The Disaster for Retirees

The years ahead are going to be very trying for our country in general and Baby Boomers in particular. I’ve often attempted to explain how this crisis is going to hit Baby Boomers especially hard. When the Fed sets monetary policy, they are putting speculators ahead of Boomers. This is a fact. A major crisis is forming because Boomers are feeling pressure on their investment portfolios at the same time that pensions are underfunded. Where is retirement money going to come from?

Let’s think briefly from the perspective of Boomers as it pertains to the 3 major asset classes of real estate, stocks, and bonds.

Real Estate

90% of people are totally off-base in the way they think about real estate. The American dream is to not only own a home, but perpetually move up to a bigger and bigger home as you age. Fine. But what Boomers are finding out is that there is no liquidity in the current real estate market. Furthermore, there is a good chance that capital gains taxes will rise as the budget crisis intensifies. Those who are holding out for real estate to recover are getting hit by huge costs of carry. Energy costs are rising fast even though there is no inflation according to the Fed. I’m afraid many Boomers are learning a very basic lesson in investing: residential real estate is a huge liability without cash flow.

Stocks

Stocks have recovered nicely from their March 2009 lows. Unfortunately, people panicked in 2009, which actually created net outflows from 401k plans. Even Boomers who didn’t panic are finding that stocks have gone nowhere for a decade. An inflation-induced rally in stocks appears to be in the cards, but I don’t think many Boomers will participate. Why? Many have been brainwashed into believing it is now time to move into bonds for “safe” yield.  

Bonds

The worst is yet to come for bonds. Government bonds are near 3-decade highs even though we are running record deficits. Huh? Bonds aren’t even tracking inflation, and this is what Boomers are staking their retirements on? I’m truly baffled. It is a fact that bond defaults are the true capital destroyers. Judging by the way people are flocking into bonds now, this time should be no different.

Savings

Right when Boomers need yield the most, it is nowhere to be found. I’ve pointed out how the Fed is crushing Boomers with their interest rate policies. Well the mainstream financial media is finally catching on. An article in today’s Wall Street Journal describes the current plight of retirees. The article points out that investment income has fallen considerably from 2007, in large part because of the Fed’s interest rate policies.

The Fed lives in a world where lower interest rates are the solution to all our economic ills. There is no nuance in the way they think. Their interest rate policies show that they assume everyone is a speculator. Does the Fed not know that Baby Boomers are about to retire, and that by and large, retirees are not speculators? Does the Fed not know that lowering interest rates crushes the spending power of people who are least affected by a recession? I seriously wonder why people still trust the Fed after they were taken totally by surprise by the financial crisis of 2008.

In my experience, it is very difficult to talk to most older people because they assume they know more than younger people in all aspects of life. Tell them in 2007 that a real estate crash is coming and they scoff at you because they made such gaudy gains in real estate. Tell them a bond default is coming, and they’ll ask you: “What makes you think you know more than the Fed?” Tell them that their pensions just won’t be there to fund their retirements, and this is about when their brains shut down. This has nothing to do with the logical weight of my arguments and everything to do with psychological barriers to believing facts. But I understand this. I truly sympathize with Boomers who assumed home prices would never fall and stocks would rise forever. But now is not the time to make big mistakes even bigger. Now is the time to face the facts.

Our government is running $1.5 trillion deficits. Pension obligations are coming due now. The Social Security trust fund is filled with Treasuries that the Fed just so happens to be buying directly. Taxes are set to rise across the board. It is truly time to get out of all government bonds. If I were about to retire, I would borrow money at a long-term fixed rate and hedge with moveable/liquid assets. This is just the prudent thing to do. I would not put one penny in a savings account yielding 0.24%. Even according to the government’s manipulated CPI, inflation is much higher than 0.24%. This is just common sense here.

No matter how obvious the debt crisis is, I know many Boomers will not take the proper precautions. This is a disaster waiting to happen. When Boomers really start to struggle, that’s when civil unrest should appear in America.

The Disaster for Retirees is a post from: Expected Returns

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