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Will Boomers Cash In
Old 03-14-2005, 09:38 AM   #1
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Will Boomers Cash In

Posted for fair use/educational/discussion only.

What do you guys think about this? Should we be moving into CDs and other more stable investments int he next few years

http://www.csmonitor.com/2005/0314/p14s01-wmgn.html

Will boomers cash in?

By Gregory M. Lamb | Staff writer of The Christian Science Monitor

Baby boomers have triggered social change at each stage in their lives - from expanding school rolls to inventing the yuppie. Now, they're reaching a milestone that has some experts worried.

The first boomers turn 59-1/2 this year. That's old enough to pull money out of Individual Retirement Accounts (IRAs) without tax penalty. And while no one expects a huge drawdown immediately, some financial analysts are concerned about what boomer retirement will do to the stock market.

Call it the cash-in crisis of the early 21st century. If the nation's 80 million boomers fund their golden years by pulling their trillions of dollars out of stocks and bonds, markets could tumble, some experts say. Others counter that the threat is overblown because markets are far too complex to judge using generational shifts alone.

This debate is heating up as boomer retirements loom. In just three more years, the first boomers will be eligible for early Social Security payments. Three years after that, they'll reach the classic retirement age of 65.

[...cut to shorten message]

Actually, boomers may be working until age 71 or 72 whether they like it or not, add economists Anne Casscells and Robert Arnott. That's what they say is needed to maintain today's "dependency ratio" - the number of nonworking people, including retirees and children, per working person.

With little change in the retirement age, that ratio is expected to move up quickly and dramatically for three decades starting in 2010, with a massive influx of nonworkers. These nonworkers would be sellers, not buyers, of stocks, driving prices down.

"Our guess is that getting poor investment returns [in the future] is fairly likely, and it would be part of this process of people working longer," says Ms. Casscells, a managing director of Aetos Capital in Menlo Park, Calif. As retired boomers sell assets to buy goods and services (such as $1 trillion or more per year in healthcare services), demand pushes up prices and wages for the relatively smaller workforce, creating inflation. Because boomers' savings now can't buy as many goods and services, they will hesitate to retire as early or go back to work.

...[cut]

Those born between 1910 and 1940 may turn out to be the "golden generation" of retirees, enjoying an average of 16 to 18 years of retirement if they made it to 65, funded by a huge cohort of baby-boomer workers, say Casscells and Mr. Arnott, chairman of Research Affiliates in Pasadena, Calif. Boomers should expect about 12 years of retirement, based on retiring at age 72, they say.

Though some people will stay invested in stocks throughout their lives, poor market performance could become a vicious cycle for boomers. If they have had a poor experience with the stock market during the years they are contemplating retirement, Casscells says, "they're likely to say, 'Forget about this. Just give me something safe' " with a fixed return - causing yet more selling.

In theory, since these demographic changes have been known for years, markets should have already taken them into account. But research published last year by Stefano DellaVigna at the University of California at Berkeley and Joshua Pollet at the University of Illinois suggests that both institutions and individual investors are shortsighted, looking only about five years ahead in assessing stock values. That window is about to include the first wave of boomer retirements, which investors now may begin to weigh when making investing decisions.

Others add that the cash-in crisis fails to take into account immigration of new workers into the United States, which will help keep the dependency ratio manageable. But Casscells points out that immigration rates would have to quadruple during the next 25 years to keep the current worker/nonworker ratio in balance.

Another mitigating factor: Empirical data suggest that financial assets "decline only gradually during retirement," says James Poterba, an economist at the Massachusetts Institute of Technology, in a 2004 paper. "The evidence suggests only modest effects, if any, of a changing demographic mix."

And since boomers were born over an 18-year span (1946 to 1964), that will spread the effects of their retirement even further, Mr. Gist says. The peak birth years didn't arrive until the mid-1950s, meaning the biggest part of the boom won't turn 65 until 2020 or so, still 15 years away. At this point, he says, "it's a tricky thing to make any predictions about."
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Re: Will Boomers Cash In
Old 03-14-2005, 06:04 PM   #2
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Re: Will Boomers Cash In

I can't speak to all the points but consider - yes, the baby boomers will be selling their investments. But the money they take out doesn't go up in smoke...it's used to purchase goods and services from US companies, which allows them to pay their employees (who reinvest some back in their 401k) and generate net income, which gets paid as dividends and/or reinvested in the company...making the stock attractive to investors...and so on...
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Re: Will Boomers Cash In
Old 03-14-2005, 08:02 PM   #3
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Re: Will Boomers Cash In

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But the money they take out doesn't go up in smoke...it's used to purchase goods and services from US companies...
Yes the money is spent, but the bear case is that retirees have historically spent less than active workers because of their awareness that they can't replace the IRA money. Lower spending may mean less corporate profits. Even for the boomers who keep working, their aging bodies are likely to affect how much they can earn.
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Re: Will Boomers Cash In
Old 03-14-2005, 09:40 PM   #4
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Re: Will Boomers Cash In

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Yes the money is spent, but the bear case is that retirees have historically spent less than active workers because of their awareness that they can't replace the IRA money. *Lower spending may mean less corporate profits.
So then they die and their children inherit the unspent funds and spend or invest it themselves.
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Re: Will Boomers Cash In
Old 03-15-2005, 03:06 AM   #5
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Re: Will Boomers Cash In

I agree with retire@40. I have always felt that
(unless you put it in your mattress) money doesn't
live in a vacuum. For example, I have heard that
"tax breaks for the rich" (old lib scare tactic) will take
money out of circulation. Not so! They still buy houses,
luxury cars, boats, airplanes, golf clubs, etc, etc.
If the money moves at all, someone somewhere
will benefit and it follows that "the economy" will also.

JG
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Re: Will Boomers Cash In
Old 03-15-2005, 03:36 AM   #6
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Re: Will Boomers Cash In

Whoever said, "Its the economy, stupid" should fire a one-liner to the author(s) of that dumb article. If retirees have to cash in to survive it will be the result of some economic catastrophy not the cause or start of one.

It won't happen. If it does we'll be headed to the ZipperLand Ranch.

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Re: Will Boomers Cash In
Old 03-15-2005, 07:01 AM   #7
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Re: Will Boomers Cash In

Quote:
I agree with retire@40. I have always felt that
(unless you put it in your mattress) money doesn't
live in a vacuum. For example, I have heard that
"tax breaks for the rich" (old lib scare tactic) will take
money out of circulation. Not so! They still buy houses,
luxury cars, boats, airplanes, golf clubs, etc, etc.
If the money moves at all, someone somewhere
will benefit and it follows that "the economy" will also.

JG

Oh please, not Reagan's "trickle down" economics again!

Grumpy
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Re: Will Boomers Cash In
Old 03-15-2005, 07:36 AM   #8
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Re: Will Boomers Cash In

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So then they die and their children inherit the unspent funds and spend or invest it themselves.
From my experience, this is the most likely scenario. Savers save and spenders spend. The ones with the bulk in the 401k/IRAs will probably not draw this out until the have to at 70 1/2 and then it will probably be reinvested. The savers will live off pensions, SS and part-time work. The spenders will work until they die or can't anymore. That's why we, on these boards, are a rare breed, we were (are) savers and then will be (are) spenders. Most people can't seem to make this transition.

Also, don't forget the millions (billions?) of Indians and Chinese that will most likely be joining the ranks of the middle class for the first time and be looking for places to invest their money.

Beachbumz 8)
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Re: Will Boomers Cash In
Old 03-15-2005, 12:35 PM   #9
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Re: Will Boomers Cash In

Quote:
Oh please, not Reagan's "trickle down" economics again!
Yep, the rich whiz on the middle class and it trickles down on the poor...
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Re: Will Boomers Cash In
Old 03-15-2005, 03:27 PM   #10
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Re: Will Boomers Cash In

Check out this fellow's take:

http://www.publicpensionsonline.com/public/940print.cfm

The author, Thorton Parker, maintains that there is a basic flaw in what he calls the Retirement Stock Cycle. He says that stock market history in the last century can be separated in two cycles. From 1926 to 1981 most returns from owning stocks came from dividends with a small amount from what he calls "gains". Post 1981 to present the vast, vast percentage of total return comes from "gains" with a small and dwindling part from dividends.

What happened in 1981? The birth of the IRA and 401(k) business. Prior to that time mutual funds were moribund and pension funds did not rely on stock returns to fund future pension liabilities. Parker points out that a whole new industry emerged out of Wall Street to sell the public on common stocks as the way to a future retirmement heaven on earth. He calls it "Groupthink". And we all bought into it hook, line and sinker.

Further, he notes that the 1982 - 2000 Great Bull Market resulted from millions of Boomers bidding up prices on a declining inventory of stock shares outstanding. This created what he calls "Phantom Wealth" in common stock shares.

1982-2000 was the first half of his Retirement Stock Cycle. The second half will be characterized by millions of Boomers trying to live off the Phantom Wealth. And, in effect, the process will reverse itself. There are not enough young workers to buy us out of this false and illusory Phantom Wealth embedded in the market indexes. And, he says don't count on all those middle class Chinese and Indians to bail you out.

I think he makes some interesting points, especially about Groupthink, which are right on. Unfortunately he doesn't have a workable or realistic solution to the problem he so clearly sees and describes.

Donner
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Re: Will Boomers Cash In
Old 03-15-2005, 07:28 PM   #11
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Re: Will Boomers Cash In

I read that article and then I decided to go back and read some of your other posts Donner. I ended up reading all 70 of them. You have been quite busy imparting your knowledge to us.

I just wanted you to know, that you have made me question the way that I have been investing our money. I will have to digest some of your material and try to decide what I should do. I think that I have been investing a little too aggressively and maybe I should be a little more conservative. The G fund in the TSP is starting to look better and better!

In your opinion, what would be the better thing to do:

1. Redirect the new money going into the tsp from the C fund to the G fund or

2. Doing an interfund transfer from the C fund to the G fund or

3. A combination of 1 and 2.

I am hoping to retire in 3 yrs or less. I keep thinking long and hard when early retirement is offered, but still have a 16 year old at home. My spouse will probably keep working for at least 9 years. I know that I need to get serious and get my financial information in order and do some number crunching, but I am very good about procrastinating at paperwork. (Yes, JG, it is too much like work for me too) Unfortunately, my spouse has no interest in anything financial and tells me to make the decisions.

I really appreciate this board and all of the great contributors. Thanks for all of your time and energy in answering our questions. I mostly lurk here and I feel like I know alot of you from your sharing of your lives, families and vacations!
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Re: Will Boomers Cash In
Old 03-15-2005, 07:58 PM   #12
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Re: Will Boomers Cash In

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What happened in 1981? *The birth of the IRA and 401(k) business.
The new private accounts are scheduled to begin just as the boomers start to retire, giving the boomers a captive group to sell their IRA/401k equities to. *The politicians are aware of the problem, and the potential for prolonged economic downturn. *The current plan seems to be to borrow $2 trillion, and use most of it to buy boomer equities via the private accounts.

The boost that private accounts gave to Chile's economy and stock market was noticed.
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Re: Will Boomers Cash In
Old 03-15-2005, 08:24 PM   #13
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So then they die and their children inherit the unspent funds and spend or invest it themselves.
It will probably take decades for the majority of boomers to die. I don't understand how inheriting boomer assets will prevent a bear market in the 2010s.
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Re: Will Boomers Cash In
Old 03-16-2005, 07:53 AM   #14
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Re: Will Boomers Cash In

Donner - I read your post of March 15th above and the Parker article - while it is hard to disagree with Parker's numbers, it is possible to disagree with the conclusions derived from those numbers.

I lived through those times and remember a few other events that I think were pretty significant that may change some thinking. IMO the biggest thing that impacted the 60's and 70's was the use of computers in company accounting and finance. I remember stories about quotes for stocks being 'guessed' in order to make a sale to a customer. Computers managed to bring quick and easy quantification into company's accounting.

Then in the 70's a guy named Carl Ichan became a billionaire by discovering that many companies issued stock and the value of that stock was often minimized to keep down the taxes to the owners. Icahn (and many others) discovered that he could (1) buy up all the shares of many, many companies, (2) turn the companies private, (3) sell off major properties and business components for more than the cost of the original shares, (4) go public selling new shares, and (5) still own a majority of the outstanding shares. After Mr Icahn did this a few times, company owners and shareholders rightly began to wonder about the real value of their stock and were forced to a new reality - either revalue or someone else would. Thus, the computer guys and the financial optimizers have taken over companies from the top.

This trend has been pretty good for both finance and shareholders, IMO.

Basically, I think that there was this big-time shift in monetary processes from the 60's to 1980 that emphasized company $ values over simply company dividends. This precipitated the change from retirement pensions (which existed and survived because there was a lot of unstated value in companies) to the 401k's (which specified the company $ committment to individuals).

What does this mean? To me, it means that stocks and mutual funds are now pretty fairly evaluated and the ups/downs of the market are just that, ups and downs. To me, it means that the sky is not likely to fall when the boomers start retiring! To me, it means that a 4% SWR for a small portion of the population is not going to cause the disintegration of the US monetary system.

I'll leave it to others to infer what they wish about other implications.

Best Regards

JohnP
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Re: Will Boomers Cash In
Old 03-16-2005, 08:03 AM   #15
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Re: Will Boomers Cash In

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It will probably take decades for the majority of boomers to die. *I don't understand how inheriting boomer assets will prevent a bear market in the 2010s.
That's the point, it will take decades for the boomers to die and if they don't cash out, then how can they cause this bear market?

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Re: Will Boomers Cash In
Old 03-16-2005, 08:27 AM   #16
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Re: Will Boomers Cash In

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That's the point, it will take decades for the boomers to die and if they don't cash out, then how can they cause this bear market?
Not sure that I believe it will either so I'm just speculating. There are many phenomenon that have a "tipping point" where just a small change in input can lead to big end results. Imagine that there are 20 similar condos for sale and that there are 21 buyers. If those condos are similar enough there will likely be some competition and prices will drive up some as none of the buyers wants to lose out. If on the other hand there are 19 buyers the prices will fall as each is reasonably assured of being able to buy a condo. At what number of buyers does the bottom drop out of this little condo market?

So, for the stock market with boomers retiring and selling off some equities every year either for consumption or to move to safety (perhaps the old saw of 100 or 110 - your age in equities) at what point do the sellers increase enough to overwhelm the buyers? The youngest boomers are only in their early 40's and many will be just starting to seriously save for retirement so they will take up some of the "slack". The echo boom is still too young (sub 30) for any serious impact but perhaps they will be in their own serious buying phase at the "right" time?

Two big unknowns with this are the predicted buyer/seller ratio over the next couple of decades and at what point does it lead to a collapse of the price of equities. If we assume that the boomers are in a normal distribution and that they buy equities up until the day that they retire and then sell them at the same rate (major bad assumptions) then you would expect them to switch from being net buyers to net sellers as a group as the middle of the boomers retire. That's in 1955 + 62 = 2017. If I was to mildly correct that I would suggest that they will sell slower than they bought so that might push it out some more. If boomers retirees don't have enough saved (as studies suggest) then their retirement age will be pushed out further. Still unknown is at what point does this buy/sell ratio cause market prices to go over a tipping point or phase change? Again, nothing more than speculation while I drink my morning coffee.
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Re: Will Boomers Cash In
Old 03-16-2005, 03:45 PM   #17
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Re: Will Boomers Cash In

Dreamer--
First, let me give you the long version of my take on the current state of play of the economy and the markets. I hope it will give you an idea of where I am coming from in my own approach to managing our family's retirement savings at this point. Basically, I think we are at a place in market history which warrants extreme caution with priority on preservation of capital over current yield or prospects of future capital appreciation. Here are some reasons why I feel that way:

1. Market Capitalization . The broad stock market Indexes such as the S&P 500 are over-priced and over-valued. When you own a share of common stock what you own is a share in the future annual flow of earnings (ie., expected dividends) of the company, or in the case of the indexes a significant part of the dividends expected to be generated by the market as whole. When I was in business school many years ago I was taught the Dividend Discount Model method of valuing common stock. I use a thirty year holding period, a historical growth rate of earnings and associated dividends, and, personally, I apply a 10% capitalization rate to the expected dividend flow from this asset class to arrive at an intrinsic value for me for this market. And I have done sensitivity analysis lowering the capitalization rate reflecting higher appetite for risk, as well as jiggering with the estimated growth rate of earnings and dividends. Any way I shake it, valuing the market based on expected dividend flows yields an intrinsic value far, far lower than the current market capitalization value at the 1200 level of the S&P 500. Discounting future EARNINGS, if you can trust the quality of those numbers, does yield a value which approaches the current market cap (although still yielding a somewhat lower intrinsic value as well). Simply put, if you are buying the markets now you are buying high in the hopes it will go higher. And it might. For awhile.

2. Risk to Reward. Another way of saying that the market is over-priced is that investors are not being rewarded for the risks they are assuming through ownership of these assets. Dividend yield on the S&P 500 is now about 1.7% and the 10 year Treasury Bond is about 4.5%. With inflation running at somewhere around 2.0 -3.0%, the real rate of return is pretty skimpy on the risk free Treasuries and virtually microscopic or actually negative on other asset classes. This happens because investors are bidding up the price of assets, chasing yield, and ignoring risks. So, in effect, the markets are saying to me, our capitalization rate, the return that we require on this asset class, is a lot, lot lower than your 10% requirement, Donner, and thus we are willing to pay a lot, lot more for this market than you are. So be it. I have to get at least a 10% return on risky assets (less than historical returns mind you, I am not a greedy man).

3. Economy. Everywhere you look the economy is Goldilocks golden right now. Name any indicator and it is looking good. There is a lot of momentum in the economy right now. Dontt confuse the current state of the economy with the current state of the capital markets. You can get mesmerized in the glow of the current quarter's good news, or worse, last quarter's good news. Markets look forward, not back. And the economy will slow. The Fed is managing that outcome as we speak.

4. Monetary Policy. The Fed is pursuing a classic anti-inflationary policy. It has raised short term rates six times in a row since last June with promises of more to come. Trouble is, even the Fed can't point to any CURRENT inflation statistics of note. The Fed has two competing prime objectives: Price Stability (no inflation) and full employment. So they have low inflation and a 5.4% unemployment rate. What gives? The Fed knows that it has spent the last 4 years in an extremely accommodative mode pumping liquidity into not just the U.S. but the world economy to prevent a deflationary recession as a result of the Tech Bust and 9/11. And that policy has worked in spades. People are working and prices are low. And we have a Goldilocks economy that is gathering momentum. Greenspan is taking the punchbowl away in what he hopes will be a measured pace. Why?
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Re: Will Boomers Cash In
Old 03-16-2005, 03:52 PM   #18
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Re: Will Boomers Cash In

If you ask Greenspan, he'll tell you that while things look ok now, he had no room to move at 1% if something turned south. Now at least he has some room to 'fix' things if the economy suddenly goes in the can.

At least thats what I think he'd say. I have to see how thick his briefcase is first.

So what'd you get on the dividend discount model for the s&p500? Off the cuff without an envelope it looks to me like we should be around 850-900 for a fair value. At 1188 we're a bit spendy. Did I do that in-the-head math about right?

Those future earnings expectations I think is where we'll have the problem. I dont find a lot of people believing that earnings over the next 3 years will be as good as they look right now, or are projected to be.

Just so everybody remembers...i've been saying for a while that we're due to hit the wall sometime in March of this year...its March...but I havent done much of anything other than keep looking at my good asset allocation and hanging on...

I sincerely hope I'm wronger than heck...
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5. Worldwide Capital SurplRe: Will Boomers Cash In
Old 03-16-2005, 03:56 PM   #19
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5. Worldwide Capital SurplRe: Will Boomers Cash In

5. Worldwide Capital Surplus. Easy money in the U.S. over the past four years has stimulated U.S. consumers to borrow and spend in China, Japan and other places overseas creating great oceans of surplus capital here and abroad. This surplus has created a historical (biblical?) imbalance between the users of capital (businesses, corporations, homebuyers, car buyers, appliance buyers etc.) and the suppliers of capital (that would include you, me and our retirement savings). All that capital is chasing yield in the U.S. capital markets, hang the risk. The result is that ALL asset classes are bid up and expensive right now. We have asset bubble pricing virtually everywhere you look and the Fed knows it. It’' in the stock market, the bond market (big time), the real estate market, and the commodities markets. This is where the inflation really is, not in the consumer price of manufactured goods. The Fed has created a god-awful situation where capital is sloshing all over the world becoming dirt, dirt cheap leading to over pricing of financial assets, whacked out risk/reward relationships, low, low capitalization rates, currency devaluation, and an out of control trade deficit. The Fed hopes its measured pace of short term interest rate increases will slow this process down and drain some of the worldwide liquidity out of the system thereby deflating the many asset bubble balloons without a big bang and without wrecking the economy. Remember, the Fed’' prime objectives are price stability and full employment, not the maintenance of "irrational exuberance" in capital markets.

6. Capital Destruction Capital is like any other commodity. When you have way, way too much of it what happens? The price plummets and producers begin giving the stuff away. That is what is happening and what we are seeing in our capital markets today. And there is an inevitable period of capital destruction as the supply of the commodity is brought back into line with demand and the producers (those who are left standing) once again get a fair rate of return for the product. I believe we were engaged in the destruction phase in the capital markets in 2000-2002 when 9/11 came along in the middle of it and the Fed intervened to save the economy. It poured on the liquidity and cut interest rates to the bone. But was the medicine worse than the disease? It's like finding a drunk out cold on the floor and pumping a fifth of bourbon into him to get him on his feet. There is a price to pay for that. The easiest and most effective way to bring the supply of capital back into balance with worldwide low levels of aggregate demand is to destroy a lot of capital. And I mean a lot of capital is going to have to be destroyed to get the job done. The question remains: just exactly whose capital is going to be destroyed in the not too distant future?

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Dreamer, this is a long, lRe: Will Boomers Cash In
Old 03-16-2005, 04:02 PM   #20
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Dreamer, this is a long, lRe: Will Boomers Cash In

Dreamer, this is a long, long way to get around to your question about what I would advise you to do with your ER savings stash. As you can guess, the foregoing analysis colors any advice I would give to you or anybody else on this Board. It colors my management of my wife's and my own hard earned savings over a lifetime of work. We can't replace those savings. We are rapidly approaching the end of our accumulation phase and the beginning of distribution. Our health is somewhat precariously decent right now, but who knows where we go from here. We almost certainly won’' be going back to work again in any meaningfully remunerative way after retirement. We cannot afford to have our capital destroyed in the next 1 to 2 to 3 year time frame depending on how long and how high the asset bubbles expand. So our capital assets are invested with an eye to maximum safety at the expense of current yield and future growth prospects. Critics would argue that my low risk, low yield approach in the face of rising retirement expenses may run us out of money at the other end of the retirement rainbow and is unwise in the long run. Mebbe, mebbe not. But I am staring hard at the here and now. Our TSP is now exclusively in the G Fund. Our other financial assets are in money markets with big fund families (Fidelity and T.Rowe Price), I bonds and EE Bonds, and insured savings accounts. We are saving like mad. My approach, oft repeated here, is that the Donners are very close to where we need to be in terms of covering our projected retirement budget and maintaining our current standard of living through retirement saving, pension, and social security. I will not undertake the risks of common stock ownership I have tried to outline for you with the presently dim prospect of significant long term reward over the course of our retirement. Post capital destruction phase I will likely change my approach.

Only you can evaluate your own personal situation and approach to market risk. I fully realize that market risk is only one form of risk and there are others - inflation risk being the prime culprit. But I think it's like trying to cover the New England Patriot offense - you have to give up something. I think most of the active posters on the Board have a very high tolerance for market volatility and are prepared to ride it out with a very long term view that equity markets will eventually yield them a historic annualized 11% total return with some very, very good years and some very, very bad years. Mebbe, mebbe not. I don't have the stomach for that roller coaster ride and perhaps I will die the poorer because of it. However, I do suspect there may be a great many others lurking out there who harbor similar queasy feelings about the current state of the capital markets. Only you know how lead-lined your own stomach is. The fundamental question I always pose to myself is:: what do I need to do to get to where I need to be? Not where I want to be but where I need to be. Dreamer, what do you and your spouse need to do to get to where you need to be, given your own family’' circumstances? Start from where you need to be and work backwards. The right path for you should begin to become clear. You might not like the answer (work longer, lbym, save more for instance). But the answer may not be as arduous as you might fear. My advice: don't undertake any more risk than you have to in order to get there.

I hope this is responsive to your question. Sorry for the lengthy discourse but I honestly don't know how else to put my views into perspective. I do wish you and your family all the best as you plot the management of your retirement assets and your future. Good luck and good fortune!

Donner

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"Remember, if you come this way, don't take no shortcuts and hurry along as fast as you can." (Virginia Reed, Age 12, Donner Party Survivor, 1847)
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