Tuesday, April 1, 2008

WSJ: Americans Delay Retirement As Housing, Stocks Swoon

Actually this is a great day to post this sort of article since it points out the potential dichotomy I believe might become a permanent long term fixture between Wall Street and Main Street. The article highlights how the continues boom and bust cycles (bubbles) certain portions of society create (and since our regulation system is so poor - i.e. no regulation of mortgage brokers is a great example), along with a financially illiterate populace, along with structural budget imbalances [Mar 26: Annual Spring Warning on Entitlement Programs Fall on Deaf Ears], is creating what I foresee as the "very long term" crisis - the inability for many to retire until they literally drop over. I don't have any exciting stock picks or trading ideas here but it speaks a lot to our society - again much of our capitalism is based on the risk taking, ability to "win it big" if you "work hard" carrot - in lieu of higher taxed societies with more safety nets and "perks" ("free" universities, health care etc). I am not going into the right or wrong, as that can be debated forever, but simply the potential roadmap for our system. And as investors, as we weigh one country's prospects versus another's it's important to see the macro picture. Our American system is based on consumption and services. Many of the stresses I see only growing by the year will inhibit this consumption culture, and in fact should lead to 'forced saving' (i.e. not because one wants to, but because one has to). I believe this "forced saving' is only now beginning as its first incarnation - only to be interrupted by the next asset bubble of 2-4 years in duration... followed by another forced saving era ... until people realize they cannot spend 120% of what they bring in forever. This is why I bring articles like this to the forefront.

As each bubble passes, and wages do not keep up with life costs (or over ambitious living standards) people are forced to find "innovative" ways to keep up their spending - i.e. serial house equity withdrawals, raiding their 401ks, etc. (credit cards is a whole 'nother issue) As I've said many times, the former situation has masked the deteriorating condition of many American's personal balance sheet, while the latter is a more recent phenomena which is accelerating. I've been googling news stories on the 401k raids and there are many, here is a recent one.
  • Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills -- and getting slammed with taxes and penalties in the process, according to retirement plan administrators.
  • Rather than borrow money from their 401(k) accounts, which would have to be paid back, a growing number of beleaguered families have been cashing out, plan administrators say.
  • This is happening even as borrowing from 401(k) accounts remains fairly flat. Fewer still are borrowing from 401(k) plans to buy homes. By contrast, new figures from plan administrators show the number of 401(k) "hardship withdrawals" is up in early 2008 compared with the same period last year. The main reason? The need to stave off foreclosure or eviction.
  • Consider Tamara Campbell, who raided her 401(k) after her husband was laid off from his job as an occupational technician, and they fell behind on their mortgage for several months. "If I hadn't done that, we would have been foreclosed on last year," says Campbell, who lives in a Denver suburb.
  • Such hardship withdrawals began rising last year, and in January this year, they exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23 percent on plans that Merrill Lynch administers, compared with the same period in 2007
  • Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20 percent increase in hardship withdrawals to save a home. And Principal Financial says that in January, it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.
Or another one. Or another one. All in the past month. And when they are not taking money out wholesale, we are helping them take out loans with 401k debit cards! [Jan 23: Let's Not Forget the Underlying Economy] So as we move away from a corporate pension system (rightly or wrongly), a faltering government system (which is only "funded for the next 40 years" due to cost of living adjustments that come nowhere near real life), and individuals constant overspending and mistakes (buy tech stocks at high, speculate on home flipping), it is causing a very real long term crisis. And the stock returns in the US are not helping anyone [Mar 28: WSJ - Stocks Tarnished by Lost Decade]. This is why asset class 'inflation' especially of the home and stock market is absolutely critical to a country of non savers. And a government of non savers. Because this is where we are headed, and keep in mind, *many* people who are currently retiring or trying to actually did have pensions for at least part of their career. What about the next group, those in their 30s and 40s who have none? If you ever read studies on what the median balance is on a person's 401k in this country you just have to shudder. And then how people will pay for health care benefits until Medicare kicks in, almost disallows retirement for many until they finish that governmental finish line to qualify - far too expensive to self insure and only 1/3rd of companies (and falling by the year) offer retirement benefits (again I'm not judging if it's right or wrong, simply stating what it is). And keep in mind the article below is happening during a "low unemployment, non recessionary" period.

And these are part of the macro thoughts on why I worry about the long term health of the consumer in this country - like it or not - or argue "why" it is happening, income distribution is skewering more to the upper %. And more and more are struggling - some of the forces are just pure globalization (nothing we can do about it) but some are self made (either through individual decisions or systematic issues in government/business/etc). Either way they point to a long term trend of people forced to save more and/or forced to work until they literally cannot. Articles like this are just the bleeding edge of what I believe will be a multi decade issue in the country - and why we'll keep treading water until the next asset inflation bubble pops up (and retailers can boom again), in which people can "feel rich" for a short time, until that bubble bursts, government steps in to ask why this happened, cast a blame game, and then offer their handouts (which is our own money handed back to us), and we keep repeating the situation. Each cycle someone is enriched - the same part of society. And so we keep repeating. Why people don't learn is beyond me, but maybe it all seems just too overwhelming and the lack of primary financial education in elementary or secondary schools is on purpose? It is beyond me why the curriculum ignores this part of "being an adult"....
  • As the falling real-estate and stock markets erode their savings, many aging Americans are delaying retirement, electing labor over leisure in uncertain times.
  • A three-decade veteran at International Business Machines Corp., Dick Boice had planned to sell his house, pack up and move to Arizona with his wife, Lauren, to take early retirement. But two months after the January date he set to exit the work world, Mr. Boice, who is 59 years old, is still on the job. He figures he'll stay put for another couple of years. The Boices had counted on proceeds from the house sale to boost their retirement income. After a year on the market, the roomy colonial in Blue Springs, Mo., didn't move, forcing the couple to cut the asking price by $40,000 to around $250,000. The house remains unsold. Meanwhile, Mr. Boice has watched the value of his 401(k) and individual retirement accounts fall by roughly 20% so far this year, to a combined $240,000.
  • Mr. Boice has plenty of graying company at the grindstone. Millions of retirement-age Americans, stung by the recent economic pall, suddenly are having to reassess their plans -- with many forced to quickly change course. In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those in the work force rose to 16.2% from 16% in the same time span -- meaning 65 and over212,000 more hands on deck. So far, the numbers for March continue to show a "sharp" increase, says Steve Hipple, a department economist.
  • The double dip (homes and stocks), affecting asset owners of every age bracket, is unprecedented in recent decades. In 1987, property and market values dropped in tandem -- but nowhere near the extent to what's happening now. To document similar conditions, "you'd have to go back to the era of the [Great] Depression," says financial historian Richard Sylla of New York University's Stern School of Business.
  • The giant gray wave is still an inevitability. But it has run into a breakwall. Investment advisers and retirement planners at more than a dozen firms, including Charles Schwab Corp., Edward Jones and Merrill Lynch & Co., say they are seeing large numbers of older workers put off retirement as the housing and stock-market troubles have deepened. A recent Schwab survey of 1,006 financial advisers indicated that nearly a quarter of their clients are considering working longer specifically because of the economic fallout of the past 12 months. (My note: Keep in mind people with Schwab accounts are not the "lower/middle class" so just imagine what is happening lower on the totem pole of economic strata)
  • Factors other than the gloomy economic outlook may be contributing to stalled retirements, says Mr. Hipple of the Labor Department. Most retirees, of course, get Social Security benefits. But traditional corporate pension plans -- which promised specific, predictable monthly payouts -- are largely a thing of the past.
  • Over the past three decades, the 401(k) plan has gradually supplanted pension plans as the main source of retirement coverage for U.S. workers in the private sector, according to the Employee Benefit Research Institute, a nonprofit group. In 1979, it says, 62% of U.S. employees participated only in a pension plan. By 2005, 63% of workers reported that they participated only in a 401(k) plan.
  • Another big motivation for older workers to stay on the job: scarce health benefits for retirees. Between 1988 and 2007, the percentage of large companies offering retiree health benefits fell by half, to 33%, according to the Kaiser Family Foundation.
  • The dot-com bust and stock plunge of 2000-02 also persuaded some workers to delay retirement. But back then, those suffering losses in the stock market could take comfort in home values, which were still appreciating. Not anymore. "It's a double whammy this go-around," says Kevin Waldron, a Merrill Lynch financial adviser in Bala Cynwyd, Pa.
  • Many would-be retirees are angry about the conditions that they see as contributing to the economic downturn. Mr. Boice blames lax lending standards and regulations for dragging down his home value. "What really needs to happen at this point," he says, "is for those that created the subprime mess to have their hands slapped."
  • However, there is a potential upside. People who earn more as they age may rely less on Social Security, easing the burden on these programs -- including Medicare -- and keeping them solvent for longer. (always an upside!)
  • Still, the prospect of millions of grandparents toiling away in their golden years doesn't square with the American Dream. Some aging workers feel denied their due. "I've worked all my life," says Mr. Boice, the IBMer. "It's coming down to a point where I want to try to take life easier and do something I want to do rather than work for someone 9 to 5."
Again, no easy solutions. I don't really think a system where corporations are forced to pay for employees health care or retirement makes them competitive globally with companies in foreign lands that do not. But then it goes back to either (a) self reliance or (b) relying on the government, if not corporations. And without long term planning, financial education, and discipline (a) does not work very well, and without a much higher tax rate (b) won't work. So it's a rock and a hard place. To keep the balls juggling in the air - we need asset prices to continue to inflate - at any cost necessary (inflation). Which we've did early in this decade and we are now repeating. See... it is all connected...

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