Many years ago, when I was a freshman in college, I took an entry-level course in psychology. One of the concepts we learned about was a phenomenon called “cognitive dissonance.”
The term describes an inconsistency between what people believe and how they behave. A classic example is diet and exercise.
We’re regularly told by doctors that we need to eat a healthy diet and remain physically active. Yet a huge number of us don’t bother. Over 70% of American adults are either overweight or obese. About one-quarter of us rarely, if ever exercise.
We would argue that when it comes to generating income and obtaining health care in our golden years, tens of millions of Americans are similarly conflicted. In 2019, only 24% of Americans were confident that Social Security would be able to pay the same benefits in five years as it did when the poll was taken. And only about one in three Americans believes they’ll receive their promised Medicare benefits.
Americans’ apprehension in the sustainability of these programs is backed up by actuarial calculations summarized in the annual reports prepared by the Boards of Trustees for both of them. The 2021 report from the Board of Trustees for Social Security predicts that the Old-Age and Survivors Insurance Trust Fund will now be depleted in 2033. Medicare is even in worse condition. Its hospital trust fund will run out of money in 2026.
These dire predictions don’t mean Medicare payments won’t get made after 2026, or Social Security checks will end in 2034. But it does mean that without significant reforms to both programs, after these dates, benefit payments will likely be sharply reduced.
Cognitive dissonance comes into play here, because so few Americans have prepared for the impending crisis, even though based on the opinion polls we just mentioned, most of us know perfectly well what’s coming. A 2021 report from PricewaterhouseCoopers reveals that one in four Americans have no retirement savings at all. And the vast majority of Americans who have set aside funds for retirement haven’t saved nearly enough.
What’s the solution? There’s no quick fix for Social Security or Medicare, although Congress could raise the minimum age at which workers are eligible for benefits or increase taxes to pay for them. Both measures are deeply unpopular with voters, so it seems unlikely that our elected representatives will make such reforms.
Thus, as with so many other aspects of modern life, you can’t depend on the government to keep its promise. Instead, you need to find alternatives to generate income and pay for health care after retirement. For instance, we’ve suggested that you consider starting your own business to generate retirement income.
Another way to increase the amount of money you can save for retirement is by cutting expenses. One obvious cost-cutting option is housing. On average, Americans spend about one-third of their after-tax income on housing. In high-cost cities like San Francisco or New York, it’s even higher – as much as 50% of after-tax income.
Another way to save big is in transportation expenses. Most middle-class families in the United States own two vehicles – sometimes more. With low-cost transportation alternatives like ridesharing and car-sharing apps, it’s easier than ever to become a one-vehicle – or even zero-vehicle – household.
Cutting expenses clearly makes more money available for saving. But what should you invest your savings in? The mainstream financial press loves stocks, and it’s easy to see why. Since 1871, the US stock market has generated a compound annual growth rate of 9.2% annually. Adjusted for inflation, the return would still be about 7% per year.
However, stock prices are volatile, and with the American market trading near all-time highs, buying stocks now is a riskier investment strategy than it would have been at the depths of the COVID recession. If you’re relatively young and have a long enough time horizon, though, stocks have been a winning investment for over 150 years.
If you don’t mind a more hands-on investment, rental real estate is another excellent option to consider, with annual returns of 5% or more. But property prices in most of the United States are also at or near all-time highs.
As for health care, we suggest you look into the growing number of service providers that offer big discounts for patients who pay out-of-pocket. Cutting out a private insurance company or Medicare as the middleman can significantly reduce a doctor’s or hospital’s administrative expenses. Not needing to chase down payment also saves money and some of those savings are passed onto patients.
For even greater savings in health care, look beyond America’s borders. There’s a burgeoning international medical tourism industry. Some companies even send their employees abroad for treatment to save on costs.
My personal plan to pay for health care once Medicare benefits are reduced involves Panama. Now that I’m over 65, if Medicare won’t (or can’t) pay for a procedure, I can have it done in Panama for about one-half to one-third of what I’d pay out-of-pocket in the United States. And since I have legal residency in Panama, I can stay as long as I need to.
One thing is for certain. Uncle Sam isn’t in a financial position to pay for your retirement. Only you can do that…and the time to start preparing for it is now.
