B) or business-to-consumer (B2C), need to respond to the changing landscape and adapt their business models. If they don't, odds are they will shift from a once-thriving business to one that is struggling and likely to be left behind and replaced by others. Think of the transformation and rise in the share price at Apple post iPod, iTunes (its payment processing content engine), iPhone, and iPad compared to the fall of BlackBerry and its shares after the iPhone. One could argue these waves of transformation are affecting how and where future generations will be educated.

As we'll talk about in the coming pages, buy-and-sleep investing in the stock market won't help you, either. You need to have at least some of your assets in growth and that's true even after you retire.

No matter how you look at it, not only do you have to save but you have to be an active investor to get the most from your money and get the life you want, be it debt free or kicking back in the lifestyle you want in your golden years. In many ways, what we're saying is rather similar to what hockey legend Wayne Gretzky has said is one of the secrets of his success—knowing that he needed to be where the puck was going…he had to get ahead of it and all the other players that were simply following it. The same holds true for investors.

Inherent in that statement, which we suspect you subscribe to, is being able to decipher from all the noise that is out there and putting the pieces of the puzzle together to identify the companies that are best positioned for what lies ahead, while sidestepping the pretenders and those that will be left behind.

If you are an experienced investor, you may be formulating a plan of attack using the pain points we've identified in this chapter as a way of screening potential stock positions. There is no doubt the aging of the population gives rise to opportunities for healthcare companies, end-of-life-care companies, asset managers, and online investing platforms, as well as others. As you'll see, we'll be sharing techniques and procedures to help you identify the better positioned companies and how to determine which may be better for you—shares in a 9 percent dividend paying company or one whose shares are trading at a 30 percent discount to its price to earnings growth ratio?

Cocktail Investing Bottom Line

The economic climate has changed dramatically. The much-heralded savings and investing practices of past decades are no longer delivering the expected results. Frustration and even rage are evident across society as families look at the current state of their finances. The nation is facing a veritable crisis, as a significant portion of the population has not and is still not saving sufficiently or investing effectively, which will impact even those who have the good fortune to be otherwise well prepared. We present an accessible, alternative way to look at investing in a style that is enjoyable to read, exciting the mind as well as touching the heart.

At a time when people are living longer, many are increasingly concerned that they will not have enough money to last during their retirement years. According to data published by Fidelity Investments, the average 401(k) balance at the end of March 2014 stood at $88,600. This means that average investors will likely fall short in saving for their retirement unless they take a more active and informed role in saving and investing for their golden years.

• Whether you are raising children, saving for retirement, concerned over living a longer healthy life, or trying to make the most of your education let alone put food on the table and make ends meet, you need money.
• You can only work so many hours in a day and so many days in a week, and that means you need to make sure your money is working for you.
• Saving is a step in the right direction, but to grow your money over time in order to achieve your goals, you will need to invest to get the most from your money and get the life you want, be it debt free or enjoying the lifestyle you want in your golden years.
• Buy-and-sleep investing is over, and you need to be an active investor who is taking note of the ever-shifting series of landscapes.
• Cocktail Investing recognizes pain points as well as opportunities that arise from the intersection of several powerful forces—economics, demographics, psychographics, technology, policy, and others—that, when combined, give way to a powerful force that shifts the what, where, and how people and businesses are going about their daily activities. At the very core of these uber-catalysts, companies, be they business-to-business (B2B) or business-to-consumer (B2C), need to respond to the changing landscape and adapt their business models. That offers opportunity for investors like you.