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Protracted recession and it's effects
Old 09-10-2008, 11:16 AM   #1
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Protracted recession and it's effects

I realise most discussions about the viability of ER over the long term on this board are met with derision, however, new topics and discussion need to be explored to make information viable to the exploration of retirement. So here goes,


My belief is the US and various regions throughout the world are going to move through a protracted recession.

Let me qualify my reasons:

There is a worldwide liquidity crises and this will effect housing over the long term as risk management kicks in at lending institutions, thereby limiting mortgages and loans to worthy clients and good investments. Means testing will limit the purchase price of houses moving forward. This will hurt those individuals who overpaid for housing as house prices are not going to rebound to previous heights. The long term effect will be poorer citizens.

Financial markets are shot throughout the world as US mortgage lenders bundled derivatives containing bad loans and shopped them to foreign markets, thus reducing the quality of foreign bank investment books.

Easy credit and a worldwide housing boom have stretched credit markets in most Western countries and on the downturn banks have been forced to increase credit loss provisions. The result is increased vigilance by risk assessment departments and a reduction of available credit.

Slowing world markets will decrease corporate profits over the mid term leading to increased unemployment and cost cutting initiatives.

The "war on terror," (whether you believe in it or not) has strained the US treasury. Coupled with recent bailouts of Fannie and Freddy, and a potential for the bailout of the Fed Deposit Insurance Corp, the Treasury will become increasingly restricted on what it can do to help the economy.

US household debt is out of control. The consumer will become increasingly strapped and unable to spend their way out of recession as it has in the past. (Default to the Fed argument above).

The result: This limits the next rally in equity markets moving forward. Markets will probably be choppy for years, reacting to news and limiting gains to the 6% range long term but near zero medium term (1-2 years).


This will be an ER stress test. As I have a ways to go until I retire I look forward to studying the effects on the ER population as a study for whether long term ER is viable.

Granted, those with millions or secure pensions will do fine. But ER on a budget looks like a wash.

Let the comments begin.

I reasoned my opinion so I would appreciate a return in kind. Don’t just slag me without giving a reasoned opinion as it contributed nothing to the board.
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Old 09-10-2008, 11:26 AM   #2
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I reasoned my opinion so I would appreciate a return in kind. Don’t just slag me without giving a reasoned opinion as it contributed nothing to the board.
Sorry; I can't make the cut.

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Old 09-10-2008, 11:45 AM   #3
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CanadianGrunt:

Was there an actual question in there somewhere ?

I suppose you want reasoned pontification as to whether or not we are in for prolonged hard times or not.

It seems to me that you have made up your mind already. However regarding ER keep in mind that safe withdrawal rates from a diversivied portfolio are (by definition) low to survive hard times. Anyone can prosper when things are going well. It's hard time that stress-test SWRs.

So if you believe that past is prologue, then there is lots of evidence that someone could ER now (using SWRs and a diversified stash) and live a happy productive life. People have certainly been through hard times before.
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Old 09-10-2008, 11:51 AM   #4
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I believe we may be in a mild recession. However, this recession seems significantly worse because it is forcing people to live within their means. Access to mortgage debt and other loans has gone from insanely easy to reasonable. The price of food, which had remained way under inflation in cost for awhile, has finally risen to meet inflation. There was a temporary high spike in oil prices, which is going down.

Some small basic costs went up and access to easy credit went down. I believe this should help facilitate fixing most of the financial problems you mentioned. Also, as for your political questions, I will not get into them, but, there will be anew president by the end of the year, and that will probably fix those problems as well. The sky is nowhere remotely near falling...
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Old 09-10-2008, 11:55 AM   #5
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I am not asking a question. I am making a statement. Looking for some intelligent discourse, somewhat like you get at the Bogleheads forum.








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CanadianGrunt:

Was there an actual question in there somewhere ?

I suppose you want reasoned pontification as to whether or not we are in for prolonged hard times or not.

It seems to me that you have made up your mind already. However regarding ER keep in mind that safe withdrawal rates from a diversivied portfolio are (by definition) low to survive hard times. Anyone can prosper when things are going well. It's hard time that stress-test SWRs.

So if you believe that past is prologue, then there is lots of evidence that someone could ER now (using SWRs and a diversified stash) and live a happy productive life. People have certainly been through hard times before.
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Old 09-10-2008, 11:58 AM   #6
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Old 09-10-2008, 12:01 PM   #7
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I believe we may be in a mild recession. However, this recession seems significantly worse because it is forcing people to live within their means. Access to mortgage debt and other loans has gone from insanely easy to reasonable. The price of food, which had remained way under inflation in cost for awhile, has finally risen to meet inflation. There was a temporary high spike in oil prices, which is going down.

Some small basic costs went up and access to easy credit went down. I believe this should help facilitate fixing most of the financial problems you mentioned. Also, as for your political questions, I will not get into them, but, there will be anew president by the end of the year, and that will probably fix those problems as well. The sky is nowhere remotely near falling...


I am not stating the sky is falling. We are entering a new phase of finance. I am suggesting returns moving forward may not be sufficient for some early retirees. I am suggesting that low future returns may make early retirement non feasible for many moving forward.

I realise this is heresy on the board….but this is my opinion. It is a relevant discussion I hope.
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Old 09-10-2008, 12:23 PM   #8
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So, Canadian Grunt, the sky is falling? That's the main point of your OP it seems.

Okay, so I'll grant you that. You suggest 6% long term returns are all we can expect. Let's call inflation 3%, so that leaves us with a real return of 3% long term. So that knocks the SWR from 4% to 3%. I'll have to work a few more years to pad the porfolio, but how does that mean the end to the concept of early retirement? It just means it'll be a little bit later of an early retirement.

Now if your premise is true, then it follows that your conclusion that "returns moving forward may not be sufficient for some early retirees; low future returns may make early retirement non feasible for many moving forward." is also true. Anyone depending on a 4% SWR may be scr3wed but everyone depending on a 3% SWR will be fine. Or 2%. Keep in mind that the 4% SWR included a couple of bad periods for equities investors.

Maybe follow the old advice that it's good to have a plan B and a plan C. Reducing expenses, hopefully temporarily, might be plan B. Working for money might be plan C. What is it they say, "keep agile, mobile and hostile"?
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Old 09-10-2008, 12:32 PM   #9
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I am not asking a question. I am making a statement. Looking for some intelligent discourse, somewhat like you get at the Bogleheads forum.
I wish we were as smart as those guys over there on the Bogleheads forum.
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Old 09-10-2008, 12:34 PM   #10
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[quote=FUEGO;711945]So, Canadian Grunt, the sky is falling? That's the main point of your OP it seems.

Okay, so I'll grant you that. You suggest 6% long term returns are all we can expect. Let's call inflation 3%, so that leaves us with a real return of 3% long term. So that knocks the SWR from 4% to 3%. I'll have to work a few more years to pad the porfolio, but how does that mean the end to the concept of early retirement? It just means it'll be a little bit later of an early retirement.


Great now we can start the debate. There seems to be this underlying assumption that the cost of living will remain at 3%. This may not be so. I think the real cost of living, not the core cost, will be higher moving forward.

I think it is higher than 3% now. Much of what you read from the Fed is based on core costs, removing volatile products. Last time I looked I use volatile goods like gas, oil, natural gas, food, airline costs, and related vacation costs. These are all up.

I think oil still has another leg up, lets just see where that plays out.

Start working the numbers with COLA at 4-41/2% for the next 5 years.
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Old 09-10-2008, 12:40 PM   #11
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I wish we were as smart as those guys over there on the Bogleheads forum.



I think people on this forum are plenty smart, just not very open to a debate like other forums. Posters tend to follow the herd or are chased out. What does this bring? I have been here for a while but don't post much until lately, just adding another element to the discourse as it is getting old and repetitive. I think the forum could take some lessons from the discourse shown on Bogleheads with a modus operandi to debate in a rational manner.

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Old 09-10-2008, 12:44 PM   #12
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The OP would have been a lot easier to read in list form

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Old 09-10-2008, 12:47 PM   #13
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CG:

If you want posters to debate like they do on the Boglehead forum then perhaps that's where you should go debate.
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Old 09-10-2008, 12:51 PM   #14
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Lets see I retired at 38 years old (in 1979). Originally my retirement was 50% COLA and that lasted about 25 years then the % went up (due to SS) to about 70% COLA'd. I have virtually never had money in the stock market, only fixed assets (mostly FDIC CD's). I have never used the "nest egg" except a couple of times for new homes. So you imply inflation is the big change coming - (it was MUCH higher in the late 70's and early 80's when I first "retired") frankly, I do not think it will be a problem for me (since it never has been, in the past). I plan to enter a "spend down" mode in a couple of years (age 70) so returns on "investments/CD's" will not mean much to me. It will be a bit different in that I will be taping the nest egg by design and plan. Of course there may be some other thing that happens to cause the personal "sky to fall" but, I am just a dumb OAG, so I will be fine.
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Old 09-10-2008, 12:53 PM   #15
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One good thing about hard times is that good help is so much easier to find. It just makes the life of a millionaire so much better !

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Old 09-10-2008, 01:04 PM   #16
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One good thing about hard times is that good help is so much easier to find. It just makes the life of a millionaire so much better !

My question is does the Boglehead Forum have Andrews Sisters clones who are also the strongest most athletic humans ever to walk the earth? If not, count me out.

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Old 09-10-2008, 01:38 PM   #17
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Great now we can start the debate. There seems to be this underlying assumption that the cost of living will remain at 3%. This may not be so. I think the real cost of living, not the core cost, will be higher moving forward.

I think it is higher than 3% now. Much of what you read from the Fed is based on core costs, removing volatile products. Last time I looked I use volatile goods like gas, oil, natural gas, food, airline costs, and related vacation costs. These are all up.

I think oil still has another leg up, lets just see where that plays out.

Start working the numbers with COLA at 4-41/2% for the next 5 years.
Sure - inflation may be higher. But nominal returns will probably rise similarly. I own a broadly diversified portfolio that includes companies that sell the volatile stuff you mentioned (gas, oil, natural gas, food, airline tickets, etc). Their revenues will grow along with increases in the prices of goods and services.
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Old 09-10-2008, 02:10 PM   #18
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I am not asking a question. I am making a statement. Looking for some intelligent discourse, somewhat like you get at the Bogleheads forum.
-
I read the Bogleheads forum occasionally but find it a bit too dull for my taste. When I came to ER forums, I didn't post in the finance sections for a long time because obviously there are very intelligent well-informed people there. My posts came off as naive despite 35 years of investing experience. Then it hit me, you know what, I have to consider only my own situation. Fact is, no one here or there knows which way the market is going. Look around, we do discuss it here.
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Old 09-10-2008, 02:19 PM   #19
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It helps me to keep the analysis arithmetic and not emotional, sociological, or speculative. That is, the markets and economy are what they are. At any point in time, I can decide whether I can live off my alloted SWR. If I can, great. If not, I either lower my expenses, get a job, defer retirement if not FIREd, or make a larger change like a smaller house or cheaper city.

Now if I had already retired, was unable or unwilling to work, and was really pinched despite all the measures above you have the option of annuitizing or dipping into reserves when they're low, and the risk of early failure rises. Holding 10 or more years in cash and short term bonds is a nice cushion to avoid some of these.

Guess what I'm saying is that if things really go south for a long time as you fear, plan for it and move on. Maybe you have to defer retirement by a few years.

Maybe my reply is too obvious to be useful, but spinning all this speculation, theorizing and unknowable what-ifs around it doesn't help me much.
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Old 09-10-2008, 02:19 PM   #20
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I read the Bogleheads forum occasionally but find it a bit too dull for my taste. When I came to ER forums, I didn't post in the finance sections for a long time because obviously there are very intelligent well-informed people there. My posts came off as naive despite 35 years of investing experience. Then it hit me, you know what, I have to consider only my own situation. Fact is, no one here or there knows which way the market is going. Look around, we do discuss it here.
Absolutely. If Canadian Grunt knows to a substantial certainty that we will have 4.5% CPI inflation long term with 6% nominal returns from equities, then he should just go out, snap up as many inflation protected securities as possible that pay more than 1.5% real yield and be done with it. Simple as that. Today's low return bond environment can still provide that in the US (not sure about the case in Canada though).

So what is there to argue about? You can beat the market without all that crazy volatility.
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