This week Victor discusses the recently high number of people 65+ who are having to file for bankruptcy. As well as, a look at stock market predicting and just how unknowable the market really is.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and Certified Elder Law Attorney (CELA®) and Certified Financial Planner™ professional (CFP). Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
For more information, visit Medina Law Group or Palante Wealth Advisors.
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Victor Medina: Everybody, welcome back to Make It Last. I’m your host, Victor Medina. I’m so glad you could join us this Saturday morning, but here’s the trick.
I’m not here. You’re listening on the radio if you’re live. Of course you podcast people are always getting this delayed. I’m actually on a vacation. I have pre‑recorded this show for you, which is a little fun for me. If I can go to WCTCAM.com, I can actually click the “Listen Live” button and it will play. That is not me. I’m not there. I’m on vacation.
In any event, I’m going to give you a couple of great shows coming up for the period of time that I’m going to be away.
Today, one of the things that I wanted to go through was a very alarming topic, which is that bankruptcy seems to be growing in older Americans. I’m going to go over an article that was recently published and give you some of the alarming numbers that are related to this growing trend.
I think that part of the reason why this has me so concerned is not just because the number of bankruptcy filings is growing and that in and of itself is a problem but typically bankruptcy is for people that are at the end of their rope and it’s for a very small section of the population.
If those are growing, then you might imagine that, similarly, the number of older Americans who are struggling is also growing as well. I have a different topic for the other two segments. One of the things that comes up from time to time is people who are trying to essentially predict where the market is going.
You can spend an entire day watching CNBC and listening to people tell you what they think is going to happen with the market. It could be right, it could be wrong, who knows. They are going to tell you for 24 straight hours that they know what’s going on and they know what you need to be doing.
Actually, when you come down to it, there are some numbers behind how often they have to be right in order for it to be effective for your investing. I’m going to go through that in the next couple of segments when we get there.
Let’s first gets to this topic of bankruptcy. What we need to understand is that the whole structure of law builds in these defined safety nets if something were to happen to you and you haven’t done planning in your life to avoid it, like a little social safety net around there.
If you run out of money to pay for long‑term care, there’s Medicaid. Medicaid is a safety net. Helps you pay for the care that you need. If you don’t have a power of attorney, there’s a safety net. You can go through a guardianship, and that guardianship will essentially appoint somebody, be like a power of attorney for you.
Now, we can get all into the details about why that’s not a great idea. You put your power into the hands of the judge and he can make any decision that he wants, but the safety net is there. The one for people who can’t pay their bills is bankruptcy.
What we’re seeing is that the people who are in that definition of older Americans, those people are facing a growing need to file for bankruptcy. Before, this idea would have been unheard of, completely unheard of because, before where we are today, people who worked their entire lives were taken care of by the company that they worked for in the form of a pension, but the pension is gone.
There’s no more pensions any longer, unless you’re a cop or a firefighter or you work for the school district or you work in state work. Those government agencies still have pensions, but private employers, private sector jobs ‑‑ no more pensions. This problem has been building for a number of years.
When you add to that…There are two other categories of increased factors to the need to file Medicaid. One is medical expenses have gone up. Now, not only have they gone up just generally speaking, but the amount of your Social Security that you’ve got to pay in Medicare premium, that number goes up.
A lot of people who are growing older have inadequate savings. They just simply haven’t put aside enough to get through a retirement.
When you combine all of that, no guaranteed income because the pension’s gone away or limited guaranteed income…They may have Social Security, but they don’t have pensions. If they don’t have pensions, they don’t have guaranteed income.
If they have increased medical expenses and expenses in general and they didn’t have enough saved, for all of those reasons we’re going to invite more chance that someone’s going to need bankruptcy.
Now, there’s been research behind this. The research is essentially saying that the rate of people who are age 65 and older who file for bankruptcy is three times what it was in 1991, and that that same group of older Americans account for a far greater share of all of the filers.
It’s not just that the people who are older file three times as much but everyone’s filing bankruptcy more. No. Actually, this group of older Americans are essentially making up a bigger percentage of the total number of people who file for bankruptcy.
As I mentioned, and the research bears this out, the reason why this is happening is, essentially, over the last 30 years we have shifted financial risk from governments and employers to individuals, and they have to bear a greater responsibility for their own financial well‑being while the social safety net shrinks.
That’s in a time where they don’t have any more opportunity to contribute. Fall anywhere you want on the spectrum of responsibility and self‑reliance, if you are incapable of working and caring for yourself, no one can lay on your feet the blame that you can’t do that, especially when, at the same time, people were taking away the thing that was going to take care of you.
If you think about the whole erosion of pensions, we switched from a system where for all of your work and effort there was a share of the profits that were set aside for a defined benefit ‑‑ that’s what a pension is ‑‑ to a contribution program.
By the way, nobody got a pay raise on that. They got paid the same, but they were told by the company, “You’re now responsible for saving for your own retirement and your own well‑being when you can’t work any longer, and we’ll just keep more of the profits.”
Victor: That shift happened, and it happened at a time where the older adults now are really bearing the brunt of that.
I’m coming up against a break here, but when we come back I’m going to give you a couple of stories that are related to this bankruptcy, and then we’re going to try to leave you with some tips going forward so that you don’t have to be one of the statistics.
We’ll go over that when we come back from this break on Make It Last.
Victor: Everybody, welcome back to Make It Last. You know we’re spending today talking a little bit about a growing alarming trend, which is that older adults are more and more filing bankruptcy.
The numbers are staggering. The amount of bankruptcies filed for this category of people ‑‑ 65 to 74, post 65 ‑‑ it grew over the last 20 or so years almost 204 percent. That is enormous.
Bankruptcies, by the way, all went down in every category of 55 and younger. We don’t have younger people making dumb decisions about money and having to file bankruptcy or being forced [indecipherable 9:47] bad life circumstances, but those numbers all came down.
18 to 54, the numbers and the percentage of bankruptcies filed for that age range all went down in those categories. Anybody that was 55 and older, they all went up. 55 to 64 went up 66 percent, and 65 and up went up 204 percent for a growth of nearly 300 percent. 300 percent.
That’s scary because, as much as we have this older 65, the growing trend is that people who are nearing retirement age are also filing for bankruptcy. The only explanation that seems to make any sense are these structural shifts of financial responsibility away from government and institutions to, essentially, people and individuals relying on themselves going forward.
We see that. We see that in situations where you go to any of the big box stores, and you see a whole cross section of older adults that are working there, probably for minimum wage, just as a way to get some extra money in to make ends meet.
In the research, what they discovered is about one in three older adults who receive Social Security benefits ‑‑ about one in three of them ‑‑ the monthly check accounts for 90 percent of their income. 90 percent of their income comes from Social Security, and you know that Social Security is not a big check. That’s not a huge amount of money.
Even if you worked your entire life, you might get, I don’t know, $2,500 a month coming in. That’s got to be 90 percent of your total living? That’s really tough. That is really, really tough. We were also talking about some other reasons which might contribute to that, which include this increase in medical expenses.
That goes hand in hand with a lack of savings. If you don’t have a lot in savings, you don’t have a big financial cushion for any kind of catastrophic health problems. People who are older are often turned to Medicare to pay their medical bills, but there’s gaps in coverage.
There are high premiums and requirements that the patients end up shouldering more and more of those costs, again, forcing low‑income beneficiaries of Social Security and Medicare to spend more of their own income on those bills.
New research that came out by Keiser Family Foundation showed that by 2013 the average Medicare beneficiary’s out‑of‑pocket spending on healthcare took up 41 percent of their average Social Security check. They also estimated ‑‑ this was five years ago ‑‑ that the figure would rise.
We also have people carrying debt longer. I don’t know about you in discussions with your friends and family, but in my estate planning practice, I see a lot of people come in who are post retirement and just about to enter retirement maybe. When we ask for the financial picture, they’ll show that they’re still carrying a mortgage.
They could be doing that for lots of reasons. Often it’s not because they took a 30‑year mortgage late in life and they bought a home late in life. Many times it happens because individuals will refinance that debt to, basically, carry the cost of sending a kid through college or something else that has had them tap their home for additional money.
A lot of people with debt. That, obviously, impacts the ability for people to weather any catastrophic health concerns going forward. It’s hard, too, if you have some form of a specialty drug.
I made mention previously about my family member who’s going through this struggle. They’ve been prescribed an expensive but, thankfully, very effective drug for them. The retail cost for that drug is $15,000 per month.
They’ve got insurance. They have what they thought was great insurance. Insurance is supposed to be there to help people weather the catastrophic risk of loss that is unlikely to happen. That’s the definition of insurance.
I don’t want to go all academic on you, but insurance exists in a situation where the risk of loss is great, catastrophic ‑‑ if you have to go to the hospital, the health bills are huge, but where the risk is low ‑‑ the chance that you’re going to have a hospital stay is low. When you have that situation, you transfer that risk to an insurance company, and they insure you against that.
Here we have this family member. The risk of them getting a serious medical condition was low. The cost of that was catastrophically high, both the health insurance to go to the hospital and stuff like that, but now this prescription. The prescription costs $15,000. We were supposed to have transferred that risk. That’s why we have health insurance.
They’re responsible for $3,000 a month out of their pocket to pay for it. That’s their share that they have to pay for this drug. Let’s go back to our family just making Social Security, where Social Security is 90 percent of their money. What did we say Social Security was? $2,500 a month? One spouse doesn’t cover the cost of this medicine if that was that family.
That’s huge, that having to get sick essentially means that you can’t afford to stay alive. I down want to be melodramatic about it, but that’s exactly the situation that we have right here. One of the things that came out of the interview that unearthed this study, there’s an individual who had Parkinson’s disease. His medical expenses rose precipitously.
He was a union worker. The medication that helped reduce his shaking rose to $1,100 on a three‑month basis. He hasn’t taken his medicine in three months because he can’t afford it. He and his wife, who had cancer, filed for bankruptcy in June, after living off their credit cards for a time. Their financial difficulty drank everything out of there. That is alarming.
I will go a little philosophical on you. This generation of older Americans that have worked and worked diligently, put their money in and have Social Security coming out, were supposed to have this social safety net. They get sick, and essentially we’re telling them, “If you can’t afford to pay for your own care, then, in fact, we’re not going to give it to you.”
It all emphasizes the need to ensure that you are setting yourself up to the extent that you can control it to help withstand what might be coming down the road. If you have no way of getting a guaranteed income because you don’t have a pension and because your Social Security is not going to cover your costs, we got to do some financial planning to get you to that point.
Getting to you two necessary expenses on a guaranteed basis is important. If you shifted the right to a pension, or if your company shifted it, to this money that you’ve been saving, we can’t think about that as just an account that is there to be drawn off of as needs are, just go to the bank and take money out.
We might need to carve out a portion of that and get you the guaranteed income that you need so that it meets your minimum expenses. You got to get out of that world where Social Security is 90 percent of your income. Got to figure out a different setup for that.
Some planning will help you do that. If your finances permit it, we got to think about some long‑term care insurance. We want to make sure that if you have a catastrophic need for paying for healthcare, if you have a catastrophic situation with healthcare, we want to leverage your money.
We want the money that you’ve paid into the long‑term care insurance to blossom into two or three times that value so that you can help pay for the care that you need. We need to get you in with the Medicare premium or supplements, excuse me, consultant.
We need to make sure we filled the gaps to help pay for the deductibles or the things that Medicare parts A, B and D don’t pay for, so that you don’t have that pressing down on you financially. All these things have to be in place. Retiring is a big, big endeavor and you need holistic planning.
Spread it wide and broad into making sure that you have your ducks in a row, so that when you choose to retire and you enter retirement, not only are you actually set up to withstand all of these pressures, but you, in fact, have a peace of mind that you can rest easy that you’ve put all of those things in place.
When we come back I’m going to shift gears a little bit. I’m going to talk to you about timing, outguessing the market and what numbers need to work for that to work, and hopefully dissuade you of that kind of planning.
I’ll give you a little teaser of what’s coming up, but that’s it for bankruptcy. If you have any questions on this and you want to explore more, you can certainly drop me a line.
Victor: You can send an email to info@MedinaLawGroup.com or you can drop a line to the show. Let’s continue this conversation. Anyway, when we come back, we’ll talk a little bit more about guessing the market. Stick with us on Make It Last.
Victor: Hey, everybody, welcome back to Make It Last. I want to talk to you a little bit about timing the market.
There are a lot of people who will tell you that they can time when the market’s going to go up and down. They will be able to predict the future movements of the stock market moving into the market before it goes up and getting out before it starts to go down.
The problem is that numerous studies from industry and academic experts demonstrate time and time again that these people have no such ability to beat the market.
It ranges from individuals that are your neighbors, that will tell you, “I’m moving the cash because I am afraid of what’s going to be coming down in the market later,” or, “I’m buying in now because I know that this is the bottom of it.” That can be just regular, average Joe and Janes. Or you can get to the professionals that say that they can do that.
How often do they have to be right on that guess to essentially beat an index that follows the index? There is already research that was done on this. It was by a Nobel laureate named Sharpe. That’s with an E at the end.
He basically did this study in 1975. He wanted to identify the percentage of the time that a market timer would have to be accurate to break even relative to the benchmark portfolio. What they concluded is that they have to be accurate about 74 percent of the time in order to outperform a passive portfolio essentially at the same level of risk.
That’s 74 percent of the time. How often does that actually happen? There was a study afterwards from 2000 to 2012 that basically graded 28 well‑known market timing gurus who made 4,600 forecasts from that 12‑year span. They took 28 well‑known market timing gurus and they compared it against 4,600 forecasts over the course of 12 years.
Can you guess what they learned? Not one of them met Sharpe’s requirement of 74 percent accuracy. In 1992 SCI Corporation updated the study to include the average stock market return. That basically said that they had to be right 70 percent of the time.
Want to guess how many people were right 70 percent of the time? None of them. When you look at the research, there were 10 of these gurus who had a percentage accuracy of more than 50 percent. They were more often right than they were wrong.
It might look appealing to follow them. Listen, that’s better than 50 percent of the time, I got to make money with that. You have to beware because the opportunity costs associated with being in cash before markets rise actually creates a higher hurdle that can only be made up by being in cash before they go down.
There are transaction costs, taxes that add hurdles for market timers just to break even. That is to say it’s not a zero‑cost endeavor. It’s not like being half right or right half of the time is automatically going to make you more money.
There are costs associated with that, and that really does impact whether or not you would make anything by following those 10 people. I’m not even giving you their names, by the way, because I don’t think you should be doing this.
I find it interesting that the research really does support this idea that you shouldn’t be doing market timing ever. John Bogle, who is famous for starting Vanguard, once gave a quote and said, “Look, it’d be great to get out of stocks the high time and jump back in the low, but in the 55 years of a business…”
This is him speaking here. He’s not only never met anybody that knew how to do it, he’s never met anybody who had met anybody who knew how to do it. [laughs]
It’s just very, very unlikely that you would be able to fit pick which…Even if you focused on the 28 most well‑known of those folks, only 10 of them did it more than half of the time. It was no way of knowing going into that which of those 10 it was going to be.
Either you’re going to be the market timer ‑‑ your name is not on the list ‑‑ or you’re going to try to choose the market timer. Which of those 28 do you think is it actually going to be, even assuming that you could make money on that?
I’m also struck by the language that we use about this. Even people who are tracking the market, they tend to talk about it in the present tense. During times of crazy market volatility, they’d say, “The market is going up,” or, “is going down.”
It’s an innocuous statement, but it seems to suggest that the future direction of market prices is somehow knowable. That can serve as the impetus for rash investment decisions, like you kind of know what’s going on.
You have to understand that, and this is attributed to Eugene Fama, security prices move in a random walk. At any point in time, we only know the current and past price of any particular security. Where that price is going to be even one second later is unknown and, most people would suggest, unknowable.
The market continually sets prices in response to news, which by its nature is unpredictable, and also because the impact of investors sets the price based on mood, which is also unpredictable. We don’t know what the impact of the news and the price is going to be on the mood that’s going on.
The investors, I think, should probably change their language. I think what they should say is that the market has gone up or the market has gone down. Then don’t even think about it any longer because where something is going to be in the future is not knowable.
What I’m going to do is I’m going to pause here for today and leave you with a little tease. If the market is unknowable, why do planning at all? I’ve done in prior shows the concept that we need to plan against future market conditions, but if we don’t know what they are, why would we do that? What’s the value of planning for those market conditions?
Earmark your calendars. When we come back next week, I’m going to talk to you about the reason why not knowing where the market is actually means that you have to do certain kinds of planning in order to prepare. We’ll do that when we come back next week.
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That’s been it for today at Make It Last. We’ll be back next week same Saturday and we will share the rest of the information with you. This has been Make It Last where we help you keep your legal ducks in a row and your financial nest egg secure. Catch you next Saturday. Bye‑bye.