Financial security is a common pursuit. Whether you’re just starting out in the working world or you’re looking to retire, financial security or the pursuit of financial security is of large importance for you. Unfortunately, a generation of Americans have been led to believe that the contributing factors to financial security come from anywhere but yourself.
For example, a generation of Americans have been made to believe that the only chance they have for financial security and a form of retirement is through the stock market. Financial “experts’ have pointed to historical returns as a guaranteed path to financial security, even as stock markets get more volatile. As long as your time horizon is long enough, you’re a guaranteed winner.
Meanwhile, these experts are winners every year regardless of performance due to the fees they collect for their advice. The problem is that millions of Americans have had their savings fully invested in stocks rather than spreading it out over a number of asset classes. Financial advisers will be quick to push diversification as long as it is diversification within a fully invested portfolio (so they can collect fees on every dollar). Put simply, the stock market and the potential for outsized returns has become the only hope for financial security for far too many people.
Similarly, many individuals put their hope for financial security in external entities whether it is the government (through vehicles like social security or welfare) or perhaps a corporation (through a vehicle such as a pension plan). Again, these can be contributing factors in your overall financial picture, but you should never fully depend on these financial tools.
Unfortunately, many of these things that Americans depend on for their financial security have been shown to be unreliable and volatile. Let’s look at some examples.
- The Stock Market – Sure the historic gains are impressive, but the last ten years have been flat. Furthermore, if you consider days like May 6th, 2010 when the Dow dropped almost 1,000 points in a matter of minutes, you can see the fragility to today’s market and trusting this market is difficult.
- Pensions – Pensions have been getting cut for years now as corporations and governments continue to fight under-funded pension programs. When planning out decades of “retirement,” relying on a single pension for your security is a gamble.
- Government – Other government programs like social security are hardly reliable. In 2010, social security paid out more benefits than it collected in taxes/fees for the first time ever. The awful fiscal shape of social security is no secret, so can you really rely on this being available for you when the time comes?
Your Game Plan
My point in this article is not to convince you to abandon these common institutions such as the stock market, pensions and government programs, but rather to convince you that these are not bullet proof strategies. While hopefully these entities will supplement and contribute to your financial security down the road, you’re playing a dangerous game if you depend on them 100%.
Take some simple steps today to create a situation where you provide for yourself both today and for the future. Then, any large stock returns and social security income you receive are just a bonus.
So, what to do?
- First, get your lifestyle in sync with your income level. By embracing a more frugal lifestyle with some margin between what you take in and what goes out, you will be able to save money now and be ready to live on less later.
- Second, accumulate some basic savings and invest in assets outside the stock market. This might be some cash savings, precious metals or maybe some real estate. Diversify your assets across asset classes — don’t be fully invested in stocks no matter how convincing your adviser is.
- Third, improve and keep up your earning power. This is possible by honing your skills and expanding your abilities. Whether you’re an employee or self-employed, the more you can do, the more marketable you are, and the more secure your future will be.
It seems like there is a great amount of uncertainty in today’s financial world. Whether it’s a 1000-point drop in the Dow or a soveriegn debt crisis, uncertainty definitely exists in today’s global economy. Make sure you put yourself at the center of your plan for financial security. As financial systems and economies struggle, I think self-reliance is going to continue to make a comeback.
Photo by bigburpsx3.