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alstry (35.87)

How will people retire???????

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July 07, 2008 – Comments (12)

Right now a record number of people are in or preparing for retirement.

The majority of their assets are allocated in stocks, bonds, and real estate.

All three asset classes are losing value right now.

If the current trend continues......what will happen to the value of people's retirement nest eggs and what effect will it have on our economy?

12 Comments – Post Your Own

#1) On July 07, 2008 at 1:25 PM, StockSpreadsheet (72.03) wrote:

A lot depends on how much they have saved.

A general rule of thumb is that you can pull out between 4% and 5% of your asset value each year and you will never run out of money.  You also need a decent portfolio diversification, (not all tech stocks, for instance), so that some of your assets will tend to go up when others go down, and the bonds and divy stocks keep paying you your dividends/interest.

Assuming that people saved what they should for retirement, (and most Americans have not), then the current bear market shouldn't hurt them too bad, since they should have at least a year's worth of expenses in cash/CDs/short-term treasuries, etc., if they are within a couple years of retirement.  

Assuming all of this, then their first year of expenses is already in the bank.  As for after that, the 4%-5% withdrawal rate assumes some bear markets along the way.  As long as the bear market doesn't last too long, (5+ years), then people should be able to survive OK in this bear market and their portfolios will recover in the next bull market, (during which time the U.S. should be in a better positon since a lot of the excesses will have been wrung out of the market and the surviving companies should be in better shape, (leaner workforce, less debt, etc).

For those that have only saved half or less of what they should have, then these are going to be very trying times.  Many of them might not be able to retire when they want, assuming they have a choice.  Many of the elderly might have to take a part-time job to make ends meet, travel less than they had planned, and in general have a much more thrifty/low-cost retirement than they had hoped.  Hopefully also, they will have family members that might be able to help them out.  You might start seeing a wave of elderly moving in with their kids to help make ends meet.

A lot depends on how long the current recession lasts, how far the dollar and stocks fall, and how prepared people are for retirement.  I think that a lot will be hurting, and that you will probably see more elderly living with their kids than has been true for half a century.   Hope you get along with your parents, as they may be wanting to move in, (depending on their finances and yours). 

I know some elderly that have moved in with their kids to make ends meet, and I know more that are considering it for the future if it becomes necessary.  I think this will become more common in the next decade.

Just my two cents.

Craig 

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#2) On July 07, 2008 at 1:26 PM, RainierMan (75.28) wrote:

According to a recent ABC news report, some people are continuing to work for exactly this reason.

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#3) On July 07, 2008 at 1:34 PM, LordZ wrote:

EVer see Logan's run...

IF things keep going like there going, the majority of people will be in bad shape and maybe something like Logans run might come into play

where when you reach a predetermined age, you are extinguished or you are chased down .... RUN

RUNNER !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Buy plenty of mac and cheese and tuna fish,.

 

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#4) On July 07, 2008 at 1:35 PM, alstry (35.87) wrote:

Let's say stocks, bonds and RE drops 70% in value.....and stays that way for 15 years just like Japan.......how will people retire taking out 5% per year unless they are die within 5 years?

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#5) On July 07, 2008 at 1:36 PM, bingobum (69.11) wrote:

gold,energy,crops

stick with cramer

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#6) On July 07, 2008 at 1:54 PM, HighHopesInSD (30.48) wrote:

Alstry,

As I said above, if the bear market lasts longer than 5 years, it is going to be very difficult.  I don't know of a bear market that took all assets down 70% in value.  The most I heard of was about 48%, at least for any bear market since the Great Depression.  

If you want to calculate for a 70% drop across ALL asset classes and that the depression will last for 15 years, then we are all screwed.  It will be worse than the Great Depression and you will start seeing 10-30 people, (friends, family and/or neighbors), in each house just to make ends meet.   With that type of drop, then consumer spending will pretty much dry up across the board, and anything not an export industry or maybe consumer staples, (food, medicine and maybe some clothing), will be toast.   

Personally, I don't think it will get that bad.  I don't think it will take 15 years to write off all the crap on the books.  Therefore, I think our stock market will rebound much sooner than 15 years from now.  Japanese companies didn't write off their bad loans, bad debts nor bad investments and kept them on the books and they are still on the books at a lot of Japanese companies.  That is why their stock market and economy has been in such a slump for such a long time. 

It might take American banks and other financial institutions 3 years to finally come clean about 90% of the crap on their books, but I don't think it will be longer than 3 years.  Therefore, I think the recession won't last much longer than 3 years max.  Sure, the U.S. is going to have some problems with the dollar, (we spend too much, save too little and manufacture WAY too little, and our trade policy needs be revamped, (such as putting tarrifs on Chinese goods until they let the renminbi float)), but I think we will eventually muddle through.  Until then, we can just do the best we can with the hand we got and hope things get better sooner rather than later.

Best wishes.

Craig    

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#7) On July 07, 2008 at 2:02 PM, alstry (35.87) wrote:

What if wiping clean from the books means bankruptcy and reorganization.......than my 70% number might be conservative and permenant for those who were equity holders going into the reorganization?

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#8) On July 07, 2008 at 2:21 PM, FoolishChemist (97.14) wrote:

With the way things are looking right now, it might be better to ask "will people retire??????????"  But for those who do retire, I don't think it will be how they had envisioned it.

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#9) On July 07, 2008 at 2:35 PM, DemonDoug (75.10) wrote:

Alstry, how about a more cynical viewpoint.  The majority of retirees have no assets (except maybe their primary residence, which is not an investment but a home).  They have nothing to sell anyway. :)

I think if you want to be bearish on stocks, bonds, and real estate, look at the rich and wealthy.  One rich guy probably holds as much if not more than 1000 poor guys; so the question is, how is he going to do, and what will his affect be on the market?

Now I'm going to turn this optimistic.  Since the majority of people who hold lots of assets are probably people with good financial IQ, I don't see it as likely that they will be liquidating everything just to pay off loan-shark Vinnie on the corner.  If anything, they may be opportunistic to buy quality companies on the cheap (imagine if you had invested in PBR or SQM a year ago).

Cynicism: Chances are most of those poor dudes with no assets won't be retiring.  They'll keep working out of necessity until they drop dead.   Optimism: This is probably actually a bullish sign for the economy because you'll have less people taking taking taking from the system and more people actually being productive and providing a good or service that is useful to society.

Cynicism: It's likely that with people being less wealthy overall we may have less rich people who have cash to put in the markets. Optimism: Many of the "well old" find that they enjoy working well after traditional "retirement age."  So those rich people that do hold a lot of investments probably won't be selling them off anyway, as more and more of them emulate Charlie Munger, Warren Buffett, Kirk Kerkorian, Clint Eastwood, etc.

Alstry I think the only real critique I have of you overall is that you are as one-sidedly negative as the CNBC talking heads are one-sidedly positive.  If something is going down, something else is going up; if you hold 100% of your assets in cash, what you are banking on is bonds, stocks, commodities, and RE to go down and the dollar going up.  This would mean you are bullish on the dollar.  To be bearish on one thing is to be bullish on another... just wondering what that is sometimes for ya al.

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#10) On July 07, 2008 at 3:03 PM, alstry (35.87) wrote:

If something is going down, something else is going up???????????????????????

Now you are getting it....just not stocks bonds or real estate:)

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#11) On July 07, 2008 at 3:06 PM, DemonDoug (75.10) wrote:

Let's say stocks, bonds and RE drops 70% in value.....and stays that way for 15 years just like Japan.......how will people retire taking out 5% per year unless they are die within 5 years?

If this were the case then it would mean the dollar would rise 70% in value.  This means that everyone could easily retire because current SS checks would easily start to pay for food, rent, and medical bills.  Also, Japan didn't turn into some mad-max insanatorium, we won't either.  Finally, in case you hadn't noticed, the official but unspoken policy of the US Federal government is to inflate the dollar, which will prop up asset prices, or at least make them volatile.

What if wiping clean from the books means bankruptcy and reorganization.......than my 70% number might be conservative and permenant for those who were equity holders going into the reorganization?

I seem to remember a whole lot of BK's in the whole S&L thing in the 1980's.  A lot of those guys are getting nailed again this time around.  It's the federal reserve and the deficit spending alstry - it's continually inflationary policies and corporate welfare, it keeps the gravy train rolling.  With a lot of BK's that would cause likely even more deficit spending which would make a 70% loss in the dollar seem conservative and by proxy other assets would rise.

In any scenario commodities win, btw.

You can say what if what if what if... but you are looking at the wrong history.  The US in the 1970s is a much better template, where there was a lot of stagnation but we muddled through and high-quality companies did pretty well (check out a chart of MO from the 1970s to see what I mean).  We also know from recent history that the Fed will flood the market with dollars, and their current policies reflect that.  A drop of japanese-style proportions is just not very likely in the face of these policies.

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#12) On July 07, 2008 at 3:25 PM, alstry (35.87) wrote:

First, I have never intimated a mad max kind of result.  Trends in that direction are not out of the question but a total breakdown is very unlikely.

As far as commodities, I guess we can agree to disagree on this one....but you are still the top dogger blogger in my eyes.

My expectation is a deflationary environment unlike anything we have seen in at least 100 years....but as you know....I have never been mainstream in any stream:)

So looking at any models less than 140 years old is simply not very probative to the current environment....but if I keep talking like this people might start guessing my age:)

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