The Federal Open Market Committee (FOMC)
press release wasn’t quite as catchy as España Cañí — the Spanish song played
to rile crowds at events as varied as baseball games and bullfights — but it
helped motivate investors as they pushed American stock markets
higher last week.
The markets’ optimistic surge was a bit
difficult to understand. Since April, the U.S. economy has offered mixed
signals. As it turns out, the economy actually suffered a contraction — not a
slight expansion, as was originally thought — during the first quarter of 2014.
Unemployment has been relatively steady with employers adding about 200,000
jobs in each of the last four months. However,
inflation numbers have some pundits concerned.
The Bureau
of Labor Statistics’ Consumer Price Index Summary (CPI) showed the CPI
increased by 0.4 percent in May, but that doesn’t really tell the whole story. The
price of food was rising faster (0.7 percent) than the CPI and in May, the food
index posted its largest increase since August 2011. In addition, the cost of electricity
and gasoline rose 0.9 percent. When
questioned about the discrepancy, Chairwoman Janet Yellen indicated the numbers
around inflation could be just ‘noise.’ The
Fed’s attitude toward inflation had The
Guardian accusing it of magical thinking.
“…Consumers are surrounded by rising prices
on all sides – paying higher bills, paying more money at the market, paying
more just to get to work. At the same time we’re shelling out more for these
necessities, our incomes are stagnant. No more money is coming in. Yet the Fed,
which just wrapped a two-day meeting to diagnose the economy, is dismissing
these real-world costs as a trick of the charts – a mere math problem rather
than a real snapshot of the challenges facing Americans.”
If
economic signals are mixed, why were markets so optimistic? Reuters suggested investors’ confidence
had a lot to do with the markets’ resilience during 2014 to-date (in the face
of events in Ukraine and the Middle East, among others), as well as economic
improvement, earnings growth, and the availability of cheap credit.
Decimate is a very interesting word…In the early 1500s, according to OxfordDictionaries.com,
decimation
(an earlier version of decimate) referred to tithing—paying a tenth of your
income to an organization that was usually religious in nature. By the end of
the 1600s, “An English Dictionary defined [decimate] as both ‘to tythe
or take the [tenth]’ and ‘also punishing every tenth man.’” More recently, decimate has been defined as destroying
a large portion of something or drastically reducing the strength or
effectiveness of something.
When
it comes to retirement, the great decimator could be healthcare costs. The
Employee Benefits Research Institute (EBRI) estimated that, in 2013, men needed
$65,000 and women needed $86,000 to have a fifty-fifty chance of covering
healthcare expenses during retirement. At least, that’s how much they needed to
pay for Medigap premiums, Medicare Part B premiums, Medicare Part D premiums,
and out-of-pocket expenses.
Of
course, if they wanted better odds, people had to save more. Let’s say a person
wanted a 90 percent chance of having enough money to pay the healthcare costs listed
above. In that case, a man needed $122,000 and a woman $139,000. A married
couple (both with drug expenses in the 90th percentile) needed
$360,000 in savings. EBRI Notes said,
“Individuals can expect to pay a greater share of their costs out-of-pocket in
the future because of the combination of the financial condition of the
Medicare program and cutbacks to employment-based retiree health programs.”
Of
course, it’s important to note that these targets don’t include any expenses
associated with early retirement or long-term care costs. A new study estimates
that a couple retiring at age 62 will pay about $17,000 in out-of-pocket
expenses each year until they become eligible for Medicare. No matter when they retire, 70 percent of
Americans eventually need long-term care services and support, according to LongTermCare.gov. The cost of long-term care depends on the
services required, but it is not insignificant. One survey estimated that the
average cost of care for one year in a private nursing facility was about
$96,000 in 2014.
Putting
sound financial strategies in place can help prevent healthcare expenses from
decimating your retirement.
Weekly
Focus – Think About It
“People who think they know everything are
a great annoyance to those of us who do.”
-- Isaac Asimov, American author and biochemistry professor
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