The retirement-minded have been glued to the developing bailout of Wall Street knowing that the side-effects are going to impact their retirement. Whether you’re just thinking about retirement or are already there, the bailout of Wall Street, banks and mortgage holders will have consequences – and so will no bailout if that is the way the cookie crumbles. What’s more, as the financial malady spreads world wide the magnitude of the downside effects worsen.
If the bailout occurs and massive amounts of money are injected to absorb bad loans and right the economic ship, the soaring deficit will further weaken the dollar, boost the need for tax hikes and ratchet inflation to an even higher level. While these consequences augur poorly for folks on fixed incomes already in retirement, a south-sailing economy will dampen the need for employees of all ages. As the economy grinds to a lower gear under the extra weight of higher prices, lower disposable income and slack job opportunities, saving extra for retirement to compensate for earlier over-consumption will be impossible for most. What was once a tenuous retirement will develop into a dependency on others or continued employment.
What will be the fate of the retirement money currently invested? If in the market, the purchasing power could be severely eroded by a depressed market that is struggling to climb the hill back to break even – assuming it was not exposed to total loss from bankruptcy, forced merger or regulatory confiscation. If in the safest port of all – bank deposits insured by the FDIC – the rate of return is anemic when compared to inflation and purchasing power will suffer a torturous fate of shrinking in value. The ace in the hole – home equity – could be difficult to unlock as buyers become scarce and/or the supply-demand imbalance melts away equity.
The bailout means higher taxes, increased inflation and most likely a weaken economy – none of which are good for retirees or the near-retired. What’s more, the severity of the downturn and the period of adjustment needed to return to normal could indeed be steeper and longer than most economic cycles.
What if the bailout is aborted? The credit markets are likely to freeze with the consequences that money cannot be borrowed and commerce cannot be efficiently conducted. Credit to the economy is analogous to motor oil for an engine – the lack causes the engine to seize up and not function. As money dries up so does the ability to finance the expansion of businesses and payrolls are more difficult to meet. Again, the economy grinds to a lower gear with unemployment rising and payroll dropping. The government will have the option of raising taxes to balance the budget or risk run-away inflation by monetizing the debt by printing more money. The balancing act of just enough government intervention and the right amount of free market latitude will be exceedingly difficult to engineer. Accordingly, the economy is likely to head off in the direction of abyss or go the opposite way toward runaway inflation. Either way, retirees and those near-retirement will be worse off.
Regardless of whether the bailout is funded or withheld, there will be undesirable consequences for the retirement-minded. In the long-run the market will come back and many of the anemic investments will recover and be just fine. The only problem is that when the “long-run” has played out most of retirement may be distant memory. What you can do now is crunch the number to determine if you can afford to lock up an adequate guaranteed lifetime income that will give you a comfortable retirement. Don’t leave your retirement in the market and watch it melt further if you still have enough to “buy” a good retirement – seek out your financial advisor and talk about converting what you have to a safe investment that can be turned into a guaranteed lifetime income. Outliving your money is called longevity risk and most insurance companies will insure that risk by issuing you an annuity that can be converted – usually on your time frame – to a guaranteed lifetime income for you and/or your spouse. Check it out before it is too late. How you reward your elected politician when you cast your ballot is your business – but by my way of thinking we need a political housecleaning more than we do an economic makeover. Cast your ballot wisely because our leaders do make a difference.
Shelby J. Smith, Ph.D.
September 30, 2008
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