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Will There Be Income In Retirement? Ordinary Americans Ask
There are times when the pressure to provide 24-hour financial news coverage sensationalizes a story when a calmer, more factual approach would be in the best interest of TV viewers. The most recent example is the downgrade of the United States’ bond rating from triple “A” to “double A plus” by one of the three bond rating agencies. The other two agencies did not follow suit with similar downgrades, but global markets responded with a turbulent few days that left many Americans wondering if they will have any income in retirement. It’s a fair question when you look at Washington’s inability to work together on a logical sustainable plan and as the possibility of another, deeper, deeper recession looms large on the anxious minds of many hard-working people.
Many Americans fear that there will not be enough income in retirement if the markets continue their slide, or do not recover quickly. In fact, there will still be income in retirement, if we don’t have to withdraw all our money at once. Equally important is that we keep a watchful eye on our investment balance, always maintaining a well-diversified portfolio. “Diversification” simply means that some money is invested in stocks, perhaps stocks that pay dividends and some stocks that provide us with growth. Blending is necessary so that our purchasing power remains intact. This is the most important thing each of us needs to protect as we look to the future – our purchasing power. As we have lived in an inflationary environment for the past six or so decades, it is important that we send enough money forward so that we can continue to afford the things that are important to us.
In the language those 24 hour financial news networks throw around – we need to make sure our investments will keep pace with inflation. Here’s a practical example of what that statement really means: I paid more for my car in 1978 than my parents paid for their house! This is inflation, where the cost of things increases significantly over time. Does anyone remember when it was 15 cents to send a letter? That was only until the 1980s, and now what does it cost – 44?
Yet to keep pace with inflation, we cannot invest all our money in one place, not even in Treasuries, whether we agree with the downgrade of the Standard and Poor’s or not. It won’t buy us goods and services in 10 and 20 and 30 years. We need growth in our portfolio and as long as we quantify our risks, we can live with them. In fact, we cannot live without some risk (read: growth) in our portfolios, precisely because of inflation.
Before we worry too much about retirement income, we need to consider the real consequences of the downgrade:-
1. Note that while Standard & Poor’s is one of the three major credit agencies that rate all bond issues, the other two bond rating agencies—Moody’s Investor Services and Fitch Ratings—have not uniformly downgraded the United States’ ratings. Do we usually go to the opinion of two out of three?
2. While the downgrade of Treasuries was supposed to imply that Treasuries would no longer be a “safe-haven”, what actually happened was a move INTO Treasuries by many stock market sellers. We saw US Treasury prices go up above And so goes their yield below.
3. On the global stage, where it was feared that China might sell US Treasuries if it believed the US might default on its sovereign debt, that did not happen.
4. World central banks actually bought over $2 trillion of Treasuries last week and after the downgrade! The fact that our Treasuries are so liquid and so safe (and we still have a “Triple A” rated credit rating from both Moody’s and Fitch and in the eyes of most of the world) is the reason.
5. Possible Related Coincidences:
a Standard & Poor’s is the only bond rating agency accused in early 2008 of not downgrading banks and mortgage companies fast enough. Some say this recent downgrade of US bond ratings is payback.
b Bank stocks weakened in the first day of trading after the downgrade announcement in part (or mostly?) because of the pending blockbuster AIG issue.
Since markets are emotionally volatile, you should always keep the full picture in mind.
The average investor needs to remember that their portfolio must be effectively diversified, and importantly, that much of their portfolio is “fixed” for many years into the future; ie, 5+ years. Markets fluctuate; And they recover, as history has shown, over and over again. The number of days and the extent of that percentage recovery is anyone’s guess. Which is exactly why one needs to invest Don’t miss Those early recovery days.
While America cannot continue to borrow 40 cents for every dollar we spend, nor can we put people back to work without investing some capital in the biggest component of economic growth, job opportunities. (Even if rumors surface that jobs are available, corporations won’t release them.) Examples of smart spending abound, including spending $10 trillion to fix our bridges and roads, which will create serious jobs, or wait 3 years. When will the expenditure reach 40 trillion? Just like setting aside depreciation expenses on the balance sheet, we must “take care” and protect our infrastructure, making payments down so we don’t face future catastrophic measures and even compound losses.
Markets are emotional, and, at least for the short term, we should expect continued volatility. Yes, there will be income in retirement … for those of us with heads and nerves of steel.
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