My great uncle recently passed away, leaving my 90-year old great aunt a widow. They both worked hard their whole lives living within their means, and built a comfortable nest egg. My Great Aunt still lives in the same 1-bedroom apartment in Brooklyn they bought for $550 in 1950.
Uncle Mort always handled their finances, so I have been helping her get everything in order. We were surprised to learn she had enough savings to ensure she should never have to worry about money again, even if she moves to the expensive assisted living home we are trying (unsuccessfully) to persuade her to try out.
Most of her savings are in CDs and bank accounts, with some in stocks and mutual funds. At 90 there is no reason to expose her to the risk of a stock sell-off or a bear market that could last years. And with bond yields at historic lows, it is not worth taking on interest rate risk.
So she is forced to settle for less than 1 percent rates in checking accounts and CDs with no indication they will rise. She has no protection from inflation other than the adjustments on her social security checks.
Hedge funds, pension funds, endowments look for relative performance. A 90-year woman needs absolute performance. She doesn't care about beating an index. She needs to make sure what she has lasts. That it keeps up with inflation. That she doesn't lose what she has worked for her whole life.
So why should she have to suffer or be forced to take on more risk to maintain a decent standard of living? Her husband fought in the Pacific in World War 2. She worked for the city of New York as a civil servant and earned her pension.
Helping plan her finances, I have to assume she will earn nothing on her savings. Every dollar spent outside of social security and her pension will come out of principal. In the past she could have depended on a 4% to 6% yield from a 5-year treasury, with the principal safe. Now she will earn nothing on her savings, and with the U.S. Gross debt close to 100% of GDP, we cannot even assume the principal is completely safe.
Bernanke is waging war on the elderly and savers on behalf of the banks, the hedge funds, the debtors who benefit from negative real interest rates. All economic policy has winners and losers, but is this ethical?
With stock market's cyclically adjusted 10-year PE (CAPE) at 23, 10-year returns on the S&P are estimated by John Hussman at ~4% based on historical data with likely significant volatility that an older retiree can't live with.
Bond yields are at historic lows with significant interest rate risk and little compensation for taking on duration. To minimize risk, we will keep at least half in savings accounts, money market accounts, and CDs.
To generate a little income and have some exposure to equities, we will put a quarter in the Vanguard Target Retirement Income Fund (VTINX). The current yield, after expenses is 2% and the expense ratio is only .16%. The asset breakdown is 30% stocks, 65% bonds (45% Total Bond Index, 20% TIPS) and 5% cash.
20% will go into the Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIPX). Vanguard describes this fund as "designed to generate returns more closely correlated with realized inflation over the near term, and to offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund."
Finally, we keep 5% in gold coins or the physical gold ETF (GLD) as a hedge against tail risks.
In Bernanke's war, we know we can't win. The layman can only play defense and fight the worst-case outcome - an inflationary shock that destroys a lifetime of prudent saving.
Disclosure: I am long GLD.