Given the enormity of the current financial crisis, millions of Americans are wondering where their next month’s paycheck will be coming from.
Granted, it looks as though at least a couple of trillion dollars are being committed to the financial rescue of the entire working American population. There will likely be another trillion or three thrown at it not too far down the road, as well.
But what happens after that? It won’t be enough to solve all the financial and social problems we face.
The Retirement Crisis Is Already Here
For example, one of the lasting impacts of this latest financial crisis that goes beyond the far-reaching changes in the country’s economy is a looming retirement crisis. I’m talking about the money lost in the retirement plans and investment accounts of late boomers who only have a decade or less before they retire.
Now, it may seem like a retirement crisis that won’t be a big deal for another decade hardly seems worth squawking about now. But it is. That’s because without well-funded personal retirement accounts, we’re likely to see tens of millions of late-boomers living in poverty and seeking additional help from already strapped social services.
There are no good, fast, or easy answers to this challenge, either.
From Pensions to 401Ks
Of course, it wasn’t supposed to be this way. In the old days, up to around the mid-1980s or so, company and union retirement pensions were the norm. American workers didn’t invest their money in the market for retirement as much as they relied on company and union pension plans to do so for them.
Those pension plans had what is known as “defined benefits,” which simply means that an employee would know how much his or her monthly or annual retirement from their employer or union pension would be when they retired at a certain age. The pension was “defined” for the employee based upon their wage rate, seniority, and other factors. There were formulas, so that they didn’t have to wonder what their retirement income would be. They could count on it being there for them when they retired and, in most cases, for the rest of their lives.
But most of those plans have gone away. With the exploding popularity of employer-sponsored 401(k) plans and Individual Retirement Accounts (IRAs) in the early 1980s going forward, along with the decline of unions, pension plans quickly fell out of favor. Some still exist, of course, such as in the public services—police, firefighters, schools, and what remains of the unions—but most others are gone.
The creation of the employee-sponsored 401(k) retirement plan was supposed to replace the company pension and give American workers control of their own retirements. And it did.
But for the late boomers, it hasn’t turned out so well. With cataclysmic market crashes in 2008 and the current financial disaster, late boomers in the 55 to 60 age range are seeing their retirement accounts—and their retirement dreams—evaporating before their eyes.
But in all fairness, it didn’t begin with this meltdown, but rather, with the prior meltdown in 2008, and even with the crash of 2000.
Sequence of Returns Risk
In the financial world, one of the pillars of wisdom was that of long-term investing. The longer one’s money stayed in the market, the more it would grow. Sure, there would bull and bear markets over the years, where stock markets would fluctuate in value. But the long-term trend for the past 90 years—essentially since the Great Depression in the 1930s—was positive. But even so, it took the stock market 25 years to recover from those losses.
That wisdom began to fail first with the stock meltdown of 2000, also known as the dot-com crash. Boomers who had contributed to their retirement accounts starting in say, 1995, saw their accounts grow for the next five years. Then, they saw their accounts fall by 30, 40, or even 50 percent or more. The Nasdaq lost almost 80 percent of its value by 2002.
Then, a few years later, they began to feel okay about positioning their retirement funds back into the market again.
And why not?
They had to make up for the losses they’d suffered in the dot-com bubble burst of 2000, and of course, by 2004, the stock market was booming again.
Then came the crash of 2008. Boomers again saw their retirement accounts fall in value by up to 50 percent almost overnight. But in many cases, so too did their houses and their businesses. All the while, their wages had remained at 1996 levels.
As a result, boomers’ relative purchasing power was dwindling year after year for decades. Household earnings were rapidly falling behind the inflation of housing prices, medical expenses, and college education costs. This meant that they had to spend more money to live in the present, and therefore, save less for retirement.
The time-in-the-market investment wisdom had failed. The longer late boomers had their money in the market, the less money they were actually getting. It was a stunning reversal of the most fundamental of assumptions in the financial world.
This dismal phenomenon is called “sequence of returns risk.” Simply put, it means that if your account is hit early and often enough with negative market returns, then it will be much more difficult to actually recapture or grow your principal, because even in positive years in the market, your capital has been depleted, so the growth is minimized as well.
That’s been the case since at least 2008.
The Final Blow
Then comes the crash we’re living through right now. Late boomers’ retirement plans have once again taken a massive hit to their valuation. Many others have never recovered from the prior two crashes.
This final blow will only have wiped out those late boomers that got back in the market after sometime in the past several years, only to live through the third and final blow to their retirement dreams.
The boomer retirement crisis is a much bigger problem than many fully realize. In fact, it’s here, right now, not 10 years from now. Among U.S. households headed by people 55 years and older, about half have absolutely no money saved for retirement. And among those who did have money saved, the pandemic has likely taken much, if not most, of it.
Where should they invest now? And with what money?
It’s a Gen X and Millennial Crisis, Too
But this isn’t just a boomer crisis. Generation X and Millennials are headed down the same path. That’s because volatility in U.S. stock markets is exceptionally high, and is due to several factors that are beyond this particular discussion.
We’ll talk about them another time.
The bottom line here is that we need to see that the current retirement blueprint doesn’t work anymore because the fundamental underlying assumptions no longer apply. That applies to the younger generations, too.
So, while we’re trying to save the American way of life, we need to take a long, hard look about how we can devise a new way toward funding successful retirements. Don’t get me wrong; I’m not advocating for a return to the old ways.
But what I am saying is that there’s a looming crisis that we have to figure out a solution to sooner rather than later.
Now would be a good time to begin.
James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”
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Author: James Gorrie