Miscellaneous Thoughts
Financial Advisors often tell their older clients to begin transitioning from equity to bonds and cash as they progress in age. While stocks are the best way to build long-term wealth, when you’re my age and long-term gets closer and closer to breakfast tomorrow, you probably can’t afford to wait ten years for your investments to pay off. Bonds move in the opposite direction of interest rates. Thus, the elderly are disproportionately affected.
Social security, which mostly goes to the elderly, will receive an 8.7% increase in payments to beneficiaries in 2023. Estimated 2022 payments were $1.24 trillion. The total cost will be about $100 billion, adding to inflation.
Pensions
If a retired person has a private pension, during the 40 years of near-zero inflation preceding Biden almost all were capped at a low annual cost of living increase. In my case, my private pension is capped at three percent increase per year. When inflation exceeds that amount, the elderly are adversely affected. Whether a defined-benefit or defined-contribution plan, once the individual begins drawing on the pension, it is paid out of a fund controlled by the company (or union) operating the pension. The fund receives regular contributions from the operator, which must maintain adequate funding to assure the payment of pensions. Under US GAAP (Generally Accepted Accounting Procedures) the operator estimates fund income and payments for future years, and many overestimate fund earnings on investments. If the fund falls short, it must be made up by the operator.
Nearly all the assets are invested in the stock market, which has declined by about 25% in value since Biden became President. Very little of the fund is in cash. The shortage can be ignored, but not if the pension accepts insurance from Pension Benefit Guarantee Corporation, a government entity. Then, the operator must make up the shortfall out of current income. Which can seriously reduce corporate income, and thus corporate tax liability. Biden further wanted to increase taxes on corporations; instead, he’s going to reduce them. Where Biden gets the money for his inflation-boosting promise to cancel student debt is beyond me.
Producer Price Index
People pay attention to the Consumer Price Index, but few look at the Producer Price Index – largely because they don’t know it exists. The producer price index drives the supply side of the economy. It rose by 0.4% in October, belying our President’s announcement that inflation was at zero.
President Biden does not know the source of inflation, so he can’t possibly know how to reduce it. A bill that spends an additional $300 billion is labeled the inflation reduction act of all things.
We’re screwed.
Of course those of us needing to rely on our 401's to live are somewhat shocked to take a 20% hit and also understand that the dollar that you had two years ago is now worth 85 cents. I am fortunate enough to be OK with my military + SS checks so I'm mostly in equities. So the big hit in 2000 was ugly as my contracted advisor discovered stop loss quite late. I wasn't as badly hit in 2008 but it still hurt. This latest hit will mean a bit less for my kids but I'm personally likely OK.
My real injury happens with my RMD - required minimum distribution valued at last year's number. In a down market the timing is awful. I'm delaying with hopes Congress might waive the requirement but I suspect they would rather have the taxes. A large part of the distribution goes to taxes as well. That withdrawal of principal requires even more risk to replace it. But the low rate environment kills safety for seniors.
As we enter this period of stagflation a lot of seniors will get hurt. When I hear of people with no savings going into retirement it's scary. There are still places to live where SS just barely meets needs but most can't even get there.
I suspect the next Congress must deal with the years of irresponsible spending we have been warning about forever. As debt service must be payed it consumes a huge portion of outlays and I expect our military might be needed to fend off our eager competitors who might wish our resources for themselves. That leaves transfer payments as the only place to cut and those won't be easy cuts. Wonder if they will finally act? Maybe we could stop buying drugs nobody wants so GrandMa might have some oatmeal with a bit of milk.
Are we ever--and I had the most disconcerting experience today that don't bode encouragingly.
My retirement acct. was set up under my then-employer with a major provider of retirement and insurance plans for non-profits, and for most of the past 30 yrs they've been pretty great to deal with.
At the appropriate age I began making monthly withdrawals from my IRA into my checking acct. by phone request, and these are always processed within 3 business days.
Today I called to request the usual, and the customer service rep told me it would take four days to be transferred from their end, and another 3 to be cleared by the banking system, and when I asked what the hell was going on, he tried to tell me this has been the normal time lag since April.
Which is untrue; didn't happen last month or any previous month for the past two years.
Banking industry must be squeezing every minute they can out of asset transfers. Scary.