Will Boomers Cash In

[yakers]

I'm going to cut, paste and keep these posts. Dreamer sounds a lot like me, I will be 55 in October and have 32 yrs under CSRS. There are efforts to downsize my organization so I will try to collect a small buyout if I can on the way out in the next year or two. My wife is 57 and will be retiring as a teacher with a very modest partially COLAd pension in June 06. She will also get a small SS pension when she turns 62.I have one son left at home who is 16 and in his second year of high school.
Between my pension and my wife?s we should be able to survive. We also max out her 403b and Roths, our house is paid off and no other debt.
So one big issue is my son?s college costs. I have saved a good bit ($100 a month since he was 5) but we do not know what his probable costs are. In a year or two we will have a much better idea.
The best things on our side are no debt, pensions, decent savings, a willingness to work if necessary and a simple life style. I am blessed that my wife likes living somewhat simply or at least below our means. What she hates are budgets. I swear if I said- hey you have $10K a month to spend, she would not feel empowered but constrained psychologically even though she might spend half that.
We are expecting our first grandchild in a couple months and that is going to be a factor in where we live and travel. Older boy & wife are about 300 miles away.
I have a job I like but I am ready to go. I had a small mental shift when I noticed a growth on my head and could not figure it out, everything went through my head from just getting older to Oh God, I?m dying of cancer. When I finally got it sorted out it wasn?t all that serious. But it changed my outlook a little. There were some things I want to do like write more and I want to rent and maybe live on a canal boat in England. I did this twice in my life but I want to do it again with my wife and the kids, if they want. And maybe we?ll go live in Central or South America for a while and I?ll actually learn Spanish. Back in paragraph 3 I said the resources we have, I left out maybe the most important one, we have our health and we want to have that to travel and keep up with family. The job, though a good one, is not worth that.
This boomer plans to cash in.

[Donner]

Charlie-- Haven't read it but it's on my list. Still struggling to get through Bernstein.

Donner

[laurence]

Donner, what's the best way to invest in a G fund(company, fund name)? I have about 30k sitting on the sidelines that I think I'd like to move all/part into. Keep posting!

[Donner]

Laurencewill-- Yeah, if all else fails just pick a body part and pass the salt!

[Nords]

Quote:

Boomers will NOT retire in the masses forecast. Mostly because of the lack of savings and desire for a higher lifestyle.

I'm with you, Cut-Throat. Boomers won't be cashing in until their descendants finish probating the estates.

And those SS payroll taxes will continue to be paid by immigrants.

And those American stocks will continue to be bought... maybe not by the British, French, & Japanese, but by the Indians, Chinese, and Malays.

[Donner]

Laurencewill-- I don't know of any private sector equivalent of the TSP's G Fund. Closest thing would be an intermediate term Govt bond fund or maybe a GNMA fund. But those would be subject to interest rate risk.
I love my little G Fund.

Donner

[charlie]

Donner, you think long rates are going up as do I.
But you don't think measurable CPI is going up.
It seems to me that long rates can increase only
by real yields going up or by the market perceiving
an increase in inflation or some combination. The
market is made up of people and countries that
read the CPI reports. How do you reconcile this
apparent discrepancy in your thinking? I think
real rates are a little below the historical norm
and don't really understand what drives real
rates, but it seems unlikely for real rates to go
up drastically ..... that leaves CPI. No?

[yakers]

Donner,
Another good post. There is one gal on Vanguard diehard forum (Laura) who is a big fan of the G Fund and she is not a Govt employee. I used to avoid the G Fund but I had a long time to retirement then. I do think I will move more of my AA to it. A lot of my AA is psychological in that having a pension makes me feel I can take more risk. The opposite could be true for others, having enough saved in a conservative fund would mean not having to take any risk. Thanks for your comments and insights. Since it will not cost much to move a bit more into the G Fund that is a reasonable step for me to take.

[HnE]

EE bonds may be the closest to the G fund for those without access. (90% 5 year rate) No downside risk for loss of principal and interest rate adjust every 6 months.

Sticking with my asset allocation plan. The more you have, the more you worry.

Again thanks for a interesting discussion.

HnE

[Donner]

Charlie--

If you go to www.bls.gov you can get all kinds of info about the CPI. Here is an excerpt from the FAQ:

7. What goods and services does the CPI cover?
The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, service meals and snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.

The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.) End of excerpt

I think consumer inflation gtets in there through energy costs and food costs (often ignored in "core inflation" by those with an interest in ignoring them). Also, health and education costs will bump the index up. But there is an awful lot of deflationary bias iin this basket of goods as well.

What goes in to the real rate if you use this CPI as your deflator? Well, over and above inflation you should have some risk premium built into yield for market risk(risk that the whole market goes sour) and credit risk (risk that your company or country goes sour). The market has been ignoring risk of all kinds for some time but I think that is beginning to change and is starting to be dicounted into the market. If CPI were to heat up that would be another adverse factor boosting the nominal yield and hurting capital even more. More than the CPI I think the world markets have there eye on Greenspan. That guy means business. And that is a risk factor to be "premiumed" in all by itself.

Donner

[Donner]

HnE--

You're right about that. And the more I think about it TIPS if held to maturity should do the same job. Nice thing about I Bonds and EE Bonds is that they will give you your principal back after some small holding period.
Good catch.

Donner

[charlie]

Donner, thanks for the link and your time.

I am not an economist and I am struggling to get
around some of the concepts like what moves
real long term rates. Basically what I have learned
from reading "The Coming Generational Storm" is
that real rates are driven by supply and demand
for our debt.

If/when the world perceives that the US is in real
trouble, our debt will be shunned and real rates
will spike to attract buyers. In response, the fed
will pump up the money supply to reduce the value
of our debt .... and this will cause a real spike in
consumer prices as measured by the CPI. If the
fed does not pump up the money supply, businesses
will not expand due to the high real cost of debt and
recession/deflation will ensue. The latter is politically
unacceptable so actual CPI inflation is the most likely
outcome, IMHO.

The only thing saving our bacon so to speak is that
the rest of the world (except possibly the UK) is
worst off than we are.

Cheers,

Charlie

[Michael]

Quote:

The only thing saving our bacon so to speak is that the rest of the world (except possibly the UK) is worst off than we are.

Some nations buy our treasury bills to keep their currencies low compared to ours, which keeps their economies humming by exporting to us. They can do this because they pay for our treasury bills by simply printing more of their money (creating new money out of thin air), and using the new money to buy the bills. It is not like they actually have to work to earn the money to buy the treasury bills.

[Donner]

Charlie--
I am enjoying this discussion of cause and effect in the capital markets. You make a lot of sense in your observations as everybody on this Board has come to depend on. If you are reading "Coming Generational Storm" then I am going to make a point to get a copy.

What establishes the real rate for various asset classes is kind of a mystery to me, too. I think there are a few models around that attempt to quantify the determining variables. But I think the best you can do is observe the result.

You have to observe the result and work backwards from there in order to understand what could be causing that result. Kinda like the wind. Can't see it, touch it, smell it, or hear it. But you know its there through its effects.

To me the most plausible explanation for the effects we are observing in the capital markets today is an overabundance, a superabundance, of surplus capital in the world economic system. All of us are participants in that system as both suppliers and users of capital -- we are savers and consumers at the same time. But we in the US are doing way more consuming than saving and we depend on the rest of the world to make it work. Fortunately, those people save like crazy. And they get to save because we consume. Its either a virtuous or addictive cycle depending on your point of view.

Personally, I think we are in an unsustainable and unstable situation which is creating a strategic problem for our country as we become less and less able to break this pattern of twin trade and fiscal deficits. The optimists say not to worry. More tax cuts and more currency devaluation and we will grow and export our way out of it. (see Larry Kudlow). I'm no longer so confident about that. And neither apparently are a bunch of other people. We are beginning to circle each other around the cage. You don't want to be the weak cat in that situation. I believe the US is getting relatively weaker by the day as measured by the twin deficits.

I think Greenspan understands all this and is working to reverse and repair the damage before it becomes a really big problem for all of us. And that means that Americans are going to have to consume less and save more. Hence, he is moving those short term rates up to discourage our consumption and encourage more saving at higher rates. That's going to strengthen our currency and inflict a little pain on the the other cats in the cage. And it will keep the flow of capital coming our way. Unfortunately, it means that lower demand will slow the economy down, reduce the growth of earnings and dividends, raise prices in the bond market and put a cap on asset inflation in the markets. At least, I think thats the goal, anyway.

But in the process of making us strong enough to fend off the other cats in the long run Greenspan is going to have to be the enforcer of financial discipline in the short run. He went up to Capitol Hill last week and hectored the Congress to cut the deficit by reducing expenditiures (consumption). He said, in effect, "I am going to do my part to reduce demand through monetary policy you guys do your part through fiscal discipline and we will give those other cats in the cage something to think about"

Greenspan did what he had to do for the last 4 years to keep the economy out of the tank. Now that the economy is gaining momentum he is turning his mind to our long range strategic best interests before his term is up. As investors, we just have to be aware that the landscape is changing before us. And we should be aware that part of the plan for long term health of our economy and our country is rising rates, real and nominal, with the unfortunate side effect of this medicine being the crushing of some capital. I think he believes that pain in the markets is something we are just going to have to take now in order to keep the country strong. So, no, he is not smiling much these days.

As for me, I am going to try to stay away from the consequences of Greenspan's determination. I am going to tryto take as small a share as I can of the discipline to come. Crush somebody else's capital, Alan.
I need mine to get Mrs. Donner and me through the next 30 years.

Donner

[Donner]

Michael--

You've got the right idea. But those other countries need good old greenbacks to buy our Treasury obligations. Japan has about $800 billion worth and China has $600 billion. We had a $666 billion trade deficit in 2004. We need them to keep lending if we keep consuming the way we do. Can't keep it up forever without handing them a sword to do us in with. (fact is we have given them a big enough sword to do the job already) The Fed is saying enough of this already!

Give those other guys some credit -- they work plenty hard to earn those greenbacks. And they are using one virtue which we used to value in this country -- thrift.
But that's all out the window now. Gone with the wind.
Those days had better make a comeback in America or the jig will be up sooner than anybody thinks.

Donner

[Dreamer]

Donner,

Wow! I feel like I have my own personal financial manager. Thank you so much for all of your good advice. Also, if I remember correctly, your wife is the one that encouraged you to post. If that is correct, please thank her on my behalf!

Thanks for the birthday greeting. I just turned 52 yrs. Happy Birthday to you a little early. Congratulations on your first grandchild that you are expecting. I have a son that will be 27 in a couple of weeks, but I don't think he is dating anyone steadily at this point. I look forward to having grandchildren someday.

I do keep the Federal Health Benefit Family Plan and will keep it in retirement. I do not plan on using the tax deferred savings for 9 yrs, because hopefully that is how long my spouse will continue to work. He is 53 and needs to be able to draw a reduced social security benefit, since his pension will be neglible. I admit that I need to find out more info regarding his pension. Whenever, I try discussing his retirement plans with him, he says that he is going to work forever. He does like his job and his health is good, but I can see him telling me one day that he has had enough and will be retiring. I hope that he will be 62 at that time so he will be eligible for SS. Either that or else he will be willing to cut back on his spending. Who knows, what will be happening with SS. We have his estimate from the SS yearly statement that is sent, but that amount could be lower or else they could raise the early retirement age for SS. Our agency has a website that one can go to called EBIS (Employee Benefit Insurance Statement, or something to that effect) and it tells you the amount of pension that you can receive at age 55,57 and 59 with and without leaving a survivor annuity. I do plan on leaving a survivor annuity. An interesting note on this: I was at this site and I showed my spouse the amount that he could receive if I were to die. He looked at it and said that he could not possibly live on that amount.

[Dreamer]

Donner, Part II

I told him that it was alot more than I would receive if he were to die. As you said, SS would be 0 thanks to GPO! Luckily, his 401K plan is better than mine since his company does match part of it. I would at least have whatever portion of the 401K that remained. His family does live alot longer that mine does, so I guess it is good that he would get the pension.

My soon to be 27 year old is still in college. We were paying for all of his college costs, but quit when he informed me that he was going to start taking out college loans, because that was what everone did. He did not want to live at home and this was an easy way to get living expense money. I did not want him to start out life in debt, but he would not listen. I did not want to support a partying lifestyle, so we quit paying his college expenses. We have paid a time or two when he stated that he did not get the loan or it was late in coming. I just wish that he would graduate or else get a real job and finish at night. My 16 yr old daughter is a

[Dreamer]

Donner, Part 3

very good student. We did the pre-paid tuition plan for 4 yrs of college at an in state public college. We would still need to pay room and board, books and fees, but should be able to manage that pretty easily. She keeps talking about going out of state and I told her that would be fine, but she would need to pay the difference between what the pre-paid tuition plan pays and the out of state cost herself. She was angry to begin with, but now she wants to know if we can go visit some of the other colleges that are in our state. We live in a college town and she wants to move away. I think independence can be a good thing, so I have no problem with her going to another in state college.

One thing I forgot to say regarding the EBIS site is that they have an annuity amount based on your projected TSP balance and your contribution rate and how you are investing. The amount that it shows for me at age 55 is alot higher than 4% SWR on the projected amount. Of course, I have no idea how long that annuity would last or how they figured it. They give you the amount based on how much you think your annuity would earn. I used the 4%, just to be conservative.

I am very good at procrastinating, but you are right. I am going to have to start some number crunching shortly. Thanks for letting me know how I should do it. I also, need to recheck insurance policies, wills, etc. Our will was written in 1975 prior to having our 2 children. We made provisions for any children that we might have, but we lived in another state and have people in our will that are now deceased. See what I mean about the procrastinating! The next thing that I need to worry about will be doing this year's taxes!!

Thanks again and please continue posting! You seem to be a very popular poster, thanks to your intellect and thoughtful replies.

Dreamer

[charlie]

Donner, there is a section in "The Coming Generational
Storm" that says Greenspan is playing "economic
chicken" with the rest of the world ..... winning so far
but how long can it go on? The book also talks about
"unstable equilibrium" in that almost anything could
trigger a run on the bank, so to speak.

The defensive steps I recently took were to increase
my allocation to foreign equity in the Pacific (ex Japan)
and China. I also have invested some of my fixed
income in a global bond fund that is not hedged.
Although I increased my foreign equity, I reduced my
overall stock allocation to 50% As far as domestic
fixed income, I am almost totally in intermediate
bonds and CD's that pay 2+% + CPI. Since long
rates are composed of a "real" component plus
a consensus of long term inflation you can see why
I am concerned about a spike in real rates as opposed
to a spike in measurable consumer inflation.

Thanks for your comments.

Cheers,

Charlie

[Dreamer]

Yakers,

Sorry, that I did not respond to your question before, but I honestly don't feel that I know enough to give anyone any advice. I figured that Helen and Donner know a whole lot more than I do and I would not want to steer anyone in the wrong direction.

It does sound like we have quite a bit in common. My 16 year old is a daughter and she is a sophomore also. Sounds like you are doing pretty good on saving for his education. We did the pre-paid tuition plan for our daughter and hope that it is okay when it comes time to use it. There was some talk awhile back, that the plan was in trouble, but we received a letter stating that our state legislature was going to make good on it. If it was not any good, then that could derail my retirement plans by a few years. I would have to crunch the numbers as Donner states!

Congratulations on your first grandchild also. It should be a fun experience!

We do not have any debt either, except for the monthly Discover Card bill and we pay it off every month. We put just about everything on it, so that we can get the bonus. They have a double bonus with Blockbuster, so we normally get our movies for $2.00 per movie.

I am glad to hear that the growth on your head was not cancerous and that your health is good. I had a brother who died of lung cancer shortly after his 45th birthday. He was way too young and I miss him greatly! Cancer is not an easy way to go either. I wish that I could wave a magic wand and take away every one's nicotene addictions! He stopped smoking approximately 2 years before he was diagnosed. I am a former smoker who quit 12/31/85. I wish that I had all of the money that went up in smoke between my spouse and myself. We could probably be enjoying an early retirement, if we had invested it properly. Oh well, live and learn.

I noticed that you mentioned traveling by canal boats in England. There is a site that I read called Unconventional Ideas by John Anderson. I do not know how people are able to have the blue links post, so that one can just click on it, but you can go to www.unconventionalideas.com/england.html. His family did the canal boat trip in England and he has some pictures. I would be interested in hearing about your canal boat traveling. John Anderson has some pretty neat ideas on alot of things. He has some good common sense ideas, but a few that I would be afraid to try. I think that I have gotten too conservative in my old age!

I think that there is a lot of Baby Boomers out there who will be running into trouble. I see people who are retiring, who do not have the assets to retire and they do it anyway. I see people's income, assets and expenses, when they state that they are financially unable to repay an overpayment. It amazes me! I could not sleep at night, if we had as much debt and we are both still working full-time and these people are retired. I would not count on the majority of boomers to keep working. Some may have to end up going back to work at a later time, but they want the instant gratification of retiring the same as they wanted the instant gratification of stuff that ran up their credit cards and had them taking out second mortgages and refinancing their houses. I hope that I am wrong and that they will grow up! LOL.

Keep posting. Dreamer