Will There Be Income In Retirement? Ordinary Americans Ask

There are times when the pressure of providing 24 hour financial news coverage causes a story to become sensationalized when a calmer, more factual approach would be in the TV viewers’ best interests. The most recent example is the downgrading of the United States bond rating from triple “A” to “double A plus” by one of the three bond rating agencies. The other two agencies did not follow suit with a similar downgrade yet World markets responded with a tumultuous couple of days that has caused many Americans to wonder if they would have any income in retirement at all? This is a fair question when you look at Washington’s inability to work together on a logical sustainable plan and as the prospect of another, even deeper, recession looms large in the worried minds of many hard-working folks.

Too many Americans feared there would be sufficient income in retirement if the markets continue their slide, or don’t recover swiftly. In fact, income in retirement will still be there, provided that we do not need to withdraw all our money at once. Equally important is that we keep a watchful eye on the balance of our investments, always maintaining a well diversified portfolio. “Diversified” simply means some money is invested in stocks, with a mix of perhaps dividend paying stocks along with some stocks that will provide us growth. The mix is necessary so that our purchasing power remains intact. This is the crucial thing each of us needs to protect as we look to the future – our purchasing power. Living in an inflationary environment as we have for the last six or so decades, it is important that we send enough money ahead so that we can continue to afford the things that are important to us.

In language those 24 hour financial news networks throw around – we need to ensure that our investments will keep pace with inflation. Here’s a practical example of what that statement really means: I paid more for my car in 1978 than my parents paid for their house! This is inflation, where the cost of things rises substantially over time. Does anyone remember when sending a letter was 15 cents? That was only as far back as 1980, and what does it cost now – 44?

Yet to keep pace with inflation, we can’t invest all our money in one place, not even in Treasuries, whether or not we agree with the Standard & Poor’s downgrade. That won’t buy us goods and services in 10 and 20 and 30 years. We need growth in our portfolio and so long as we quantify our risks, we can live with them. As a matter of fact, we can’t live WITHOUT some risk (read: growth) in our portfolios, precisely because of inflation.

Before we suffer grave concern on income in retirement, we need to consider the real results of the downgrade:-

1. Notice that while Standard & Poors is one of three major credit agencies that rates all bond issues, the other two bond rating agencies are – Moody’s Investor Service and Fitch Ratings – did not similarly downgrade the United States rating. Don’t we usually go with the opinion of two out of three?

2. The downgrade of Treasuries was supposed to infer that Treasuries would not be a “safe-haven” anymore, what actually happened was a move by many stock market sellers INTO Treasuries. We saw the US Treasury prices go up and their yields go down.

3. On the world wide stage, where it was feared China might sell off US Treasuries if it believed that the US could default on their sovereign debt, that did not happen.

4. The world central banks have actually bought in excess of 2 Trillion dollars of Treasuries in the week leading up and after the downgrade! The fact that our Treasuries are so liquid and so safe (and that we’re still a “triple A” rated credit rating from both Moody’s and Fitch and in the eyes of most of the world) is the reason.

5. Coincidences that are likely related:

a. Standard & Poors is the same bond rating agency that was accused of not downgrading the banks and mortgage companies fast enough at the onset of 2008. Some have said this recent downgrade of the US bond rating is payback.

b. Bank stocks faltered on the first day of trading after the downgrade announcement partly (or mostly?) because of the pending block buster AIG lawsuit.

With the markets so emotionally volatile, you have to keep a full picture in mind at all times.

The average investor needs to remember that their portfolios must be effectively diversified, and just as importantly, that much of their portfolio is “earmarked” for several years into the future; i.e., 5+ years. Markets do fluctuate; and they do recover, as history has shown, time and again. The number of days and the extent to which that percentage recovery happens is anyone’s guess. Which is precisely why one needs to STAY invested, in order to not miss those early recovery days.

While the US cannot continue to borrow 40 cents for each dollar we spend, nor can we put people back to work without investing some capital in job opportunities, one of the biggest components of economic growth. (Despite rumors coming to the surface that there are jobs available, corporations just are not releasing them.) Examples of smart spending abound, including spending 10 trillion dollars to fix our bridges and roadways now, which would create serious jobs, or wait 3 years when the cost will balloon to 40 trillion? Just like setting aside depreciation expenses on a balance sheet, we must “care for” and keep our infrastructure safe, making down payments so that we don’t face future catastrophic measures and compounded damages as well.

The markets are emotional, and, for at least the short term, we should expect continued volatility. Yes, there will be income in retirement… for those of us with level heads and nerves of steel.

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