Making Your Way to Financial Independence

In his second inaugural address, President Obama emphasized, “The commitments we make to each other—through Medicare, and Medicaid, and Social Security—these things do not sap our initiative; they strengthen us. They do not make us a nation of takers; they free us to take the risks that make this country great."

Regardless of rhetorical flourishes, the debate rages—how to pay for the promises made by government? No matter which side of the political divide you are on, the reality is that entitlements and social programs are not “government promises.” They are taxpayer promises! Someone has to work and/or invest to generate the tax revenues needed to fund all activities of government, including transfer payments and entitlements. That’s another debate—do tax and welfare policies incentivize work and investment, or penalize same?

Before Congress delayed the debt ceiling showdown for a few months, the President warned that if the debt ceiling was not extended to allow Uncle Sam to borrow more money, among other things, Social Security checks might not go out. That statement should expose the “trust fund myth.” When tax receipts exceeded outlays, before the baby boomer tsunami began to wash up on the shores of Social Security and Medicare eligibility, the surplus was invested in a trust fund. In an off budget transaction, the government borrowed trust fund surpluses and spent the money, replacing the money with an I.O.U. from the Treasury. For those who proclaim that a Treasury note is “as good as gold,” it is not gold; it is a paper promise, an unfunded liability that must be repaid from current tax receipts.

For those under age 50, count on changes to Social Security and Medicare. Benefits will have to be watered down. If the politicians transform America into a European-style social welfare state you will pay with higher taxes and fees, inflationary erosion of the dollar’s buying power, and disincentives to invest. We know that good people sometimes get into trouble and need help from government or charities. However, your goal should be to minimize the odds of trouble, carry sufficient insurance to protect yourself and loved ones, and build financial independence. You would prefer not to depend on government largess.  You wish to be a “maker,” making your own way to financial independence.

If you are south of age 50, regard Social Security and Medicare as a “high side plus.” Increase savings. To generate $40,000 per year in retirement income ($3,333 per month) from an investment portfolio, at a 4% annual spending rate you need $1 million in capital. To overcome inflation at today’s 2% annualized rate, with an average 25% federal and state income tax rate, to net 4% in real terms you need a total annualized return of (4+2=6/.75=) 8%. You can’t get that in bonds or other fixed income investments. The 30-year bond bull market is over!

 Make stocks a core holding. Dollar cost average and don’t try to time the market. Maximize your 401(k) match at work. Look at alternative investments to supplement stock holdings, consistent with your risk posture and need for liquidity. Keep consumer debt under control.

 Invest in yourself with ongoing education and skill upgrades. Be willing to take a risk if you have a yen to be an entrepreneur. Answer the “what if?” questions. Maintain an up-to-date will, power of attorney for assets and health care, advanced directive, and adequate life, health, disability, and basic and umbrella liability insurance. As you approach age 50, consider long-term care insurance. Business owners should have a well-crafted growth and succession plan.

 Work out. Take care of your health. Love your family and your neighbor as the Good Book says. Every morning look into the mirror and affirm, “If it is to be, it is up to me.” We need an ever-growing pool of makers to grow our economy and pay the bills!

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪  3930 East Jones Bridge Road ▪ Suite 150 ▪ Norcross, GA 30092 ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com