Sunday, June 22, 2014

Nest Egg Inflation

As I get older, retirement seems further off in the distance. Inflation is nibbling away at my savings. But there are bigger problems that lie hidden just beneath the surface.

The Robert Reich movie "Inequality for All," talks about the 1% getting richer and the middle class getting poorer. On the one side, the middle class still earns the same amount, but it doesn’t go as far anymore. This is called inflation, but a better description would be government printing of dollars. If we look at the rich getting richer, one item eludes people, the increase in wealth doesn’t mean that they now spend more, it most probably goes into a bank account. These extra dollars are not sloshing around in the economy, they have been absorbed into what could be labeled a “wealth sponge.” The excess of printed dollars is effectively removed from circulation.

On top of that, we have many people approaching retirement squirreling dollars away in their IRA’s and 401K’s. Many people believe that Congress enabled these retirement plans to help people save for retirement. That concept was a great vote getter, but the real reason for these plans was to increase the money available for Congress to borrow.

In two years’ time, my mint flavored Altoids have increased in price from one dollar to three dollars. The dollar double cheeseburger at McDucks is now $1.69. On Reich's documentary, he interviewed a guy making 12 million a year, and the gentleman pointed out that he only needs three pairs of blue jeans a year. So we can’t depend on the rich to stimulate the economy, and at the same time, I’ve cut down on double cheeseburgers and Altoids. Put it another way, the burn time on retirement funds has halved.

People today, are not saving for retirement like they used to. The silver foxes are starting to withdraw their retirement dollars, while the young question the concept of even saving money. Why put it in the bank at one percent when you can get a new car instead? Interest rates this low almost demand that you satisfy your urge for immediate gratification.

If we go back to Bernie Madoff, we stumble upon another problem not considered. All of his investors were rich up until they were advised he was broke. It's amazing how an excel spread sheet and a LaserJet printer can give an investor the appearance of a fabulous monthly statement, while in reality they're dead broke and clueless of the fact.

The real feat of accomplishment, is the 14 trillion dollars borrowed by the US government. It was sucked out of the financial system in a span of 10 years. This money was deposited in the banks when interest rates were 8% and higher. What happens now, when the baby boomers retire and start to withdraw their nest egg dollars? What happens if there are no new dollars coming into the system to replace the ones withdrawn?

It's kind of like the government selling 14 trillion dollars worth of tickets to the latest movie and the theater only seats 2,000. There is no problem until you decide to see the movie.

inflation has had 40 years to ravage your nest egg. As you run out of funds in retirement, your kids will try to help you out and will come to the conclusion that you just didn't save enough. They will grow up wiser--- When it comes time for them to retire, they can use their government Social Security checks to pay off their government student loans. ---Why do I get the feeling that I'm missing something here?


Joseph Oppenheim said...

I loved the film. I began saving for retirement at age 7, investing at age 15...retired at age 48....not really retired, just became a private investor....the government just made earned income not worthwhile, but all kinds of tax advantages for investing. #1 rule, never take on debt.

So, I basically agree with the film, but Reich should have said best to do what some of the 1% do and/or work at what you love.

dearieme said...

"work at what you love" just isn't useful. More practical is "Don't work at something you hate" and even then some people will find it hard to follow.

The real problem is how to invest savings so that you can live on them in old age. What is there that will retain value yet be hard for a government to confiscate? I suppose one could wave a hand and say "Diversify, and be sure to keep some of your wealth abroad". But I doubt that that's practical for many ordinary people. Maybe "Buy gold coins and hide them from the government?" But then this sort of thing can happen.

Jim in San Marcos said...

Hi dearieme

Thank you for the link. It sounds impressive until you read the amount of gold found 200grams--about 6 troy ounces. The historical value is immense.

I like gold and silver because it can be transferred to you kids without the government getting involved.

But as you point out, you can hide it so well that it takes a lot of time to find it.

In this case, too much time.

Anonymous said...

If the baby boomers are retiring, and demanding more income, and the young do not want to invest, then what is keeping the stock market up?

Jim in San Marcos said...

Hi Anon 9:30

The only thing I see different from 1929 is that the individual investor has been replaced by fund managers. If the fund managers thought it was time to get out of the market, they would be out of a job.

The index funds and all of the other side bets are giving a better return than the moribund economy.

Once the Fed stops buying paper, markets could come back to their senses, and basically money in the stock market is the last great risk that has no government insurance bail out plan.

The other thing to remember about the people retiring early, there is no withdrawal penalty for IRA and 401 programs once you reach age 65. The mutual funds could have a very large surge of withdrawals in the near future.

The people I see in the coin shop I frequent, are old people (my age) buying gold and silver, I think that they have gotten the message.

Joseph Oppenheim said...

Since you think this is similar to 1929, remember stocks, the Dow, went up nearly 6x from about 1921-2 to the peak in 1929, and are only up abt 2.5x from 3/2008 to 6/2014.

So, in your world, stocks should more than double from here before crashing in 2016.

I don't know, but thanks for the optimism.

Joseph Oppenheim said...

3/2009 and 2017, that is.

Jim in San Marcos said...

Hi Joseph

What you suggest could be one scenario. I tend to believe that the real problem could be financial derivatives.

I laugh when I see a mutual fund salesman show the investor an investment pyramid and ask the client where they want their funds invested. The investment manager has an investment plan that has nothing to do with your selection. The plan you select will determine what index options he will buy to deliver your selected plan to you.

There is only one problem, the financial derivatives market is not a zero sum game. On small to large drops within reason, the system works. But on a catastrophic drop the insurers (those writing the options) are bankrupt.

The derivatives market is like a horse racing bookie parlor. Anybody can set one up, but if you have a big winner, the shop is closed.

I do question the stock market pundits touting stocks. It doesn't matter what you buy, it is going up. Buy now while the stock is affordable. I look for the stock market to go a lot higher.

It's the 60 trillion in derivatives (investment insurance) that worry me. A 30% drop in the stock market could wipe out the index options market.

What is not realized here, is that your 401k and IRA's like the synthetic crap more than the stocks themselves. It could have a very bad ending.

We could have a crash as early as October of this year or maybe as you suggest sometime in 2017, that would be 30 years from the last mini crash in 1987.

We have a front row seat, so pardon me while a go pop some more pop corn before the movie begins--I've been told, it's a disaster film.

Joseph Oppenheim said...

Yes about derivatives, but also affect everything, like gold and silver. Silver has already crashed from 2011, abt 80%, gold, abt 60%.