Nothing quite raises the hackles of Americans like watching the price of gasoline rise to record levels. Our over-dependence upon our cars causes such price increases to be viewed as a personal assault on our economic freedom. Just think, if the price per gallon continues to rise, it may become as expensive as the bottled water so many prize as a substitute for inexpensive tap water.
However, as one who can remember, as a kid, gasoline priced at 17 cents per gallon, current prices do represent a stretch. I take some comfort though in the knowledge that even when compared with 1950s and 60s prices, a tank full of gas takes a much smaller part of my income today than it did then.
It is also important to remember that today’s cars use much less fuel per mile than those we drove years ago, and more of them use regular gas than the more expensive premiums. If you were to put the pencil to it, I suspect you would discover that a family would have to be well below the poverty level for the relative price of gasoline to be higher today than in the 1950s.
But not all prices are on the rise. Many that affect our standard of living have fallen dramatically from the level of earlier years. Communications is a good example. The parents of my wife, Gladys, were both born in Denmark and as a consequence most of her relatives live there. A few days ago Gladys was ready to send a birthday greeting to a cousin when she started to consider her options. For the price of a birthday card and the 90 cents postage she could instead call the cousin and talk for 40 minutes. That same call 50 years ago would have been over $100. E-mail and all its variants have also reduced the cost of communications to a level comparable to Indian smoke signals.
Our own business has also seen some dramatic decreases in the price of our life insurance products. A whole life policy (which seems to be coming back) today is priced at about 60% less than when I entered the business in 1956. Term insurance rates have had an even more dramatic drop in price. On the other hand, however, it takes a lot more of our product today to do the same job we were doing 50 years ago.
About the time I entered our business my company discontinued selling $1,000 policies. The minimum was a $2,000 LP85. Today the minimum in most companies is $25,000. This is, I believe, a perfect reflection of how increases in purchasing power automatically increase the need for more of our product. We can afford more but alas, we need more.
My point in all this is simply to illustrate the difficulty in estimating future costs and financial needs. Some things will cost more and some less and options for alternatives may appear.
The late Bart Hodges, past National Association of Life Underwriters president and popular platform speaker, in all of his presentations talked about the need to plan for the future rather than just today. He characterized his theme by referring to it as selling “a piece of tomorrow”–what your needs will be 5, 10 or 20 years from now rather than what would it take today to replace your current income.
But planning for tomorrow can be a complicated business as not all factors change in a straight line. Options also arise allowing some flexibility, but they are hard to predict. And then there is the problem that the relative price of goods and services tends to take a fairly consistent share of income when their price rises.
Fact is there is no way to consider all of the possibilities or needs of the future; so planning is always an estimate. There is, however, a way that can come close to estimating future needs for the average person. One way is to use Social Security as a tool.
If you were to obtain a projection of benefits from Social Security for a 35-year-old person they would likely be very surprised at how high the projected benefits would be. In fact the person might conclude from the projection, that the income is close to his or her current earned income so there is no need to have further planning. And they would be terribly wrong. Social Security benefits are based upon replacing about 32% of covered wages. The 35-year-old prospect should understand that whatever the projection they get it will represent only 32% of covered compensation at time of retirement and if their income exceeds Social Security covered wages, the replacement ratio is even less. Not many people can get by on 32% of their working income–so they need to buy a “piece of tomorrow” today. The price will never get lower.
All this thinking about relative price levels was triggered by a sticker attached to last Sunday’s local paper. The sticker read, “Wanted: paper carriers, earn from 700 to 1700 per month.” My mind races back to 1940 when I carried the morning paper in Columbia, South Carolina 7 days a week for a subscription rate of 20 cents per week or $7.50 per year. Of the 20 cents, I got a nickel and if I did not have too many non-payers I averaged about $5 per week.
Looking back is not just nostalgic–it is essential in evaluating and implementing a viable financial plan for the future.