How Much Will Be Enough; J. McAdoo

A money income is almost essen tial in a modern economy. Dreams of happy self-sufficiency on a pic ture-postcard farm are dreams of the young and energetic. For al most everyone else, an income of money is the sine qua non of sur viva!. With enough money, it is generally believed, people can buy what they need. Such a premise, however, contains one fallacy, and one disquieting uncertainty. Mon ey cannot buy what is not producMr. McAdoo is an investment advisor residinF; in Nevada. HowMuch Will Be Enough. IN WHAT are turning out to be "the old days," a special kind of adver tisement appeared regularly in many magazines. It pictured an attractive, gray-haired couple, at tired in sports clothes, and smiling happily. The caption said, in effect, "I retired with $250 a month, for life". The clear implication was that, with the proper plan forpru dence and thrift, the reader could provide for a comfortable lifetime income.

As years went by, the $250 a month became $350, and then even higher. Obviously, the idea of a future income inadequate to meet future expenses has little appeal. If the ad is still being run today, it is doubtful that any monthly in come figure is mentioned at all. No one knows what it will cost to live for a month in 1985, or 1995. The price level, ten or twenty years hence, is anybody's guess. For many people, the future has arrived. Those who have retired from their working careers are now relying upon whatever sources 52 1976 HOW MUCH WILL BE ENOUGH? 53 ed and made available for ex change. And it is highly uncertain how much money will be "enough." While we may have a good grasp of current prices, no one can pre dict, with any degree of assurance, what prices will prevail even one year from now, much less ten' or twenty. Planning for a future income is seriously hampered by one crucial fault of our money: it is not a store of value. Despite the faith and the law which give the Dollar currency as a medium of exchange, the Dollar has shown a pronounc ed tendency to lose its purchasing power. Anyone who seriously con siders, and tries to plan for his needs for a future money income, must take that phenomenon into account.

There is little evidence to sug gest that the adequacy of future in come is a prominent concern of the majority of people. Those who think of it at all are subject to con tinuing reassurance that inflation will soon be controlled, and that prices will not rise at previous rates. Added to the hopes and promises of a more stable price level ahead are built-in programs for the production of future in come: Social Security, Pension Plans, and Retirement Programs. Further opportunities for future income lie in the individual's abil ity to save and invest: bank savings accounts, corporate stocks, life insurance programs, Govern ment bonds, real estate, and so forth. With careful planning, and reasonable thrift, an individual can provide for a future income in Dollars. But the nagging question remains: how many Dollars will be enough? The problem, whether or not we prepare for it, will arise for all those who live to see the future.

Inflation Eats the Principal It is an obvious, but shocking, fact that, with an inflation rate of 10%, the break-even point on a tax-free investment is a yield of 10% ! And even such a remarkable return on a municipal bond, for example, would not provide future income; it would only offset infla tion's 10% erosion of capital. Gh~en the same inflation rate, a person in the 50% tax bracket would require a yield of 20 % on a Government bond, just to stay even. If inflation rose to 15% he would need a 30 % return, and would still have no real income. While someone in the 50 % bracket may neither solicit nor merit public sympathy, the prob lem he faces is even more severe for those in lower tax brackets. The scissors-like effect of inflation and taxes inevitably destroys the adequacy of a money income. Plan ning for the future becomes a scramble to assure the largest pos54 THE FREEMAN January sible Dollar income, in the hope that that amount will prove to be enough.

Recognizing the problem, and seeking countermeasures, many people have tried to identify, and acquire, a store of value. They strive to convert capital and in come not currently essential for survival into some thing which will at least retain its value into the future. A list of things considered by some to be stores of value would include rare stamps, rare art works, rare porcelain pieces, rare firearms, rare books, rare coins, and rare metals. Yet, even those who have the means and the inclination to ac quire rare collectibles must do so with considerable reluctance. Aside from the downside risks involved, such "investments" have many drawbacks. A rare stamp, or paint ing, or book can never yield an in come. Nor can it, with any certain ty, appreciate in value. What is usually construed as appreciation is mostoften only the reflection of money's reduced purchasing pow er. While a calf or a lamb should appreciate in value as it matures, a rare coin or rare metal remains precisely what it always was.

Perhaps equally regrettable to some who seek the shelter of stores of value is the nonproductive de ployment of assets. A rare and valuable painting represents, to some, capital which might under more favorable circumstances be employed in enhancing the produc tivity of an expanding and success ful enterprise. The argument may not hold water, but the feeling may be there, nonetheless. Unfor tunately for the general welfare, those who have proven their abil ity to contribute to productivity through successful investment may be the very ones whose attention is diverted to an emphasis on stores of value. Inflation, coupled with taxation, diminishes the in centive to engage in customary forms of investment. One can only imagine with hor ror the devastating impact upon our entire economy if a substan tial number of traditional inves tors were to divert their assets in to what they considered superior stores of value. Yet, the ravages of inflation upon' the real return available through traditional forms of investment tend to direct atten tion to stores of value. Considera tions of future income are of in creasing urgency in a period of anticipated inflation. When no tra ditional form of investment can yield a real income after inflation and taxes, prudent people will look for a way to preserve capital. They will seek merely a store of value; some thing that will hopefully pro vide the equivalent of a future in come. ~ 1976 HOW MUCH WILL BE ENOUGH? 55 A Setter Store of Value Every citizen has a stake in se curing future income. The ques tion of how many Dollars will be needed to assure an adequate stand ard of living in the future is not one to be left for future consider ation; it is of vital importance now, when plans can be made, and when suitable action can be taken.

Hope, or even confidence, that "things will work out" are an un reliable hedge against an uncer tain future value of money. What are becoming, in a re stricted sense, popular forms of a store of value are largely beyond the experience, if not the means, of the public at large. Few people could distinguish between the gen uine and the counterfeit. What is sorely needed, by everyone who will require future income, is an ideal store of value, equally avail able to all. Fortunately, the crea tion of an ideal store of value is within the capabilities of an in formed and active electorate: a better money. Historically, money has served well as a store of value. Indeed, that characteristic has been an essen tial aspect of a good money. With disappointing regularity, however, governments have either caused or permitted money to be deprived of that characteristic. Through either debasement of coinage or inflation through legal tender paper currency or bank credit, money has periodically been divested of its in trinsic or representative value. The Dollar is presently in that condi tion.

For more than a generation, fashionable economic theory has held that a money devoid of intrin sic value is not only the equal of, but superior to money which serves as a store of value. Legal tender and credit are defended as being "more flexible," and free of the "tyranny" of precious metals. De spite these supposed "advantages", however, our money continues to lose its value. As history has shown so often in the past, an intrin sicallyworthless money not only reduces the adequacy of present income, but jeopardizes the reli abili ty of future income. Equally serious are the inescapable attend ant problems of social and politi cal discord. While it would be incautious to predict the economic future for this or any other country, it is safe to say that the future is, at best, uncertain. Past experience of others would strongly suggest that the best money is one which serves not only as a medium of exchange, but as a store of value. Those who are concerned about the adequacy of future income might best pre pare for that future by asking the Government to restore the val ue of money.