Wikinvest Wire

This is no joke - part 3 - retirement edition

Tuesday, April 01, 2008

I'll never forget that conversation with my dentist about a year and a half ago when I sheepishly asked, "Do you think home prices will go down a lot?"

He snapped back, "They better not! My retirement is depending on it!"

Whether he knows it or not, along with millions of other aspiring retirees, the good Doctor is now a couple hundred thousand dollars less wealthy than he was back then.

Along with millions and millions of other homeowners, who are now facing losses in their stock market investments to go along with their declining home equity, he's probably had to sharpen a pencil or two and make some uncomfortable new calculations.

That was the topic of the front page story in the Wall Street Journal today:

Americans Delay Retirement As Housing, Stocks Swoon
Nest Eggs Shrink, Deferring Dreams; 'Freaked Out' Elite

As the falling real-estate and stock markets erode their savings, many aging Americans are delaying retirement, electing labor over leisure in uncertain times.

A three-decade veteran at International Business Machines Corp., Dick Boice had planned to sell his house, pack up and move to Arizona with his wife, Lauren, to take early retirement. But two months after the January date he set to exit the work world, Mr. Boice, who is 59 years old, is still on the job. He figures he'll stay put for another couple of years.

The Boices had counted on proceeds from the house sale to boost their retirement income. After a year on the market, the roomy colonial in Blue Springs, Mo., didn't move, forcing the couple to cut the asking price by $40,000 to around $250,000. The house remains unsold. Meanwhile, Mr. Boice has watched the value of his 401(k) and individual retirement accounts fall by roughly 20% so far this year, to a combined $240,000.
The double dip, affecting asset owners of every age bracket, is unprecedented in recent decades. In 1987, property and market values dropped in tandem -- but nowhere near the extent to what's happening now. To document similar conditions, "you'd have to go back to the era of the [Great] Depression," says financial historian Richard Sylla of New York University's Stern School of Business.

With their homes worth less, fewer people feel confident enough to retire, even if they plan to continue living in them. And unlike younger workers, they don't have years to make up for downturns in the stock market. As a result, they worry that their investments will diminish to the point that they won't have enough money to get through retirement.
Factors other than the gloomy economic outlook may be contributing to stalled retirements, says Mr. Hipple of the Labor Department. Most retirees, of course, get Social Security benefits. But traditional corporate pension plans -- which promised specific, predictable monthly payouts -- are largely a thing of the past.
Over the past three decades, the 401(k) plan has gradually supplanted pension plans as the main source of retirement coverage for U.S. workers in the private sector, according to the Employee Benefit Research Institute, a nonprofit group. In 1979, it says, 62% of U.S. employees participated only in a pension plan. By 2005, 63% of workers reported that they participated only in a 401(k) plan.
You hear more and more stories about how, in recent years, some baby boomers tried to play "savings catch up" in real estate by adding some "investment property" to their retirement planning mix - that's probably not working out as they'd hoped.

The retired school teachers down the street don't know how good they have it.

AddThis Social Bookmark Button


Aaron Krowne said...

The retired school teachers -- and anyone expecting a government pension, for that matter -- don't know how good they don't have it.

As long as the government indexes their pension payments to a ludicrous core CPI/PCE computation, the real value of their pensions will fall noticeably every year, until they are worth nothing.

If your CPI-based "cost of living increase" is only 3% a year while the full CPI is 5%, you are receiving at least 2% less every year. In 10 years you will be receiving about 80% in real terms relative to when you retired.

But if the full on CPI isn't even the real story and inflation is "really" around 8%, you are losing 6% a year. In ten years, you will only be receiving about half of what you were when you started.

We'll see a lot of "retired" school teachers and other government pensioners
working in the coming decades, I can assure you of that.
And it could turn out to be much worse than even that.

smurf99 said...

My parents tripled down on real estate looking for that retirement boost. I tried to talk them out of it, but what do I know about important things like that?

Tim said...

Yes, over the long term, retirees from the public sector will get screwed, but they are much better off than those individuals who turn 55 and realize they've only got $95,000 to their name plus their quickly disappearing home equity.

Democracy Lover said...

The WSJ conveniently (buried somewhat below the lead) mentions that the issue with retirement coverage is that "the 401(k) plan has gradually supplant pension plans..", as though this were some kind of inexorable evolutionary process toward enlightenment that just "happened".

The WSJ was no doubt among the many business voices that clamored for the end to fixed benefit pension plans and touted the benefits of letting workers "invest" their own retirement funds. This was hardly a natural progression, it was a concerted effort to increase corporate profit at the expense of workers and shift the risk of pension investments from trained corporate managers to uninformed employees.

Anonymous said...

... while generating a more fees for the financial services industry

Anonymous said...

This is bad on so many levels. I am a Generation Xer and we are screwed. We have the boomers in front of us and the Generation Y behind us. A lot of careers are rotting on the vine because the boomers are not retiring from the companies so there is no where for us to go.

On top of this we will get to pay for the boomers retirement via Social Security.

As for annual increase my salary went up this year a whoping 1.3% yes 1.3% and I was supposed to be ecstatic about that. A good raise here is supposed to be 2-3%. So in a nutshell I just took a PAY CUT.

Mathlete said...

Fixed pension = no pension, in case you missed all the employers going bankrupt due to their retirement expenses.

We're already moving towards a hybrid system of defined contribution plus institutional management, taking the best of both worlds.

Anonymous said...

Big difference between United Airlines or Bethlehem Steel versus the state or federal government when it comes to writing pension checks.

Nick said...

Mixed feelings, personally. Corporate sponsored fixed-benefit pension plans are ripe for abuse by corporate accounting and greed, and susceptible to catastrophic failure (eg: corporation not there when you retire), and encourage "lifer" employees, which is horrible for corporate competitiveness. I'd say they are a horrible retirement plan.

401k is better, but does have the drawback of restricting investment options to plan-offered fund choices, which often are chosen to maximize the IB's profits at the expense of the employees. Also, they require the employees to all be competent investors to maximize their benefits.

Government pension plans are good, expect for the CPI tracking problem, and the historical disaster that is letting the government run a Ponzi scheme to provide retirement benefits.

What I would do (if I were in charge, haha):
- Construct a government-independent, accurate CPI maintained outside of government influence as much as possible, index CPI-related increases to it
- Provide a government-run "fund", available to all 401k participants (by law), which provided exactly the new CPI in growth every year
- Remove private pension plans, and possibly provide a government chartered low-cost 401k administration company operated for the public benefit (eg: non-profit)
- Phase out Ponzi [Social] Security in favor of 401k plans

Just my opinion.

Anonymous said...

Many of the defined benefit plans don't have any adjustment for inflation. Also, the current federal employees get an automatic annuity which is very similar to a defined benefit, based on high 3 salary and years of service. This annuity has an annual cost-of-living-adjustment that is tied to the CPI. Add social security, federal health benefits,a 401K, and a Roth IRA, and I can't complain. Also get 12 hours of leave each payperiod.

  © Blogger template Newspaper by 2008

Back to TOP