Retirement Crisis

Sixteen startling facts about the coming retirement crisis and how they may dramatically affect your golden years...

#1 Beginning January 1st, 2011 every single day more than 10,000 Baby Boomers will reach the age of 65.  That is going to keep happening every single day for the next 19 years.

#2 According to one recent survey, 36 percent of Americans say that they don't contribute anything at all to retirement savings.

#3 Most Baby Boomers do not have a traditional pension plan because they have been going out of style over the past 30 years.  Just consider the following quote from Time Magazine:

The traditional pension plan is disappearing. In 1980, some 39 percent of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15 percent, according to the Employee Benefit Research Institute in Washington, D.C.

#4 Over 30 percent of U.S. investors currently in their sixties have more than 80 percent of their 401k invested in equities.  So what happens if the stock market crashes again?

#5 35% of Americans already over the age of 65 rely almost entirely on Social Security payments alone.

#6 According to another recent survey, 24% of U.S. workers admit that they have postponed their planned retirement age at least once during the past year.

#7 Approximately 3 out of 4 Americans start claiming Social Security benefits the moment they are eligible at age 62.  Most are doing this out of necessity.  However, by claiming Social Security early they get locked in at a much lower amount than if they would have waited.

#8 Pension consultant Girard Miller recently told California's Little Hoover Commission that state and local government bodies in the state of California have $325 billion in combined unfunded pension liabilities.  When you break that down, it comes to $22,000 for every single working adult in California.

#9 According to a recent report from Stanford University, California's three biggest pension funds are as much as $500 billion short of meeting future retiree benefit obligations.

#10 It has been reported that the $33.7 billion Illinois Teachers Retirement System is 61% underfunded and is on the verge of complete collapse.

#11 Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern's Kellogg School of Management recently calculated the combined pension liability for all 50 U.S. states.  What they found was that the 50 states are collectively facing $5.17 trillion in pension obligations, but they only have $1.94 trillion set aside in state pension funds.  That is a difference of 3.2 trillion dollars.  So where in the world is all of that extra money going to come from?  Most of the states are already completely broke and on the verge of bankruptcy.

#12 According to the Congressional Budget Office, the Social Security system will pay out more in benefits than it receives in payroll taxes in 2010.  That was not supposed to happen until at least 2016.  Sadly, in the years ahead these "Social Security deficits" are scheduled to become absolutely horrific as hordes of Baby Boomers start to retire.

#13 In 1950, each retiree's Social Security benefit was paid for by 16 U.S. workers.  In 2010, each retiree's Social Security benefit is paid for by approximately 3.3 U.S. workers.  By 2025, it is projected that there will be approximately two U.S. workers for each retiree.  How in the world can the system possibly continue to function properly with numbers like that?

#14 According to a recent U.S. government report, soaring interest costs on the U.S. national debt plus rapidly escalating spending on entitlement programs such as Social Security and Medicare will absorb approximately 92 cents of every single dollar of federal revenue by the year 2019.  That is before a single dollar is spent on anything else.

#15 After analyzing Congressional Budget Office data, Boston University economics professor Laurence J. Kotlikoff concluded that the U.S. government is facing a "fiscal gap" of $202 trillion dollars.  A big chunk of that is made up of future obligations to Social Security and Medicare recipients.

#16 According to a recent AARP survey of Baby Boomers, 40 percent of them plan to work "until they drop".

Companies all over America have been dropping their pension plans in anticipation of the time when the Baby Boomers would retire.  401k programs were supposed to be part of the answer, but if the stock market crashes again, it is absolutely going to devastate the Baby Boomers.

State and local governments are scrambling to find ways to pay out all the benefits that they have been promising.  Many state and local governments will be forced into some very hard choices by the hordes of Baby Boomers that will now be retiring.

Of course whenever a big financial crisis comes along these days everyone looks to the federal government to fix the problem.  But the truth is that after fixing crisis after crisis the federal government is flat broke.

At our current pace, the Congressional Budget Office is projecting that U.S. government public debt will hit 716% of GDP by the year 2080.

But our politicians just keep spending money.  In order to pay the Baby Boomers what they are owed the federal government may indeed go into even more debt and have the Federal Reserve print up a bunch more money.

So in the end, Baby Boomers may get most of what they are owed.  Of course it may be with radically devalued dollars.  Already we are watching those on fixed incomes being devastated by the rising cost of food, gas, heat and health care.

What is going to happen one day when prices have risen so much that the checks that our seniors are getting are not enough to heat their homes?

What are we going to do when those on fixed incomes are buying dog food because it is all that they can afford?

We are rapidly reaching a tipping point.  As the first Baby Boomers retire the system is going to do okay.  But as millions start pouring into the system it is going to start breaking down.

No, there is not much that we can do about it now.  We should have been planning for all of this all along.  Americans should have been saving for retirement and governments should have been setting money aside.

But it didn't happen. Now we pay the price.

Source: http://endoftheamericandream.com

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Major Economic Dominos Falling: World Government Bankruptcies

Who cares what happens to the European economy? Actually, all Americans should as it directly impacts the US and portends our country's future. What we are witnessing right now is the toppling of economic domino #13- Government Bankruptcies Around the World; one of 23 dominos that have or will yet fall.

To the right is an interesting graphic that basically sums up the European economic dominos that are lining up to, essentially, topple the European Union and Euro.

After months of denials and failed fixes, the political and economic leaders of the European Union are still wrangling over what to do about Greece's debt. However, simply put, there is no way the EU authorities can stop the first domino--Greek default or equivalent write down of its impossible debt load--from toppling the over-leveraged banks which will be rendered insolvent when forced to recognize their losses.

Greek Haircut

If banks and bondholders are forced to accept a 50%-75% write down in Greek debt, then the other debtor nations will be justified in demanding the same write down for their crushing debts. This dynamic leads to estimates that more than 3 trillion euros will be needed to bail all the players out. The alternative is to deal with losses of 3 trillion euros, wiping out banks and bondholders of sovereign debt.

Germany Key, But Limited

The fact remains, the German economy is simply not big enough to fund a 3 trillion-euro bailout. Germany has 81 million people and

its GDP is $3.3 trillion; the EU GDP is roughly $16 trillion. Compare statistics with the U.S., with 315 million people and a GDP of around $14.6 trillion.

Several European nations have already been downgraded and if several nations begin defaulting on their debt, the results could be devastating.

That devastation would first drastically impact the European countries, then soon burst its way into our own nation. According to Douglas J. Elliott - fellow at the Brookings Institution - a European recession would have a domino effect and create a similarly dismal situation right here in the U.S.

Greek Tragedy Impacts US

These four crucial American sectors would be greatly (and quite negatively) affected in the aftermath of defaulting nations in the euro zone:

Business and consumer confidence: Good luck finding any business owner, employee or consumer who isn't already frightened about what's lurking ahead. If the worst-case-scenario does occur, our economy would surely experience even worst consumer spending cuts and job losses.

There's still hope, but not much. CNNMoney reported that there is a 25% chance of that worst-case scenario coming to fruition. That process would bring about a series of defaults in nations including Portugal, Greece, Ireland, Italy, and Spain.

Trade: If Europe falls into any deeper of a recession, the US $400 billion in exports would be slashed badly as well. Until Europe could afford to pay for those U.S imports, America would suffer the loss in sales and, subsequently, be forced to cut jobs in related fields.

On a international scale, other countries who rely heavily on exports to Europe would face the same situation - leaving the global trade market in shambles.

Investment: Economic data shows that American firms have more than $1 trillion of direct investment in the European Union. A major hit to Europe's economy would slash through investor profits. US investments in other countries would also be affected because of the overall domino affect in the global investing community.

Financial flows: Banks and bank subsidiaries have about $2.7 trillion in loans and commitments to corporations, and governments in Europe. An additional $2 trillion more of exposure to the United Kingdom.

The progress the United States has made in dealing with its own financial crisis thus far would not fare well if additional losses were heaped on a still-struggling economy.

The technical details of the European recapitalization will matter as well. If designed badly, the plan could even do harm by encouraging European banks to cut back on lending and to sell existing assets. A serious credit crunch would likely tip Europe into recession.

Finally, strong-arming investors into voluntarily accepting losses of 40% to 60% on their Greek government bonds will certainly add to the risks of contagion if market concerns about other troubled eurozone countries spike again in the future.

Whatever happens, the U.S. government would be wise to prepare and encourage the Europeans to take the necessary steps. Not to mention the International Monetary Fund that could continue assisting a bailout in Europe.

Here's the point: Though the mix of debt is different from one country to another, all of Europe, and indeed the developed world, is overloaded with debt: state, bank and private.

The idea that leveraging more debt can resolve this monstrous over-indebtedness is beyond fantasy.

There is a day of reckoning ahead and we believe European economic bankruptcy dominos will fall...with worldwide consequences.

Sources: Wealth Wire, Businessweek, Financial Times, IMF, CNNMoney

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Real Estate or Real Opportunities

WARNING!

THIS IS A WARNING. DO NOT BUY REAL ESTATE AT THIS TIME.

THINK ABOUT WHAT HAPPENED DURING THE 1930'S. WE ARE GOING INTO AN INFLATIONARY-DEPRESSION, HIGH INFLATION & HIGH UNEMPLOYMENT (Think 1979-1983) EXCEPT MUCH, MUCH STRONGER. Can you imagine what an inflationary depression is like?

Some may disagree with some of our points, but does it make sense to risk tying up dollars during periods of economic uncertainty? Especially when there are other opportunities specifically designed to PROFIT from what's coming?

We hear and speak to clients everyday as to whether now is a good time to buy real estate. We also have many discussions as to whether South Central America is a good choice if so. While many of our clients follow our thinking on this, there are some that either get emotionally involved in the thought of owning property offshore or are purchasing it out of fear that the US is going to collapse. In either case when they have decided to buy against our recommendations, they have come back with stories that we knew were coming.

These stories consist of clients having the lot right next to theirs discounted in order for the developer to stay afloat. By the way, these have not been small discounts. These discounts have been 30% - 50% below what they had bought at just a few months earlier. Most times these clients thought that they negotiated their lot and cost of construction down to a discount that couldn't go any lower. They just couldn't pass up "such a good deal." This was not the case.

We have other clients tell us about how the initial developer went out of business and now they need to bring in another one in which they have no relationship. Then others have delays due to a project not having enough liquidity to start the construction process, and once it is started, it gets stalled because of insufficient cash to finish it. Other delays are due to not enough of the units being sold--which of course means they will need to drop their prices which in summation means lost value to their investment.

Another example is where the developer was willing to carry the loan at no interest for the construction. A short few months later, that same developer / builder was asking for additional dollars to get started.

We could go on and on with those that did not follow our advice when buying real estate: onshore, offshore – it doesn't matter.

It is not only stories we receive from our clients that brings us to this determination. Those are all after-the-fact of us urging them not to buy. Our original recommendations were based on many years of experience and seeing these cycles repeat themselves... through an exhaustive and ongoing understanding of economic history and inter-personal relationships with those who are at the forefront of these transactions. This includes a developer in Central America who was selling primarily to Americans wanting to "escape it all." He confessed to us that he's had to drop his prices by 40%. He didn't want to do it because he had just sold a lot of property within the past year, but it was the only way to keep his company alive and continue to make sales. Even at his new prices, he has laid off most of his workers.

Let's take a look at some hard reasons why now is not the time to buy real estate:

• The real estate market has not bottomed.
• It still has a long way to fall yet.
• Do not tie-up your money into illiquid real estate during periods of economic uncertainty.
• It will be many years, perhaps 20 or more, before real estate values get back to even. (Think 1930's, when property sat idle for decades.)
• Anyone that believes in rising inflation and rising gold prices must believe in rising interest rates. People will only loan out their money if they can get their money back adjusted for inflation. This means devaluation per the most basic valuation formulas, just as what happened to the stock market. Except that with hyper-inflation it means a hyper-loss in values.
• We hear them all: all those commentators talking about real estate but they are merely commentators and are not economic historians. The inter-relationships and results are sure.
• There are too many opportunities to profit from what's coming. Why tie-up your dollars in sure-losers? If someone wants real estate, at least wait 3-4 years and then buy cheaper.
• Those on the inside of real estate also see the false signs, just as are seen in the stock market. You cannot have sharp devaluations of the dollar, and a rise in the real value of real estate simultaneously.
• Who's going to keep buying to prop real estate values up... as these commentators are all preaching to Americans, what happens when Americans discover the reality of economic collapse? And all retreat by pulling in their dollars? Where will the buyers be then? There will be no-one to prop up their values.

So you may be asking whether there are other opportunities out there? Absolutely. In fact we are most optimistic about the opportunities that are available.

For example, many think it might be a bad time to invest in an IPO. In stocks tied-to the rest of the regular economy, we definitely agree. In stocks that are contra-cyclical to the rest of the economy, they are liquid and are likely the opportunities of the decade, poised to outperform gold or silver by double, triple or more.

Think 1930's again. General Mills, General Motors, and others bought all their acquisitions for a song, and flew past Post cereals and Ford who had the big market share before then. There were more millionaires created per capita during the decade of the 1930's than during any other decade before or since! THIS is exactly where the opportunities are-- in businesses that are designed to profit from what's coming, who see what's coming, who have a unique story and will fill the gaps of those that will have to be retrenching because they don't know where to go.

In closing, there was a time when real estate was a sound investment--and will be again. It just isn't right now. Again we are very optimistic on the opportunities abound and we want to make sure that we keep our clients in the know. We're not suggesting our clients put their dollars anyplace where we aren't making our own investments. This is why you hired us. We keep you informed and give you access to not only our historical research but also experiences and established relationships that we are involved in. If you have additional questions, get in touch with our team of advisors--especially if you are thinking about purchasing real estate any time soon... Or, if you want to be involved where the real opportunities are at this time.

Take your pick: real estate, or real opportunities.

Pension Bankruptcy Domino Falling

Pension liability for private and public pension funds is soaring!

If you're betting on a private or public pension fund being there when you retire, you could be in for a rude awakening. There is a pension liability/bankruptcy domino that has been wobbling back and forth for several years. And it's getting worse, not better.

Mitchell Interview By Forbes

As part of an intriguing interview, September 7, 2011, between Steve Forbes, editor-in-chief of Forbes magazine, and Olivia Mitchell, director of the Pension Research Council at The Wharton School of the University of Pennsylvania, both public and private pensions appear to be in "grave trouble."

Mitchell estimates State pension liabilities alone, for example, are under-funded by nearly $3 Trillion or approximately 69%. Note: How much is a trillion? Counting to 1 trillion would take approximately 30,000 years!...not a typo.

Pensions Overly Optimistic

Further, many pensions are overly optimistic in terms of growth rates (pegged at 7-8%) and don't adequately address increased longevity. Healthier living and better medical solutions have increased longevity one month per year for the last 30 years. Many pensions are based on outdated longevity tables according to Mitchell.

Big Promise Pensions May Take Decades to Fix

On the Public pension side, some states are raising contributions. However, many states have pension-packages that are collectively bargained which will take a long time to unwind. Constitutionally, it may take 20-30 years to address shortfalls and get them under control. States and unions may end up going to the US Supreme Court to determine how to handle contracts that cannot be paid. If you're counting on a monthly check to come out of a court battle that could take years or decades to resolve, it could not only dramatically affect your retirement, but literally destroy your way of life..

Some states are going for broke with risky investments in order to make up lost ground—but it's like playing the lottery. Given the volatility of the stock market, the short fall could turn catastrophic.

Mitchell predicts by 2020 most state and some city pension funds will be exhausted aka, bankrupt. No, this pension shortfall didn't happen overnight. In fact, according to Pew Research 31 states were only 78% funded in 2009. And the Great Recession has made things worse.

News Headline:
Battle over pension costs in Montgomery

Maryland's Montgomery County pension and retiree health accounts are facing a long-term shortfall of more than $4.8 billion, and officials repeatedly have pulled back from difficult decisions needed to close the gap.

The pension programs for the county and the school system are underfunded by about $1.3 billion, and retiree health funds are short by $3.5 billion, county records show.

County agencies have set aside just 3 percent of what they will need to cover health care for retirees. The pension funds, which have been in place much longer, are significantly underfunded.

Source: Washington Post, March 22, 2011

News Headline:
State Pension + Debt = Big Numbers

States' debt loads are high enough, but when you combine them with their pension obligations, the numbers are really eye-popping.

Hawaii's debt, for instance, is $5.2 billion. But so is its pension obligation. Combined, the dual obligations make up 16.2% of the state's economy, according to a report released Thursday by Moody's Investors Service. That's the nation's highest total liability as a share of the state's gross domestic product.

With state economies continuing to reel from the Great Recession, their pension and debt loads are garnering greater attention. States are having a hard enough time just paying for schools and social services, leaving many struggling to make big pension payments as well.

"These are expensive obligations," said Robert Kurtter, Moody's managing director for public finance. "Not crushing burdens, but they add to states' financial stress at a very difficult time."

Just how deep states are in the hole for their pension payments is a matter of debate. A Pew Center on the States report last year pegged the figure at $452 billion. Overall, state pension systems are 84% funded.

Other experts, however, have said the unfunded liability is much greater. Even Kurtter acknowledges that the pension hole is likely understated because of the rules governing states' accounting for retirement benefits.

Source: CNN Money, January 27, 2011

News Headline:
Moody's to Factor Pension Gaps in States' Ratings

States do not now show their pension obligations — funded or not — on their audited financial statements. The board that issues accounting rules does not require them to. And while it has been working on possible changes to the pension accounting rules, investors have grown increasingly nervous about municipal bonds.

Source: Reuters, January 27, 2011

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Estate Planning Pitfall: Joint Assets

There's a common misconception that owning a home or another asset jointly with your spouse or child is an effective way to transfer the asset. It's true that, when people own property as joint tenants with rights of survivorship and one owner dies, the deceased owner's interest is automatically transferred to the survivor without going through probate. But joint ownership can have significant tax disadvantages.

Wasting An Exemption

For a married couple, it can waste one spouse's estate tax exemption. Suppose that you and your spouse jointly own a home. When you die, your interest automatically goes to your spouse tax-free under the marital deduction. Let's say that, when your spouse dies, the home is worth $10 million. Assuming a $5 million estate tax exemption and a 35% marginal rate, the home will generate $1.75 million in tax liability. You can avoid this tax by owning the home in equal shares as tenants-in-common and leaving your share to a credit shelter trust.

Adding your child's name to an asset's title as joint owner also can be a costly mistake. For one thing, it's considered an immediate, taxable gift of half of the property's value. What's more, joint ownership doesn't remove the home from your taxable estate (though an adjustment is made in computing the estate tax liability that offsets any prior gift tax reporting, so there's no double tax). Finally, it gives your child control over the property and exposes it to claims by the child's creditors.

Joint Home Ownership Problem

Income taxes can also be a concern, especially if a jointly owned home is your principal residence and you sell it, which would normally qualify for special tax treatment. If you own only 50% of the property, only that percentage is eligible (unless the joint tenant also resides in the home and meets the other requirements). Before adding a joint tenant to your property, consider alternative ways to hold the property and still accomplish your objectives.

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