Investment Strategies for a Sustainable Retirement after the Financial Crisis
From the category archives:
What happens to retirement portfolios when the government can’t pay for Social Security and Medicare, the real economy has moved to China, and tax rates are rising fast? Financial expert Daniel Amerman, CFA, introduces a different perspective on long term financial security.
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Daniel Amerman describes the how deflation and inflation combine to reduce the purchasing power of the dollar. Devaluing the dollar bails out governments and companies who have underfunded pension plans. Unfortunately, it transfers money from savers to debtors in the process. Excerpts below.
Link: “Surviving The Cure For Asset Deflation” by Daniel R. Amerman, FSU Editorial 12/03/2009
Many people would say that the true lesson of the early 2000s in the United States is the demonstration what an extraordinarily loose credit policy can do in terms of asset prices. Low cost and easily obtainable mortgages led to a real estate bubble, even as easy and loose corporate bond markets led to a booming private equity market, with leveraged buyouts being an important factor in maintaining an overvalued stock market.
The problem is that Wall Street, the government, and much of America has effectively bet everything they have on these asset bubbles not only staying inflated, but continuing to expand. Pensions long ago became “the tail that wags the dog”, for state governments, local governments and most major corporations. Almost every state and local government in the US that has full time employees has entered into promises for future benefits, which it anticipates being unable to cover from ongoing tax revenues. Some of these promises are unfunded, others are fully “funded” (meaning they have adequate current portfolios given the investment return assumptions), but the mechanism all comes down to the same thing. Via the mechanism of the markets, vast sums of money and resources will flow from the outside economy into the local economies for all the states and cities, and will pay for the legally binding promises that would otherwise be unaffordable from current revenues. In other words – the asset bubbles have to not only be maintained, but must continue to inflate, or else the pension obligations bankrupt every level of state and local government.
Governments aren’t the only ones relying on asset bubbles, so are most of the major corporations. Oh, the defined benefit plans are disappearing fast in terms of the ability of workers today to participate, but there are still tens of millions of workers covered, and many trillions of dollars of pension and health care benefits that will have to be paid. Future benefits that would destroy corporate profitability, and drive many corporations into bankruptcy. [click to continue…]
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Humberto Cruz at Boston.com reports that 51 percent of US households are now considered at risk of not having enough money to sustain their standard of living in retirement.
Link: Half of Americans at risk for not having enough in retirement, survey says – Boston.com
That’s the case even if they work until 65 – two years beyond the current average retirement age – and take a reverse mortgage on their home and use all their assets, including the mortgage proceeds, to buy an inflation-adjusted lifetime annuity to maximize their income.
In 2004, about 43 percent of households were considered at risk, based on the center’s analysis of a triennial Federal Reserve survey of consumer finances. In 2007, the number rose to 44 percent, the center now estimates, based on that year’s Fed survey. Without waiting for 2010 survey, the center’s researchers decided to update the index in response to the recent recession and economic crisis.
The index needed updating because the 2007 survey “reflects a world that no longer exists,’’ the center’s report says, with the Dow Jones Industrial Average near 14,000 and housing prices only slightly off their peak. [click to continue…]
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Retirement expert Bob Carlson at RetirementWatch.com says that American’s perceptions of net worth affect spending and saving.
Link: The Wealth Effect, Your Portfolio, and Your Retirement
The net worth of Americans is declining. That is no secret, though the extent of the decline will surprise many. The decline has affected and will continue to affect the economy, stock market, and your portfolio. The Federal Reserve gives a picture of the net worth of Americans every quarter, in a report known as the flow of funds data, and it is worth periodically studying the report.
The report for the third quarter of 2008 (which does not include the steep declines of October and November) was an eye-opener. It also does not include the losses from the Bernie Madoff scam and other frauds that have come to light, though they are a small percentage of the total.
Here is the real eye-opener in the report. In the third quarter Americans were so alarmed by the decline in asset values that they actually reduced their debts. This has not occurred since the data were first reported in 1952. In the third quarter, household borrowing, mortgages, and consumer credit fell at a $117.4 billion annual rate. Granted, that is a drop in the bucket compared to the asset values and amount of debt outstanding. But it does show a significant change in Americans’ behavior and thinking. [click to continue…]
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