The survey found that only 46% of workers have tried to calculate what they need for a comfortable standard of living in their golden years. NewRetirement.com, is here to help!!!  You can use our nifty retirement planning calculator to see what you will need to save for retirement, or use our Reverse Mortgage Calculator to see how much money you can receive from a Reverse Mortgage.

Also, there is a new Reverse Mortgage guide on the website that can shed some very interesting light on this product.

In other news, a new Charles Schwab report states that nearly half (44%) of retirees claim to be supporting at least another individual financially.  While this exhibits the generosity of retirees it is also evidence that retirees are not practicing proper retirement planning.  Everyone, of course wants to help their family in whatever way they can, but it is paramount to worry about your own finances instead of your family’s.  Helping them in the short term is fine, but imagine once you are gone then how are they going to figure out their finances in the future.  Setting the right example through debt consolidation and reducing expenses, is the most prudent decision to ensure your family’s financial future. 

And finally, to add to the launching of the socialsecurity.gov site to which I mentioned in the post “Apply For Social Security Benefits Online.” It appears that Patty Duke has brought back her role as Cathy Lane from the 1960’s sitcom The Patty Duke Show to get baby boomers online to apply for Social Security benefits. While the characters she plays in the Public Service Announcements are signing up for social security, Patty, aged 62, says she will be waiting a few more years to start receiving benefits.  This is especially a good call if you are healthy and believe you will live a long life.  In fact there is s great article from the Center for retirement Research at Boston college entitled, “How Much Do Households Really Lose By Claiming Social Security at Age 62?”  Don’t fret if you have started collecting Social Security at 62 and have since changer your mind because you have the ability to restart your Social Security benefits. Here is a nifty little Social Security calculator that will help you decide when the best time to start receiving benefits.  Oh and if you would like to see the ads please visit socialsecurity.gov/pattyduke

Motivated by political pressures and the need to show a sharp increase in securities markets, the government will be inserting trillions of dollars of borrowed money into the economy. Never mind that this will increase the national debt by 20% or so in less than one year or that commitments will be made for increased entitlements which are already far beyond our ability to pay. The combination of national debt and unfunded obligations for Social Security and Medicare now total to almost $200,000 for every man, woman and child in the country. As if that’s not bad enough, that doesn’t count any personal, mortgage, or commercial debt–all of which we must also pay.

The fact is that, as a nation, we have been living far above our incomes and the need to stash some money away for retirement. Even our children and grandchildren will be unable to pay just the ongoing costs of these obligations unless everyone is subject to staggering tax rates. The tax problem will be exacerbated by the demographics leading to the inevitable increase in the aged relative to the working population.

The problem started to be evident in 1985 when the national savings rate started its precipitous drive from the historical 9% to virtually zero in 2005 and has stayed that way ever since. In order to recover those lost savings and get back to what 9% would have provided over the past twenty years, people would have to save over 20% of their income over the next twenty years. The only time our country has saved that much was in World War II when there wasn’t much to buy, even food was rationed, and Rosie the riveter worked in a defense plant. Everyone invested in Savings Bonds, even school children.

The fact is that people should be saving more than 9% today. The reason is that a lower percentage of people are getting pensions. Further, over 40% of pensions are for government employees. The majority of the people don’t work for the government, don’t have a pension, and have fewer health benefits than government employees. Now we’re promising the equivalent of Congress’ health insurance to over 40 million uninsured people even though they now get free medical care, and those of us who pay for our health insurance don’t have benefits as good as Congress.

After the decline in savings became apparent, the financial firms discounted the importance of the national savings rate. One argument was that savings rate wasn’t important because the next generation was going to inherit so much. When people found they wouldn’t get any of Bill Gates or Warren Buffet’s money, financial firms said the value of stocks had increased so much that people didn’t have to save anymore. After the stock boom ended financial firms said that the best investment people had was their house which would provide much of their retirement needs. Right now, the government and industry say what’s important is to preserve jobs and keep spending up so that businesses can thrive. Forget savings.

Come on! At some point we have to take our medicine for such imprudent spending. As individuals we should be living within our income. So should our government. Hasn’t anyone heard about cutting expenses? I’ve gone through a number of Boeing financial crises. You learn that there are many things you really don’t need. Congress recently, and correctly, criticized the auto and union representatives for coming to their hearings in private jets. Yet Congress itself is bloated with all kinds of perks and overmanned with aides. There comes a time when Congress and the Administration must lead by example, then slash the spending of every government department severely. Just like Social Security and Medicare are entitlements, the lavish cost-of-living-adjusted government pensions are entitlements and will last as long as government employees live.

If we want change, let the change come from more prudent spending individually and by the government. Are we ever going to get away from politics where those running for office say they are going to give more benefits if elected? I’d like to see politicians give an honest and verifiable cash statement that would not only end deficits but reduce the horrible obligations that we’ve already left to our children and grandchildren. How about a twenty year plan to pay off the national debt and a fully funded trust for Social Security and Medicare?

The “Jolt” is more of the same shortsighted view that we’ve had for a long time. It may get us to spend more for a short while, but the reckoning will come. My thought is that the reckoning will be led by the baby boomers who have to learn relatively soon that they can’t retire without savings. As that reckoning comes, industry and the government will have to be smaller, but we’ll still be stung with a huge income tax burden because there will be fewer workers, even more people begging for handouts and the need to fund overly generous entitlement programs.

Bud Hebeler

11/25/08

Read more on www.analyzenow.com

So what will really happen?

First, the government will have to stabilize the credit markets. This could easily take several years because foreclosures will be spread out in time. Even though home prices may be less than mortgage values, people do not decide to abandon a home on quick notice. They have to carefully consider their alternatives including whether the housing market will recover and the desirability to move to a different location. This is extra tough when people can’t qualify for new mortgage because their credit rating was destroyed by abandoning a mortgage.

It can’t be long before credit card defaults hit the banks really hard thereby aggravating the situation. The top six credit card companies hold $639 billion credit card debt. Then there are $365 billion securities backed by that debt. These are bundled into groups of credit-card receivables and sold to investors, insurers and hedge funds which likely find their way into other derivatives. It’s the mortgage problem all over again because about 30% of credit card debts are from low-credit-score people. Business Week (10/20/08) predicts that this is the next big blowup ahead.

In the meantime, people should develop a better appreciation for the fact that they should be saving. The decline of savings started two decades ago from 9% national savings rate to minus numbers today. Failure to increase savings rates is surprising because of the large number of baby boomers who are starting to reach retirement age and the long-term trend of industry to go from pension plans to savings plans.

As a consequence of saving too little, incurring large debts and losing conventional pensions, people will have to save more—lots more and start quickly.

When the savings rate finally increases to the extent necessary, much of the resulting investment would help the stock market. It would also bring back some of the national debt from overseas, thereby strengthening the dollar and reducing the cost of imports. But this will take years, not days or months and will be softened by slower business growth.

By necessity, many are going to have to retire much later. This is good news if they still have updated skills and the physical capability, but they will face a difficult labor market. On the one hand, demographics show there will be proportionately fewer young people entering the work force. That would bode well for seniors trying to retain jobs. On the other hand businesses will be facing many difficulties. This is likely to be overwhelming for a number of years.

Businesses will have lower volume when consumerism declines—as it must with increased savings! At the same time, employers will also face higher taxes, at least at the state and local level if not at the federal level. Heavy industries will face costly capital improvements for environmental and energy reasons. All of these things put pressure on labor as well as encourage businesses to look abroad for less expensive sources of materials and components–if not total assembly. Lower market volumes mean less need for commercial real estate, so there will be trimming there as well.

Another new impediment is put on businesses that offer pensions when the stock market falls and shows definite signs of slower growth. As an example, suppose that a pension trust’s securities fall 10%. Then the company has to either come up with 10% more funds (think of a huge number) to add to the trust. If the forecasted growth rate for their securities in the trust drops only 1% point, they will need about 15% additional assets in the trust. Firms like General Motors and Ford are already reeling from pension promises that are beyond their capability to fund. This is also likely true for government pension promises—only more so because most government pensions have cost-of-living-adjustments which require higher reserves than fixed pensions of private enterprise.

Another consideration is that the cost of government itself will go up. More regulation and health insurance administration will add significant government employment. Many government employees enjoy automatic cost-of-living adjustments to their paychecks. And government employees on the average make more than the average employee in the private sector. If the business share of higher government costs goes up, the product costs go up thereby aggravating inflation.

Some people think that higher corporate taxes reduce will reduce personal taxes. Not so, higher corporate taxes are simply passed on as higher product costs so that everyone pays—just as with a national sales tax.

The net result of reduced consumerism, increased savings and higher taxes will take some time to evolve before business earnings stabilize at a lower level. When that happens, stock price-to-earnings ratios likely will seek lower values than the historical norms for decades. That’s because of at least two factors: (1) People have got to make up a large part of the savings shortages of the last two decades or face poverty in retirement, and that will take many years of cumulative effort. (2) The outlook for growth will be tempered by the consequences of an aging population that has a much different budget distribution than that of the youth. Consumerism is a disease of youth. Lower price-to-earnings ratios combined with lower earnings do not bode well for the stock market for a very long time.

An aging population brings lower national income, more government outlays for entitlements, and a disproportionate increase in the need for services, particularly medical related services. The service industry does not have as great a multiplication factor for support jobs as does manufacturing. Further, it means a significant increase in the number of retired people to the number of workers. In a couple of decades the number of retirees will be one retiree for every two workers compared to one retiree for every three workers today. By itself, that means a 50% increase in individual workers’ burdens and even more with more people on government welfare.

The part of the economy that will continue growing is the government, but it is the least productive part of the service industry. It has virtually no productivity gain. Politicians are reluctant to propose cuts in government payrolls, in part because they are part of it, but also because government workers probably constitute at least 20% of the voting public. Benefits for government workers grow disproportionately as well. Government pensions most often have cost-of-living adjustments, i.e., COLAs, and savings plans too. 80% of private sector employees do not have pensions at all, and virtually none have COLA pensions. The number of government employees with pensions is fast approaching the number of people in the private sector that have pensions. That’s because of the double whammy of the private sector reducing the number of pensions while the government’s size is increasing.

The changes from these effects do not occur in days or months. They take years to evolve. To recoup the lost savings of the past twenty years in the next twenty years would require more than a 20% reduction in consumption. This implies savings rates comparable to that only achieved in World War II when most things you could buy were rationed and little else was available. Further, virtually everyone worked and provided income for the family during the war. Saving was politically correct and even school children saved stamps to accumulate savings bonds.

No, don’t look for any rapid improvement in the stock market. There may be spurts as occasional good news is highlighted to improve the economy, but the long-term effects described above will dominate the economy for several decades. There is no quick fix for our past savings deficiencies, record borrowings, unstoppable government growth, automatic entitlement growth and inevitable demographic creep to an aging population with greater demand for services, not hard products.

At the same time, even though stock prices will seek a lower level and grow more slowly in real terms, stocks may still be one of the better hedges against inflation. Inflation will increase the apparent earnings and business assets. Since we are living in a world of ever increasing prices, everything is relative. Inflation is very hard on fixed-income investments because the real value of the principal goes down. Owning a house with a mortgage may be one of the best investments since the value of equity increases disproportionately as the price escalates with inflation and the relative value of the debt goes down. Of course this assumes that we are willing to sell our houses later on, go into smaller homes and invest the savings in something that’s liquid so we can spend it.

As bleak as the picture is as painted above, it can get worse. One of the ways to solve part of the debt problem is for the government to let inflation increase above what we consider to be acceptable levels today. That has happened to numerous other countries and our own as well. Inflation is particularly hard on retirees who are trying to live on fixed incomes. It’s not so bad for government retirees that get a kick upward every year.

It was very poor public policy to pressure lenders to make loans to people who could not afford them. The resulting boom in housing prices made it seem that a home was a great investment and worth some speculation—even by those who could not afford the payments, much less all of the other costs of home ownership. People started to consider their home as their primary retirement resource even though a house is about as illiquid as an investment can be and has negative interest. Further this policy exacerbated the lack of mobility of our work force and made people look furtively for new jobs only close to their homes.

But some good came from the resulting crash. My view is that this mortgage crisis has kick-started us on a better path in the long run. It’s better in that less consumption eventually will help provide more for the aging population and less of a burden on our children than continuing this economic madness for many more years. We’re all going to be poorer, but less poor than we would be otherwise. We may still live more comfortably than most other nations. Hopefully the troubles we suffer in the meantime will bring more economically savvy politicians into office. Perhaps they will reduce government growth and entitlements that otherwise will be an unbearable tax burden on future generations.

To our children and grand children:

These can be good financial times, not bad times!

The stock market is falling.  It may be bad for many retirees and those that will lose their jobs as brokers or from bankruptcies but not for many people—IF

·         their investments have been widely diversified, and

·         they have set a tolerance band for reallocating their investments.

Over my almost fifty years of investing, I have seen markets drop many times.  In my first fifteen years I learned the lessons the hard way—by losing money.  I followed the market.  When it got high, I bought.  When it fell precipitously, I sold.  Ugggh!  I was supposed to do just the opposite.

Eventually, I found a way to do better.  I set upper and lower limits to the amount of stock (including stock funds) that I would hold at various ages.  The formula was simple:  I would not let the stock as a percent of my holdings get below 100 minus my age.  That was the bottom side.  Then I set a limit for the top side, namely, 110 minus my age.  So, at age 40 (about when I first started this) my stock allocations were between 60% and 70% of my investments.

After a while I added real estate investments to my portfolio.  I count the equity (price less debt) as a “stock” because, after all, stock is equity as well.  I did not count the equity in my home as an investment because I reasoned that I would always need a home.  Besides, my home was quite modest.

Now, at 75, my equity limits are much lower:  between 25% and 35% of my investments using the very same formula.  The remainder of my holdings are in bonds and money markets.  Using these limits over all of these years has given me a portfolio return that is higher than if I had steadfastly held to an equity limit of 105 minus my age.  That’s because I bought stock when prices were low and sold them when prices were high.  I described the performance differences in my book, “Getting Started in a Financially Secure Retirement.”

Not long ago I was on a radio talk show in New England.  I talked about my allocation limits.  The talk show host said I was old fashioned and dismissed my conservatism.  He felt, as do many, that even retirees should have much larger stock allocations.  I thought to myself, “He’ll learn!”

I can’t see the future any better than anyone else, so my conservative bent could be wrong.  I base my stance now on something very simple indeed.  That’s the deplorable decline in savings rates over the past 20 years and the almost inevitable changes in demographics.  These embody the effects of overdone consumerism, excessive debt and the forthcoming reduction in the ratio of workers to those who will be retired or trying to retire.

In “Getting Started in a Financially Secure Retirement” I show that it will be impossible for the average person to save enough over the next 20 years to be comparable to what the 9% historical savings rate yielded.  We would have to equal the kind of savings we had in World War II when virtually everything was rationed, there was nothing on the store shelves to buy, everyone worked, and buying savings bonds was the politically correct thing to do.

My simple analysis of necessary savings rates does not count the great reduction in the percentage of workers who will get pensions over the past 20 years.  The only major segment of our society where the pension benefits are increasing is the government sector which not only is increasing as a percent of our labor force but also has cost-of-living-adjusted (COLA) pensions that are backed by a sovereign power with the ability to tax.

On the demographics side, the ratio of workers to those over 65 will go from 3 now to 2 in the next few decades.  Again, the effects are very simple to visualize.  That part of our taxes (the largest part) used to support the elderly will have to increase 50% for working folks.  That by itself will be debilitating for the economy unless government benefits are trimmed with a meat ax.

On the debt side, by the end of this year every man, woman and child will have a federal debt obligation of over $180,000.  This includes only the national debt, Social Security and Medicare.  It does not include mortgage and personal debts nor state debts and unfunded obligations.  A family of four could easily have an equivalent debt approaching $1 million including mortgage and personal debt obligations.  At an average interest rate of 5%, that would be equivalent to an annual cost of $50,000, just to pay the interest without retiring any of the debt.  The median family now earns about $70,000.  That leaves about $20,000 for living expenses, state taxes and retirement savings.

Of course that assumes that income and taxes are evenly distributed.  Since 40% of workers pay no income taxes at all, the burden will be 67% more on those who do pay income tax.

So, what do I think will happen?  I believe that not only will income taxes go way up, so will every other form of taxes go up including ones that haven’t yet been invented.  As has already happened in several places in Europe, the government will also have to reduce benefits.

Further adding to the problem will be increased inflation.  That’s because I believe that the demands for higher wages will increase as will the price for goods both because of higher industrial taxes and higher labor rates.  Productivity growth will slow because of increased demand for U.S. labor content.  Finally, the feds will silently applaud inflation growth because it will, as always, reduce the apparent size of the national debt relative to GDP.

So why then wouldn’t I advocate holding any stock if the economic future is so bleak?  The reason is that stock represents owning something tangible that will increase eventually with inflation.  The same is true of investment real estate.  If you have been following my past recommendations, you might be buying stock now, not selling it.

Do I think that things can get worse?  Absolutely.  That’s why I do things incrementally.  When in doubt I go half way.  That gives me an opportunity to talk about the part that did well and ignore the part that didn’t.  After all, isn’t that way the finance industry promotes its performance achievements?  (Smile!).

Caution:  I can’t see the future any better than anyone else.  But I can testify that (1) if you don’t save anything, you won’t have any savings, (2) that regular savings grow faster because of reverse-dollar-cost-averaging, (3) that diversifying investments helps savings growth over the long-term, and (4) that allocation control really pays.