How the Recession Is Changing Retirement 18 comments
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The Great Recession may finally be over, but the shock waves could reverberate for years—and fundamentally change the way we plan for retirement.
After most recessions of the past 75 years, the economy quickly bounced back to prerecession levels, erasing memories of hard times. This time seems different. The twin miseries of a stock market crash and a deep housing bust have eliminated $14 trillion of Americans' net worth since 2007—about $121,000 per household. That's money that millions of people had been hoping to retire on. The recent rebound in the stock market has eased some of the pain, but the decline in home values is likely to continue into next year, to be followed by an indefinite plateau. Some analysts think it could take a decade for homes to reclaim the peak values of 2006—and 20 years in California and Florida.
The unemployment rate, meanwhile, is likely to rise above 10 percent in 2010, with jobs remaining scarce for years. Real household incomes, after inflation, have been flat for a decade, with little chance for a boost as long as there's slack in the job market. Economic strains are forcing millions of Americans to revise their plans for the future, especially retirement. Here are some of the biggest adjustments we're going to have to make:
Stop gambling with retirement funds. There's a big difference between saving and investing, and until last year, the distinction was fuzzy. Many Americans thought they were in fact saving for retirement, by spending money on their homes, which theoretically raised their value, or putting cash into a stock or bond portfolio. As millions have now learned, those were very risky investments that didn't always protect the principal.
When the stock market bottomed out in March of this year, it had lost 13 years' worth of gains; even with the recent market rally, stocks are barely back to 2004 levels. By the time the epic housing bust winds down, probably next year, Moody's Economy.com estimates that home values will have fallen 43 percent from the peak levels of 2006.
Some people have indeed managed to finance a rich retirement on earnings from stocks and real estate. But they enjoyed a remarkable lucky streak that's not likely to repeat itself anytime soon. For the most part, stocks were kind to investors in the '80s and '90s, with the S&P 500 rising 234 percent from 1980 to 1990 and 308 percent from 1990 to 2000. But those gains were far out of sync with historical growth rates, and so far this decade we've seen the payback (which economists call a "reversion to the mean"), with the S&P 500 down about 28 percent so far this decade. "You can't invest your way to retirement," says economist Gary Shilling. "You've got to save your way to retirement." That means setting aside a higher portion of overall income every month and keeping it safe, through investments that either protect the principal or allow a time horizon long enough to earn back the losses from crashes like those we've seen over the past several years. Planning on free money, in other words, is a bad strategy.
Spend less. Americans are taking Shilling's advice and saving more of their disposable income, reversing a 25-year consumption binge that left Americans deeply in debt. But a real turnaround in spending habits will take years and require more fortitude than many probably realize. Between 1960 and 1985, the savings rate ranged between 6 and 10 percent of personal income, with a peak of about 14 percent in 1975. But as consumer spending became a bigger part of the economy, so did the borrowing used to finance houses, cars, vacations, clothes, and everyday items. After 1985, the savings rate began to drift toward zero, and it actually became negative for a while in 2005.
It has now risen to about 6 percent, and Shilling predicts the savings rate will rise to about 10 percent over the next decade. That's prudent economic behavior, but the catch is that greater saving will cut into consumer spending, which has been the biggest source of economic growth in recent years. A long-term slowdown in consumer spending will probably stunt the economy and perpetuate other problems, like high unemployment. And, oh yeah, Americans will have to prove they're serious about living thriftier, going without every new gadget and paying off their credit card balances.
Accept reality. For all the signs that Americans have started to adjust, many are still in denial about the lifestyle changes they'll have to make if they ever want to retire. Research by consulting firm McKinsey & Co. shows that the typical American has so little set aside for retirement that meeting basic needs will be a struggle. Worries about retirement have spiked, according to McKinsey surveys, but the average expected retirement age, 64, hasn't changed since 2007. And the proportion hoping to finance retirement through home equity has actually increased, even though home values have plunged. Does not compute.
Stay put. As people get closer to retirement age, they start to crunch the numbers required to move to that bucolic college town or Southwestern golf-course community. And these days, it may not be worth the cost, or even possible. The housing bust and financial meltdown have upended the rules for buying and selling homes and relocating. Many retirement-age people own their homes outright or have just a few years left on their mortgage, so they may think that the housing bust doesn't apply to them. But their home may still end up worth a lot less than it was only a few years ago, and with banks extremely stingy on loans, buyers could be scarce.
The home you want to buy may have fallen in value, too, but many imminent retirees have taken a big hit on their retirement portfolios, and cash is scarce all around. Retiring in place might be the best strategy. You can always consider a retirement move in a few years, once the markets have stabilized and banks have loosened up.
Leave less behind. John Bogle, founder of the Vanguard mutual fund firm, says that as retirees try to make the numbers add up, they work their way down an "inverse priority pyramid": the progressively painful list of things they can live without. The proverbial daily latte and other unnecessary expenses usually go first. Many will discard some of their more cherished hopes, like a home near the beach. Then come uncomfortable kitchen-table discussions over that legacy for the kids and grandkids. "A lot of parents want to leave a nice little nest egg for their children," says Bogle. "That's nice but not essential. I don't believe anybody should live in privation so they can leave something to their children." Break it to your kids gently.
Work longer. Early retirement isn't as fashionable as it used to be, mainly because many Americans will simply have no choice but to keep working, perhaps for 10 or even 15 years longer than they expected. Economists, at least, are cheerful about the prospect. "More people are going to postpone retirement, and I think that's going to be great," says Mauro Guillén of the University of Pennsylvania's Wharton School. The hoary idea that older workers must retire to make way for younger ones has been discredited, he says, and there are plenty of jobs with skill requirements and seasonal or flexible hours that are ideal for older employees.
Besides, a full lifetime of work can be healthful for individuals and socially productive. "Maybe we need more people who like to work and don't count down every day till retirement," muses Bogle, who is 80 and recently published his seventh book, Enough: True Measures of Money, Business, and Life. "Work is good. You're accomplishing something. Isn't that the point of a good life?" Millions of baby boomers are about to find out.
Disclosure: no positions
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On Sep 30 03:47 AM Roger Knights wrote:
> Retirement to a low-cost country abroad is an option many are exercising.
also, the options really are not india or china but the rest of asia, central, and south america. few go to india or china to retire.
for instance, you might choose not to have a vehicle and rely on local taxi which literally costs pocket change. that eliminates a huge cost which is not an option in the USA. your housing might be a compromise between local and western. you might eat more local products. or you might choose to eat every meal out.
state of the art health care (literally to USA standards) is a small fraction as litigation is not an issue. much of the operating room equipment is from the USA or EU. the asian doctors are well trained and are used heavily by Europeans and the few gringos.
and most of the countries in asia have literally free basic health care. i use these services for primary health care. health insurance is under 1/10th the cost of American health care insurance (i carry both). an added benefit is that full time in home health care is well under $1000. And the cost of medicines are again pocket change.
and as for consumer goods, they are cheaper because you do not buy the huge USA versions or the services are cheaper that are required. my 100 channel satellite costs $14 per month including cnbc and bloomberg (it would be $22 if i wanted the movie channel package - HBO, etc). Unlimited 3G data service is $25 per month.
outside the usa people shop daily for fresh foods so refrigerators are smaller. you can air condition including installation a 1500 sq ft house for under $700.
my point is you can pick and choose your lifestyle. options exist.
on the other hand, living overseas is not like living in America. there are differences - some good some bad. for me it is more good than bad, but for others in a different situation - it easily could be the opposite.
----- work was an aspect of daily living and was conducted at least 6 days a week and often 7 days a week ; work was not seen as being in opposition to "living" but integral to it. Work , worship and family dominated life(and still do in many parts of the non-Western world)The idea of refraining from making an economic contribution to the family or household for no compelling reason would have considered unacceptableand hugely selfish
-------as the home regains some of the functions "outsourced" to the outside world, the home increasingly becomes a locus of work( home office, home fabrication, home artisanal work) , healthcare, childcare and eldercare. Again, "retirement" becomes less relevant or even possible since a home that is richer in functions requires both a division of labor and a contribution from all members of the household
2. The rise and coming fall of Govt mandated and provisioned financial support after some legislated "retirement " age created a sense of entitlements and expectations that if a person worked for a certain number of years or to a certain age he or she then would, magically, have the income to be supported without work or investments.
Social Security is not, never was, an individual retirement program but an intergenerational tax. The Govt deceitfully peddled it as a retirement program and most Americans foolishly believe the lie. In the years ahead , in my view, SS will go from a universal entitlement to a quite selective program oriented towards the most physically and mentally feeble or totally destitute. It will, I suppose, merge with disability and poverty reduction programs in some fashion within 15 to 20 years.
Since most Americans simply do not have the net worth or investment management skills to retire in the absence of universal and often unmerited SS payments, they will work, the best they can,well into their 70s and 80s if they want to survive(indeed the working old, particular the healthy working old, are no longer a novelty: they represent one of the fastest growing demographic segments and will have a rising political influence).
3. As property rights are globalized( fitfully), digitization and electrification becomes pervasive, English becomes even more of a planetary language( it is an error to think that Chinese will be the language of planetary communications, business and entertainment: by 2025 there will be more Indians than Chinese, anyway) and per capita incomes rise in several parts of the Global South, an American who is able to go partially "native" may well live a comfortable, respected and safe life in parts of Asia, Latin America and Africa.Indeed, depending on the disposition and adaptability of the older American, life there may be better than life here.
www.serenity21.com/pri...
www.serenity21.com/tes...
blog.serenity21.com/20...
Our hearts go out to retirees and near-retirees who, over the past year, and especially over the past two weeks, have seen their retirement plans devastated through no fault of their own.
These are unnerving times. Even putting aside the current chaos on Wall Street, the global bailout is truly a case of the bankrupt bailing out the near-broke: One of the biggest financial threats facing all Americans is the U.S. government itself....
The federal government is now more than an estimated $90 trillion short (and rising) in meeting its future obligations for Medicare, Medicaid, Social Security and other entitlements (Dallas Federal Reserve: Storms on the Horizon, March 2008). That dwarfs Wall Street's massive failings. Forget your broker or your bank. It's Uncle Sam you should be most worried about, and he's not alone. Many U.S. states are also staring at gaping shortfalls in their pension plans. This is at a time when the U.S. faces multiple external and internal security threats that could prove very costly to deal with in the future, from Iran to North Korea, from terrorism to the environment.
America's financial black hole (or rather, red hole) is the cumulative result of decades of short-term thinking and "me-first" misgovernment in D.C. and state capitols across the country that has left these "authorities" dangerously underprepared for what might lie ahead.
Many Americans instinctively know this and are turned off by politicians at all levels of government in the U.S. -- state, federal and local. And it isn't just the U.S. Many people worldwide, including Western Europeans, have lost faith in the capacity of their own governments to meet basic obligations and responsibilities, confront serious long-term financial, social, environmental and security challenges and make the tough, responsible choices we used to expect of adults.
They've grown tired of the unending parade of incompetents and self-serving opportunists who spend more time looking out for their own short-term interests or the interests of their families, their parties and favored interest groups, than looking out for the long-term well-being of the general public they pledged to serve.
Our message to all of you, whoever you are, wherever you are and whatever your political leanings: Don't look to someone else, much less a politician from any party. Take matters into your own hands.
Empower yourself.
Do more to insulate your family, your life and your future retirement from the nonsense of bad government and bad policy. Get educated about other retirement options within and outside the U.S.
Consider Nicaragua where a couple can live comfortably on as little as $1500 a month in a country that blends the best of the Old World with the creature comforts of The New World.
The globe has become a smaller place. A massive virtual shopping mall of new lifestyle options is now more accessible than at any time in human history. New technologies have become powerful tools that make relocation much easier than in the past.
Serenity can help you build greater security against the chaos of today and the many big unknowns and disasters to come.
Maybe retirement will not be an option for many of them as they die prematurely.
We've had many decades of the rise, then shrinkage of traditional stable employment with benefits, and mainly, only government employees are left. The idea of more flexible arrangements, often involving extended families will be needed and in some ways, enriching.
But, government is set to make this as difficult as possible, with their mandates, rules, decrees, fees, procedures and taxes that mount insanely over time. They remain the millstone that subsidizes sloth, failure and cronies, at enormous and rapidly-mounting expense. Younger people, justifiably, claim to be against large, intrusive, suffocating structures, which would be an excellent survival mechanism for them since they are in line to be completely ripped off. If they can avoid the cognitive dissonance their boomer parents lived by, which involved talk of "getting real," or whatever, then building the largest Ponzi ever (our government & Wall St.), and actually build lives away from these entities and force sanity into our society, they will help themselves and all of us get back on a sustainable track.
With each leg down in the economy, whose sectors are in either a deflationary and inflationary spiral, more over-55's will be dumped into the streets by cost-cutting companies. As continued unemployment adds to the social burden, the older generation will be the most greatly affected with little chance to rebuild their portfolios and little hope of making more than a minimum wage if they are lucky enough to find a new job. Care for the elderly unemployed will be a primary problem for the next decade that will put increased financial stress on their adult children. Like the elderly in much earlier periods, they will be forced to live with their children or be supported by their children when their retirement savings run out.
To make matters even more depressing, the federal government will be forced to increase taxes and lower retirement benefits due to the huge budget deficits and rocketing inflation that will take grip of the economy. Those that have retirement funds left should look to protect them against the devaluing of the dollar from inflation or even from the possible hyper-inflation that lurks in the shadows. Even TIPS will lose value because of the manipulated CPI that it is based upon and the volatile stock market will be totally unreliable for protection. Few safe havens remain for their investments other than the tried and true, like the PMs, gold and silver mining companies, or land purchased at bottoming prices.
Can you find some place that is reasonably safe?
Low cost?
Stable government?
Friendly to retirees?
Rule of law? Property ownership, etc.
English commonly spoken? (even Spanish is OK with me)
Costs around the world have really gone up. It is not like it once was.
On Sep 30 03:47 AM Roger Knights wrote:
> Retirement to a low-cost country abroad is an option many are exercising.
Being let go from your job when you are in your forties or older is devastating, you're a health-care liability even if you have not (yet) developed any serious health issues.
Another reason why employer-mandated health coverage is a sick joke and why there needs to be a single-payer, medicare-for-all system that removes this burden from industry. Every other first world country has already figured this out.
On Sep 30 12:39 PM The Recusant wrote:
> "Mauro Guillén... says, and there are plenty of jobs with skill requirements
> and seasonal or flexible hours that are ideal for older employees."
> Well, there's about 1.5 million Americans over the age of 55 (whose
> unemployment rate has jumped 58% over last year) that would like
> to know just where those jobs are.......
The author may be a bit optimistic. With unemployment hovering at 9.7% and four more months to go in 2009, I suspect we may hit 10% before the year is out. Of course, this implies that the BLS reports will not be manipulated to look better than reality.
That last part should make a lot of poor Americans feel real good, since they haven't lost anywhere near that amount. The problem is, they didn't have that much to lose to start with. Of course, finding that next meal will take a lot of steam out of their celebration.
Having lost more than the average household doesn't make me feel all that privileged, either. Is there anyone in America that we can expect to feel good these days? Of course, there is. Look at all those Goldman Sachs executives with their multimillion dollar bonuses. This isn't even a blip on the charts for them.
And the rich just get richer. Wait a minute! I thought the Democrats were the party of the people. Aren't they supposed to be helping people "out" of poverty? We'll have to wait a few years for the final results, but, so far, it looks more like the number of people living in poverty is expanding at a record rate.
On Sep 30 01:34 PM Chancer wrote:
> I researched that for years. Results: nothing really satisfactory.
>
>
> Can you find some place that is reasonably safe?
> Low cost?
> Stable government?
> Friendly to retirees?
> Rule of law? Property ownership, etc.
> English commonly spoken? (even Spanish is OK with me)
>
> Costs around the world have really gone up. It is not like it once
> was.
As far as working past retirement, I see just the opposite happening. Who do you think is getting laid off in those job loses? It's older people, like me and my friends. No one is going to hire us back. I've barely had a nibble in 9 months and I am a technology and investment strategist and expert. I ran the numbers - I can retire in Israel, but not in the US. So, it's sayanora suckers. Keep on working so I can draw my social security and good luck in the dog-eat-dog work place of tody and tomorrow. I am outa here!
/Tuolumne
Do some searching on the WWW and you'll see what I mean.
Rick, since you make you bread and butter from one of the largest real estate developers in Boston, don't you think it skews your perceptions a little bit?
1 - Pick a retirement income strategy that is not tied to market fluctuations
There are plenty of calculators available to design your retirement income strategy. But beware! Not all are designed to be in your best interest. A lot of them are geared towards the investment vehicle the site is selling. A great number of retirement income planning calculators make the mistake of trying to predict the future; we know how dangerous that game can be. Some are just unaware that they are tying you to market fluctuations, even if you don't want to. Be certain to pick the strategy that best suits your situation. You should be looking for the lowest rate of return needed, combined with the greatest investment flexibility.
2 - Put strategies ahead of investments
Too many times investors go for an investment they think is worthwhile, or one that is 'hot'. But many times that 'hot' investment or worthwhile investment doesn't fit into their retirement income strategy. For example, if you are living on interest gleaned from bank CDs, would you sell them all and put your savings into just one stock? I don't think so.
3 - Align your investments to your income strategy
Once you pick your income strategy, you can pick the investments that align to that type of strategy. Just as in the previous example, if you picked a strategy that was an all fixed 'income investments' strategy, you wouldn't be out hunting for stocks. If you find you are, then you might be in the wrong strategy.
4 - Budget your annual income to a level monthly number, especially if you are paid on a commission basis or get paid bonuses.
In order to match up income and expenses, budget your funds to last throughout the year. This will make it much easier month to month, and especially at the end of the year to make sure your income exceeds your expenses. Commissions, bonuses, even part-time salary paid in uneven increments (such as consulting income), need to be annualized (how much is this a year), and then divided by 12 to make it monthly.
5 - Estimate expenses on a level basis (such as your income), and match them up.
Once you have an idea of your monthly income, match up the expenses and make sure you are exceeding your expenses with your income. Many utilities offer a budget billing plan, and many other expenses can have the billing changed to a specific day of the month to keep them all in step.
6 - Stay ahead of inflation by avoiding low to no rate of return accounts. You can have safety and an inflation-beating return.
Market's up. Market's down. Market's down again. Now it's up. You get the point. Times are a bit uncertain, but aren't they always? When the markets are taking off, you start wondering when they will stop, and when they are going poorly, you wonder when they will turn around. Safety is good. When you are going for safe, you can look for the highest yielding investment with safety without going for a 0% rate of return account. But with the most diverse income strategies, there should be a growth component. And you never know when things will turn around, so don't be so quick to completely jump ship from your long-term plans. Many of these plans, and growth components in income strategies, are built for the long haul and already assume market volatility and uncertainty. Just make sure you review and rebalance at least once a year.