Risk of excessive gov debt/obligations

[king smoothie]

Hi, I have been reading the forums on this site regularly for over a month now. I am 45 years old, I retired from the Navy after 20 years of service (at 38 years of age). I considered myself semi-retired for 5 years, staying home to care for our 5th child when she was born. I am now working full-time to boost our savings and to help pay for family vacations- getting off of Guam can be expensive. I have found that I like being semi-retired better than working full time.

My DW is an active-duty Navy Nurse and intends on serving for another 7 years, but she can retire in 2 years if she chose to do so. If she goes the 7, we expect a total combined pension income of $70,000 to $80,000 in today's dollars, depending on advancement. We have retirement funds in TSP (mix of traditional and Roth) and in roth IRAs, but we don't plan on touching them until I am past 60, maybe much later. Also, we have some other savings and investments. We will have one house paid for in 7 years and maybe another depending on how much I work over those 7 years or how frugal we are. With no mortgage payment, the pension will put us pretty much where we want to be, although the back up plan will be to take 72T distributions (rolling TSP into an IRA or two) and some rental income. We will still have one child in middle school at that time and one child in college, if he so chooses. Much of what we have committed to provide for college funds is already invested in 529s, with a plan to top that off.

Not to come off as a nut job, but I am a bit concerned over something I have little control over and I wonder if anyone does anything to mitigate the risk of the federal government overextending itself and needing to limit pension obligations, print money and cause excessive inflation, and increase taxes. I figure owning property outright, having a big buffer or safety margin, and having multiple income streams seems to be about all you can do that is legal and reasonable.

 

[Totoro]

In my case I try to keep as much of my financial assets outside of government as I can, and try to ensure I can migrate easily.

So I am accumulating little to no pension rights to speak of, and >90% of my assets are after-tax, mobile and under my control.

The bit of SS-like rights I am accumulating will probably be there, as governments usually do not touch the low end of pensions and SS-like entitlements.

In the longer term I may want to try to setup base in two different countries (New Zealand and Europe basically). Both for the lifestyle and to hedge bets. Only if I can make it work financially though, there's considerable overhead due to the distances involved.

In your case you're pretty all in with the US government, so keeping an eye out and diversifying a bit might be nice in the long run.

 

[Senator]

Not much you can do about it. And I used to worry about it, but there are many ways that the Government can get out of debt.

When you owe someone a million dollars you have a problem. When you owe someone 17+ Trillion dollars, they have a problem.

Income and property can be taxed. Currency can be printed and revalued. Gold can be made illegal. Guns and bullets are the only hedge that are universal.

I think you would be better off worrying about what to do in a Sharknado, which you will have a lot more control of.

 

[2017ish]

...

Income and property can be taxed. Currency can be printed and revalued. Gold can be made illegal. Guns [-]and[/-] bullets, and good liquor are the only hedge that are universal.

...

Now I agree with you, Senator!

 

[Gone4Good]

I think you would be better off worrying about what to do in a Sharknado, which you will have a lot more control of.

+1

I'd add that there's a lucrative industry dedicated to ginning up these kinds of fears. People sell books, investments (chiefly, but not only, gold), ad space on T.V., newsletters, even actual guns and bullets, all by touting various notions of societal collapse.

It doesn't have to be true to ring the cash register. Mostly it's just hype designed to move money from your pockets to theirs. The best way to protect yourself is to ignore all of it.

 

[harley]

Not much you can do about it. And I used to worry about it, but there are many ways that the Government can get out of debt.

When you owe someone a million dollars you have a problem. When you owe someone 17+ Trillion dollars, they have a problem.

Income and property can be taxed. Currency can be printed and revalued. Gold can be made illegal. Guns and bullets are the only hedge that are universal.

I think you would be better off worrying about what to do in a Sharknado, which you will have a lot more control of.

Of course, making gold illegal would only raise the value of it. Same with guns, bullets, and good (or even lousy) liquor.

One of the ways they could get out of debt would be to stop overspending. Oops, sorry, I drifted into fantasy world there.

 

[MichaelB]

Welcome aboard, King Smoothie. Looks like you've done well and are preparing for a financially secure future.

When discussing these things with my adult children I advise them to focus on the things they can do something about as individuals. Specifically, their diets, health and lifestyle, and how they raise their children. And to save, to provide for their own future financial security.

And to watch out for zombies.

 

[samclem]

Of course, if the USG finds itself in the kind of economic hole that requires reneging on pension promises and/or printing a lot of money to cover bond interest, then we have to wonder what else will be happening in the world. Promises to repay on TIPs would also be suspect, so that rules out one inflation hedge many would have turned to. In such cases, markets (rather than government/corporate guarantees) will probably be the preferred determinant of an asset's worth. Real estate, >useful< goods that can be stored and transported easily, the right kind of business (or stock in it, if equity markets are still working efficiently) all seem like things that could serve as a hedge. It probably makes sense to diversify outside the US just in case the craziness is greater in the US than elsewhere (seems unlikely to me--but not impossible).

What you'd be buying is insurance, and insurance has a cost (especially an opportunity cost, if the planned-for event doesn't happen). So, only buy what you need, and concentrate on addressing the things you can control. Oh--and vote.

 

[DrRoy]

It may go to the same principles that got most of us to FIRE, including LBYM. I am planning to start out with a small pension and a 1.5% WR. That gives me room to recover from problems of what ever kind.

 

[Whisper66]

Not to come off as a nut job.... I wonder if anyone does anything to mitigate the risk of the federal government overextending itself and needing to limit pension obligations, print money and cause excessive inflation, and increase taxes......

King Smoothie - you certainly aren't a "nut job" to have a healthy concern about our national debt. You'll hear lots of such silly terms ("nut job", "gold buggers", "chicken little - the sky is falling", etc....) that some use to try to degenerate those who take a more conservative position on the topic than they do. Many folks in this country feel our national debt is too high and have taken steps to protect themselves against what they see as possible consequences. Below is a link to a recent discussion that has various views.

http://www.early-retirement.org/for...s-on-how-it-is-going-to-affect-usd-80639.html

Everyone makes their own judgements on what might (or might not) happen and then what steps may (or not) be worth taking to protect themselves.

For one person's view, here are the steps I have taken partly as a result of the countries financial situation:

(1) I took my 2015 retirement pension as a lump sum rather than as an annuity. The annuity was not adjusted for cost of living increases which could be a significant issue if inflation takes off. I am more confident that I can invest well enough to keep up with inflation than I am confident in our government's fiscal policy keeping inflation reasonable.

(2) Shifted a chunk of my assets to dividend paying equities (funds and individual stocks) to provide a large portion of our income. In the event of a market dive, I hope to have more leeway on when I may need to sell off equities for income. I'd prefer to give some time for a market rebound rather than being forced into a fire sale situation.

(3) I diversified portfolio more than it was and moved out of anything I personally considered high risk "fun" investing.

(4) We are keeping good track of expenses and have a good idea of where and how much we could cut back immediately if needed.

(5) Have started converting tIRA funds to ROTH (using I-ORP as guidance on how much each year) to hedge against possible rapid rise in taxes.

Don't know if these are applicable to your situation but they feel like common sense things for my situation and helps me sleep at night.

Edit : should have mentioned that my financial plan is set up to allow for a large (say 40%) multiyear (3-5 yr) drop in the market of around 40% or so. So not expecting the world to come to an end but might be stuck for awhile in pretty poor market conditions.

 

[MasterBlaster]

I think you would be better off worrying about what to do in a Sharknado, which you will have a lot more control of.

Read this book in case a Sharknado hits:

http://www.amazon.com/Survive-Sharknado-Other-Unnatural-Disasters/dp/0553418130

 

[nash031]

As a fellow military member and future retiree, I have two thoughts on this:

1) Your pension is COLA-adjusted. Inflation isn't going to kill you, probably not even hyper-inflation. If anything, their recent attempt to make a budgetary change to your pension which was summarily shouted down in a bi-partisan manner once it was found out should give you confidence that things are going to have to get pretty dire before they do anything to YOUR pension. Those who come after you (i.e. those under 4 years and entering after this year) might have more to think about.

2) Your pension is for military service. I think the chances of the government renegging on your pension before they take other extreme actions with civilian government employees, etc. etc., are about the same as a Sharknado.

Personally, I agree with Senator. I would (and do) concern myself with other things, but as others have indicated, there are plenty of people out there who would tell you to do all kinds of things with your money, and in many cases that means giving some of it up.

 

[W2R]

I figure owning property outright, having a big buffer or safety margin, and having multiple income streams seems to be about all you can do that is legal and reasonable.

I think this is a great approach! That is exactly the same approach that I am using to cope with the (different) scary scenarios that used to worry me when I was planning my retirement.

Honestly I think you have the right idea for preparing for the worst. And, with any luck, the worst will not happen after all.

 

[petershk]

A couple thoughts.

First is that the absolute debt number is fairly meaningless. Sorta like I used to buy milk for 99 cents but now it's 3.99. Debt to GDP is what really matters and that isn't TOO bad.

WHAT you spend that debt on also matters because different costs have very different ROIs. But outside of voting there's little control there.

The other part is that risk isn't in a vacuum.

Of course the government can default on its obligations, it can reduce them, it can (and is) printing money and so on. But if you have 7000$ in a pension vs 1.8 million in a 60/40 stock bond mix, what's the risk difference? If the government defaults on military pensions I can't imagine the global economic turmoil. My guess is my investment values will plummet and thus my dividend and cap gain income will be just as risky as your pension.

SOME pensions are riskier than others but my guess is military ones are about as close to government bonds as you can get.

Am I worried about it? Yes. Is there a safe place? I don't think so. So... I guess we muddle through.

What I WOULD see as a real risk is people/companies who will capitalize on the anxiety and charge huge fees to pretend to mitigate the risk. If nothing happens they can claim credit... if the system blows up... well... doesn't matter than much either. Insurance only pays if insurance companies exist so if you try to insure against financial destruction I'm not sure how to do that.

As an extreme example let's say I charge you 100$/mo to prevent the world from ending . If it ends I'll give you a trillion dollars. The risk return is great except that the payer and collector are unlikely to exist in one situation and highly likely to exist in the other.

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[Fermion]

If we go down, we all go down together is what I think. Nobody is going to keep paying a military pension if they are starving themselves, no matter how patriotic it might seem. Similarly, people are not going to be 100% protected from this even if they have all of their money in bank CDs.

But this is TEOTWAWKI stuff. 1920s Germany. The USA would look very very different after such a catastrophic default and it probably wouldn't matter a lot if they kept paying your pension through it all.

Sharknado does sound more likely. Our debt can probably get to 50 trillion and still not be in the dire situation.

 

[MasterBlaster]

Debt to GDP is what really matters and that isn't TOO bad.

It may be manageable now, as you post. But all those poorly funded future entitlements are the concern. Depending on what happens, that debt to GDP could get way too large causing way big problems. Similarly large extra taxes to fund it all could cause big problems with the economy. Hence the OP's concerns about what could (possible) happen and how to protect oneself.

 

[VFK57]

Of course, making gold illegal would only raise the value of it. Same with guns, bullets, and good (or even lousy) liquor.

One of the ways they could get out of debt would be to stop overspending. Oops, sorry, I drifted into fantasy world there.

+1 If we would balance the budget (by some miracle) and stop overspending, there would not be any worry for $US stability.

 

[scrinch]

Of course, if the USG finds itself in the kind of economic hole that requires reneging on pension promises and/or printing a lot of money to cover bond interest, then we have to wonder what else will be happening in the world. Promises to repay on TIPs would also be suspect, so that rules out one inflation hedge many would have turned to. In such cases, markets (rather than government/corporate guarantees) will probably be the preferred determinant of an asset's worth. Real estate, >useful< goods that can be stored and transported easily, the right kind of business (or stock in it, if equity markets are still working efficiently) all seem like things that could serve as a hedge. It probably makes sense to diversify outside the US just in case the craziness is greater in the US than elsewhere (seems unlikely to me--but not impossible).

What you'd be buying is insurance, and insurance has a cost (especially an opportunity cost, if the planned-for event doesn't happen). So, only buy what you need, and concentrate on addressing the things you can control. Oh--and vote.

+1 Very reasonably and well put.

 

[cyber888]

The United States Government will never go Bankrupt, because we print our own money .. and yeah, that's the almighty US Dollar, which is still a de facto international currency.
And the Dollar is getting so much stronger against other currencies that the US can print another $10 Trillion more and it would not really matter if they print more money to pay for stuff.

 

[king smoothie]

So it seems we are doing what we reasonably can without being extremists, but apparently I've got work to do to prepare for a Sharknado. Especially being on Guam.

 

[Gone4Good]

It may be manageable now, as you post. But all those poorly funded future entitlements are the concern. Depending on what happens, that debt to GDP could get way too large causing way big problems. Similarly large extra taxes to fund it all could cause big problems with the economy. Hence the OP's concerns about what could (possible) happen and how to protect oneself.

It helps to put things in perspective and to also think about what the upper limit of debt a modern economy with it's own currency can shoulder. In that regard we might choose Japan as a test case to compare.

Currently Japan's Debt/GDP is about 230%. The graph below shows the CBO projections of the same ratio for the U.S. going out to 2026 where it reaches 86%.

Notwithstanding the fact that Japan's debt is nearly three times as large as ours it's government currently issues 10-year bonds at a yield of (0.12%) . . . effectively having lenders pay the government to borrow. There's no sign of a debt crisis in Japan which means that 230% debt / GDP is not an upper limit.

None of this is to say that we should take our fiscal situation lightly but it does strongly suggest that there is no reason for fear.

 

[scrinch]

First is that the absolute debt number is fairly meaningless. Sorta like I used to buy milk for 99 cents but now it's 3.99.

Meaningless unless you're retired and your budget only allows for spending $2/week for milk. You used to be able to buy a half gallon of milk, but now you can afford only a pint.

The United States Government will never go Bankrupt, because we print our own money .. and yeah, that's the almighty US Dollar, which is still a de facto international currency.
And the Dollar is getting so much stronger against other currencies that the US can print another $10 Trillion more and it would not really matter if they print more money to pay for stuff.

If they print another $10 trillion and double the supply of dollars out there, doesn't that make each dollar in your portfolio worth less? Well, that's what happened with the Roman denarius anyway, the de facto Mediterranean "world currency" when they just started minting more of them to pay government debts. Its value relative to things of intrinsic value like bread and wine and labor plummeted.

 

[scrinch]

Notwithstanding the fact that Japan's debt is nearly three times as large as ours it's government currently issues 10-year bonds at a yield of (0.12%) . . . effectively having lenders pay the government to borrow.

It is apparently a viable debt load now, but what happens when the borrowing rate goes back up to 2% or 3%? As they replace those bonds over a 10 year period, their interest payments will increase by a factor of 10 or more, and that's assuming that no more debt is taken on. Or are bond yields permanently this low?

 

[Gone4Good]

It is apparently a viable debt load now, but what happens when the borrowing rate goes back up to 2% or 3%? As they replace those bonds over a 10 year period, their interest payments will increase by a factor of 10 or more, and that's assuming that no more debt is taken on. Or are bond yields permanently this low?

It all depends on other factors. A long-run sustainable government debt load is generally viewed this way . . .

Sustainable Debt to GDP = (primary deficit)/(nominal growth rate of GDP - nominal interest rate on government debt)

Tell me what all the other numbers are and I can solve for X.

But even without filling in all of the blanks, you can gather from the formula that interest rate increases driven by inflation have zero impact on sustainable debt. So why interest rates rise is more important than whether interest rates rise.

 

[nash031]

Meaningless unless you're retired and your budget only allows for spending $2/week for milk. You used to be able to buy a half gallon of milk, but now you can afford only a pint.

If they print another $10 trillion and double the supply of dollars out there, doesn't that make each dollar in your portfolio worth less? Well, that's what happened with the Roman denarius anyway, the de facto Mediterranean "world currency" when they just started minting more of them to pay government debts. Its value relative to things of intrinsic value like bread and wine and labor plummeted.

Protect your portfolio from inflation by not keeping everything under the mattress, but that doesn't really enter into the discussion other than a big "duh".

In the case of the OP, his pension is COLA-adjusted by CPI each year, so unless that changes (and they tried once, but were summarily shouted down), it's less of a concern for him.