Retirement Question

Factual Questions
1

I was born in 1958, and if the Market treats me nice I hope to retire when I am 60, in the year 2018 or so.

But how can the Market treat me right?

As a mega-trend, lots of Baby-boomers like me are shoveling money into the stock market. As more money chases the equity, prices go up. (Look at the DJIA! This is insane!)

So in 2018 or so, when all of us are selling our stocks, who the heck will be buying? There are fewer Generation X and Y people out there.

Are we certain to have a market downturn in the second decade of this century?

Should I buy canned tuna, a shotgun and a place in the woods?

2

They said that about this decade, too. The stock market considered as a Ponzi scheme… Could it happen?

If there are fewer working young and more retired old (proportionately), won’t that burden the economy? regardless of where the money is?

More questions:

If we have a healthy economy, and you get a broad mix of stocks, shouldn’t it all work out?

If big deficits continue, won’t we get major inflation?

IF we have major inflation, would a broad mix of stocks be OK, or could inflation make the whole economy sick?

If energy sources choke, won’t the overall economy get sick?

If we export a bigger percent of jobs, won’t that sicken the economy?

Wouldn’t real estate go up as long as the population increases? unless your area turns into a slum?

If you buy a home with a 30-year fixed mortgage, that’s a bet that there will be at least some inflation, and also that you will reside there for most of 30 years. Should you offset that by investing in something that bets the other way?

SS is currently indexed for inflation and is more secure than anything, discarding the badmouthing of it (cite: Mr. Greenspan). But, what is this Administration going to do with Social Security, as it applies to those already age 60 or above? 40 to 60? 20 to 40?

This may be too many questions for GQ. It’s all one big subject, but a brief overview of any of these matters would be of interest.

3

And if we anticipate this, how can we profit from it?

4

:confused: Over the last four and a half years, stock prices have gone down.

Globalization is your friend. Along about 2018, all of those computer programmers in India and China will be accumulating enough wealth to become serious equity players.

Nothing is ever certain when it comes to asset prices. Certainly, a gigantic demographic shift like (American) Baby Boomer retirement is cause for concern. But, when people retire they don’t usually sell all of their stocks at once. And seriously, there will be more and more foreign players. If stock prices do decline, as they did between 1965 and 1982, it will at least make dividend yields more attractive. Stay diversified, save as much as you can, and try not to lose sleep over it.

5

The demographic shift is real and has been debated in the financial community for a long time. It is one of those issues where we thought we had reached a consensus, which then evaporated and was replaced with more debate. The previous consensus had been that equities would decline as baby boomers retired and cashed in their retirement savings.

There are a number of reasons why that may not happen.

  1. Privatization of Social Security - Whether you like it or not this is likely to happen. It will infuse massive amounts of money into the equities markets offsetting cashouts from baby boomers.

  2. Baby boomers may not follow the pattern we expect. There is evidence that despite the lip service given to moving money into bonds as we age, there are many people who remain mostly in equities throughout their lives. If the trend continues and people become more comfortable with investing they may be willing to take on risk to fund a long retirement.

  3. The generations behind them may not be as large, but they are far more comfortable with the need to save and with investing in general. If the younger generations save more in stocks than the generations before them it will mitigate the cashout effect.

  4. Global markets can make up the difference. As India and China become richer, they will become major players in US markets. Demand overseas will make up for slackening demand in the US.

I don’t believe that there is a catastrophe looming, but an argument can be made for the doomsday scenario. There are powerful reasons working in our favor, and given the long term return advantage of stocks I am not sure what attractive options remain for the long term investor.

6

Well, thank goodness I have abandoned the Social Security System.

Inflation could be a problem if we continue to run high deficits, if we do not grow out of it so to speak. But there is no protection from inflation save holding real things, like equity.

In any case, let’s all pull for the Indians and Koreans to pick up the slack and pay for my retirement in Mexico!

7

Is this sarcasm, or are you serious? Since when are equities considered ‘real things’? The value of equities is entirely based on the confidence of investors, and compared to ‘real things’ like real estate, have no more substance than a fart in a whirlwind. The value of your portfolio can vanish in a heartbeat, whenever investor sentiment turns against it.

8

But there is no way to protect value against inflation, but by owning real things. Although I take your point about equities not be exactly real.

9

Of course! But what does that have to do with the rest of the post?

Seriously, if you see this happening just start shorting the same stocks. Or pick a date when you think it will start happening, then start shorting them.

Look! It happening right now!

10

Now there is a story (allegedly from this week’s Economist) saying some Smart Person (Alan Greenspan?) saying there is a 75% chance of a currency crisis in the upcoming year.

OK, so how do I profit from that?

11

i don’t know, gold?

12

Paul, I was born in 1959, so our retirement plans have similar timeframes. I plan to retire in 2016, when I first qualify for a pension from my employer (the federal government).

I recently went to a mid-career retirement/financial planning seminar offered at work.

The guy who taught it was very knowledgable. He had made lots of money in stocks over the years, was independently wealthy and semi-retired at 50. He had once recommended stocks for retirement portfolios, on the long-held notion that the market would always out-perform fixed investments over the long haul. The stock market might have bad years, but it would always bounce back.

He told us that he had recently changed his mind about this.

Largely as a result of this seminar, I have put a big (90%) chunk of my retirement savings in fixed government securities. The yield may be less than with stocks, but it’s guaranteed – it won’t lose value. (It might also do better than stocks – it certainly has for the last four years). I am still putting some of my ongoing contributions into stocks and bonds, but will trim that by a little bit each year.

I have some money left in stocks and bonds, but I treat that as money that I can afford to lose. My retirement funds are in a different category.

Just my two cents.

13

Are they protected against inflation? If you have 5% bonds and the inflation rate rises to 12%, you are losing value.

14

Nostradamus still may be monitoring these boards but he has apparently used up his free guest posting rights and failed to pay the membership dues.

15

No, they’re not protected – I was comparing the guarantee of interest accrual with the risks associated with stocks, which can pay ‘negative’ interest: on my retirement money, I’d rather make 5% and lose 12% than lose 5%, plus another 12%. If we have high inflation coupled with no appreciable increase in interest rates, for a long period of time, well, I’m screwed, at least on my retirement nest egg.

However, I also have substantial non-retirement investments, which I am more willing to risk. If the market outperforms fixed investments, this would make up some of my losses.

I’m just trying to reduce risks in exchange for accepting a lower overall return. This is entirely appropriate for someone with barely ten years until retirement.

16

Sounds very prudent to me, I was just taking issue with the idea that value in bonds is guaranteed.