Katharine Roberts (right) and Nelly Falcon visit the Canaan Senior Service Center in New York. Many seniors are having to adapt their lifestyles to the worsening economy.
(Shannon Stapleton/Reuters)Photos (1 of 1)
Economic crisis scrambles retirement math
The 401(k) model of saving is under duress as stocks slide. Home equity losses don’t help.
By Mark Trumbull | Staff writer of The Christian Science Monitor/ March 4, 2009 edition
Reporter Mark Trumbull discusses some alternatives for consumers who have retirement savings in the stock market.
Reporter Mark Trumbull
The recession has pushed retirement further out on the horizon for millions of Americans – and is putting severe strain on the 401(k) model of retirement saving.
If that wasn’t already clear, a bout of stock market selling early this week brought the challenge into sharp relief, as the Standard & Poor’s 500 index closed at a level not seen since 1996, down more than 50 percent in 17 months. Coupled with huge losses of home equity in the housing market, the result is a historic decline in net worth for US households.
The downturn on Wall Street is still far from matching the nearly 90 percent drop seen in the Great Depression. Many investors are hoping portfolio values will get an upward bounce later this year, if markets begin to focus on recovery rather than risk.
But the setbacks faced by retirees and by workers trying to build nest eggs could have lasting impacts. These may include new policies designed to make retirement funds less exposed to market volatility in the future. At the very least, families are having to save more and to do damage control on retirement plans that have sunk in value.
“The hit is very significant,” says Rick Miller, who runs a financial planning consulting firm in Cambridge, Mass. “I’m encouraging people to try to stay on an even keel. And to make decisions that are appropriate to their circumstances.”
That may mean sticking with volatile investments, but not in every case.
“I’m not saying to everyone, ‘Hang in there with stocks,’ because for some clients it may not be the right the decision,” Mr. Miller says.
House hearings
Just last week, the House Committee on Education and Labor held a hearing to consider the challenge of retirement security, in light of the financial crisis.
Alicia Munnell, director of the Center for Retirement Research at Boston College, testified that Americans were poorly prepared for retirement even before the recession began.
“But I thought the dimensions of the problem would not become clear for another 10 or 15 years, when large numbers of people retired reliant solely on Social Security and 401(k)s,” she said in her prepared statement. “Instead, the financial crisis has accelerated a reexamination of our retirement income system.”
According to the center’s research, 44 percent of Americans in 2006 were “at risk” of having insufficient income for retirement. When broken into three income groupings and three age groupings, Americans’ vulnerability levels ranged from 28 percent, for one group of early baby boomers, to 60 percent – that’s the share of low-income Generation Xers who were at risk.
Now, the recession and the related loss of wealth are pushing those risk percentages upward.
In one sense, the setback for the typical household is smaller than the bear market in stocks implies. Many Americans have no retirement account, and those who have work-based accounts don’t put all their savings in stocks.
Savers lose 25 to 30 percent
Since January 2008, people who have been saving in a workplace plan for a period of 10 to 19 years have seen their account balances fall, on average, by 25 to 30 percent, much less than the S&P index during that time, according to numbers gathered by the Employee Benefit Research Institute in Washington.
But for many families, the home itself is the largest asset, one that may have declined a lot in value, depending on where they live.
“Millions of middle-class homeowners still have little or no equity even after they have been homeowners for several decades,” write economists Dean Baker and David Rosnick, of the Center for Economic and Policy Research, in a new report on baby boomers and the housing collapse.
Coping strategies
Americans are already beginning to adapt by working longer, saving more, and in some cases rethinking how exposed they want to be to the stock market.
Most Americans haven’t lost all appetite for investing in stocks, as occurred for a generation following the market crash that began in 1929. But some people with low risk tolerance are getting out of stocks for good, Miller says.
At the least, the bear market – worse than any since the Depression – serves as a reminder that stocks can go down even if you hold for a decade or more.
“I do believe it’s true that stocks have higher returns” than other investments, in general, Miller says. But “a lot of people had the view that was a sure thing.”
Whether people stay in stocks or not, what’s vital is to have contingency plans, such as fixed-income investments, in case stocks do badly, he says.
Alan Lancz, an asset manager in Toledo, Ohio, says he’s been putting more client money into bonds over the past 18 months, even as he sees a buying opportunity for stocks if share prices dip further.
Financial publications nowadays are matching investment tips with advice on how to spend less, such as a “101 ways to cut expenses” article on the investment website Morningstar.
Americans saving 5 percent
America’s savings rate, as measured by the Commerce Department, rose to 5 percent of income in the most recent quarter. Many economists expect that number to go higher still.
And workers are postponing retirement. According to a new survey sponsored by the investment firm ING Direct, 4 in 10 Americans believe the current economic climate will force them to retire as many as 10 years later than originally expected or not at all.
Some retirement experts call for new savings vehicles that do better at guaranteeing a modest but reliable stream of income. Ideas such as that were among those raised at last week’s congressional hearing.
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1. guys background search | 03.08.09
USA’s FAST ECONOMIC RECOVERY IN 2 STEPS
Step 1 - STOP THE BAILOUTS and FIX THE BANKS
- Solve the loan problem.
- Solve the derivative problem.
- Reassemble whole loan mortgages
The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already own $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money for banks to start lending, but banks hoard the money to save themselves.
Our financial system became untrustworthy, because it mixed $ billions in bad loans in with the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.
The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.
So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.
The USA has fixed this problem before, and it is not hard to fix again. This is how:
A) Start with the Resolution Trust Corporation (RTC), which the federal government setup to solve a Savings and Loan problem in the 1980s.
B) RTC buys up securitized mortgages and derivatives to reassemble whole mortgage loans.
1. “Securitized mortgages” are home loans that have been bundled into large groups and sold to investors. A group of about 4,000 mortgages can be “securitized” and sold just like a stock or bond. Investors like to buy groups of mortgages because they receive all the monthly house payments.
2. Some groups of securitized mortgages were subdivided into smaller pieces, called “derivatives.” However, both of the fancy names refer to mortgage loans.
3. The problem is that many bad loans (with no payments) got mixed in with good loans. That turned the all the securitized mortgages into bad investments, which are ruining our banks. It is a huge problem, and the government has to fix it, before our economy will recover.
4. Total securitized mortgage and derivative market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html )
5. Government should buy up securitized mortgages and derivatives at the lowest market price, which is set via a reverse auction. (Google on “reverse auction”.)
6. Squatters, who sit on their mortgage derivatives, in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)
7. Government pays mortgage derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.
8. Sellers give up all rights. No new law there.
9. Banks, investors, and insurers now have cash instead of questionable mortgage loans and derivatives. So, the banking system is healthy with cash to lend.
10. Credit will flow, and the economy will grow.
C) Government reassembles whole loans from securitized mortgage components and derivatives.
D) Government sorts the newly reassembled whole loans (mortgages) into groups according to risk/quality.
1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.
E) Government (RTC) sells the reassembled whole loans to traditional mortgage banks.
1. This solves the problem of renegotiating home loans with homeowners. Read on.
2. Law must be changed so that reassembled whole loan mortgages cannot be securitized into derivatives, again.
3. An important purpose is to reconnect each homeowner with his lender, and vice versa.
4. It eliminates incentive for mortgage lenders to make predatory and junk loans. If the loan fails, the lender is stuck with a bad loan.
5. Government recovers much of the $1.3 Trillion purchase cost, because government auctions off the reassembled mortgages.
6. The lower quality, more risky mortgages would fetch a lower price at auction.
7. Mortgage companies, that buy the risky loans, will have more room to negotiate with the homeowners.
8. Some homeowner negotiations will not succeed. Those homeowners will move into affordable rentals. (The government does not owe everyone a free house.)
9. Other renters would like to buy those empty homes at reduced market prices.
10. If the government gets stuck with some homes, the government could profit by selling the homes when the housing market recovers.
F) Insurers like AIG may be reorganized through bankruptcy.
1. Securitized mortgage pools never made business sense, unless they were protected by various insurance schemes.
2. Those insurance schemes always were a scam.
3. Insurance only works when most of the insured assets are never hit with a disaster. That is why flood insurance does not work very well. A major flood ruins all the buildings in a large area, all at the same time. So, the insurance company goes broke, and people that bought the insurance are not protected. That is the problem with securitized mortgage insurance. In an economic downturn, the “disaster” hits all the houses at the same time. Securitized mortgage insurance was doomed to fail, and the insurance companies went broke in 2009.
4. Companies that ran the insurance scam may have to go through bankruptcy.
5. Never ending government bailouts for insurers like AIG are just throwing good money after bad. So, stop the bailouts.
This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made. It reassembles mortgage derivatives into whole loans, and restarts traditional mortgage lending. People can get loans to buy homes. Credit will flow, and the economy will grow.*
Step 2 – STOP THE PORK and START THE RECOVERY
*The economy will grow if President Obama’s massive tax, borrow, and spending plans can be stopped, before he creates another Great Depression. Presidents Hoover and Roosevelt already tried to tax, borrow and spend their way out of a recession in the 1930s. Instead, they created the Great Depression, which lasted 12 years. Straight as he goes, President Obama is doing it, again. Nevertheless, cleaning up the securitized mortgage mess is a necessary first step.
If President Obama announced Steps 1 and 2, today, the stock market would go up within hours. Investors love a real business plan, instead of a political pork plan. Millions of people will be wealthier, feel wealthier, and have more money to spend. That will jump start the economic recovery within days.