In the 60’s we fought the establishment, in the 70’s we educated ourselves, in the 80’s we raised kids, in the 90’s we were going to change the world, but instead tried to accumulate wealth. Then, the 2000’s hit and we found out things don’t always go as planned.
If we look at investment returns for the last decade, we’re certainly disappointed at best. We thought that equities would continue to return their historical average of 10%, when in fact they had a return of approximately zero! Needless to say… it’s put a crimp in our projections. The big question for not just our generation, but all investors is what will happen over the next ten years?
Will Baby Boomers that are approaching retirement retreat to bonds, which had a total return of almost 6% over that same decade? It’s possible and it may be a mistake given that interest rates are currently at very low levels. Investments are critical to our retirement. The issue of preservation of principal has entered into the equation. Remember that your asset allocation is essential not only for returns but your peace of mind. What should we be doing with our money? Stop by next week to find out.
In the meantime, what are you doing to save? Share your tips with all our readers.
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Let’s get back to discussing the retirement issues that Baby Boomers, the almost 80 million individuals that range in age from 46-64, are currently facing. One question that anyone on the brink of retirement needs to ask is:
How ready am I for retirement and is this going to be a problem?
Statistics tell us that the average baby boomer has approximately $50,000 in retirement accounts. By retirement accounts, I’m talking about profit sharing, 401(k)s, IRAs, and similar instruments. I’m not including pension plans where the employee receives a stated monthly benefit and not a lump sum.
Let’s think about this; if you have $50,000 in retirement and you receive the average social security payment of $1,200 per month, will you be able to maintain your current lifestyle? This is largely dependant on how well you have prepared for your retirement. Have you been reviewing your finances regularly? If not, why? Social security will be around, but it is only one aspect of a secure retirement plan. If you have delayed in reviewing your finances, please do not put it off any longer. These 2 steps are a great way to get started:
- Look at your numbers, how much money do you have to meet your retirement needs
- Begin to define what your retirements needs are
What other steps are you taking to prepare for your retirement? Share here to help your fellow Boomers.
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The last of the economic fault lines is the international economy, so we will finish up with a discussion on that today. The strength and pace of the U.S. economic recovery is affected by international economies. And many countries across the globe are facing difficulties that may make recovery difficult. Let’s look at Europe. Greece’s debt equals 115% of its gross domestic product. Its government initiated austerity measures that cut spending and government benefits, but current debts still remain. Investors fear a default or a crisis of confidence that would threaten other eurozone countries.
The euro isn't stretching as far as it used to. The currency has fallen substantially as Portugal, Italy, Greece and Spain deal with huge sovereign debt problems. So why should we care? Depreciation of the euro will hamper U. S. exports. The European Union was the biggest market for U.S. goods last year and a stronger dollar makes U.S. exports more expensive and less competitive across the globe.
Besides Europe, other countries are having their own recovery issues that will affect how strong our recovery will be. Take China for example. China relied heavily on government stimulus to keep itself afloat during the recession. Now China will struggle with the transition from a stimulus-driven rebound to a self-sustaining expansion. Growth in the global economy needs to become more consumption-driven. Thanks for reading.
Let’s continue our discussion of economic fault lines. This week’s topic is government spending. Last year, the economy was infused with a nearly $800 billion stimulus package. This gave help to state and local governments, funded public work projects, and helped troubled industries. Much of that money is due to run out just as state and local governments are nearing the end of their fiscal years and faced with budget-balancing. Lawmakers in several states are considering raising sales tax and property tax, and cutting government programs. At the same time, jobless benefits are starting to run out for some of the long-term unemployed, who are hitting the 99-week maximum. A million unemployed could have their benefits run out by the end of this year. This will not help our economy.
Congress has delayed approving more money to cover Medicaid costs for states. Medicaid, which covers more than 60 million people nationwide, is one of the costliest services states provide. And with the severe recession, more Americans have turned to Medicaid for assistance. State tax revenues were lower last year as well, so deep budget cuts will have to be made. The federal share of Medicaid was increased last year as part of the stimulus program, but this funding will run out at the end of December.
This could mean trouble for the economic recovery. Thousands of state, county and local government workers could be laid off in the name of budget-balancing. More unemployed workers will do nothing to help the economy. Thanks for reading.
We started discussing economic fault lines last week, or areas of the economy that are still struggling. Last week I covered unemployment; this week I want to talk about the credit markets. Banks have struggled since late 2007 with several issues. Among those issues are: commercial real estate, bankruptcies, falling real estate values, and a very weak economy. These issues caused financial institutions to focus their energies on capital and asset quality.
Banks need capital to make loans to businesses. This refocusing of priorities from growth to capital and asset quality has caused lending to dry up. It does not appear as though this trend will change in the next 12 months. Remember, in order for the economy to grow, the credit markets must be in a growth mode. So it appears that our number two obstacle for growth will remain well into 2011. The good news here is that we are seeing some light at the end of this banking crisis tunnel. Problem loans, as defined by regulatory authorities, have peaked as of year-end and have shown further improvement at the end of the first quarter.
We must have a strong banking system that is dependent on not just making new loans but repaying existing loans! Let me assure you, the banking system is strong. Next week, we will delve into residential home sales and foreclosures and their effect on the economy. Thanks for reading.
It's the end of the year. 2009 is almost over. Let's celebrate for a lot of reasons. Let's also turn the page on the calendar and look into our crystal ball and see what 2010 will bring.
Here are a few thoughts, or predictions, if you will:
1) The stock market will continue to show positive numbers, not the dramatic increases we saw for 2009, but positive numbers. Historic gains for the Dow Jones are now in the 9% range. Don't look for anything that strong but wouldn't we be happy with 6%.
2) The economy will slowly move forward, again not dramatic movement but we could see GDP growth in the 2½% range. If we head into a slight, double-dip recession, we could see smaller growth but I don't see any numbers stronger than the 2 ½ %.
3) Housing...let's go to number four as there won't be much in housing to cheer about. The housing industry has too much supply out there to see any stabilization yet.
4) Interest rates...a little upward pressure in the third quarter but not a lot of movement. Low interest rates are a function of the weak economy. The Fed is committed to getting the economy going and therefore, low interest rates.
5) Unemployment. Can it get any worse? Probably not. We should see some improvement to the 9% range by September.
In a word or two, a slow recovery but at least it's a recovery. Happy New Year.
We've been talking about what's coming in 2010. We covered GDP, or the strength of the economy. Then we looked at interest rates. This week we are going to look at the ever increasing problem in our banking system. As of today, we have had over 100 bank failures nationwide this year.
A bank failure essentially occurs when bank's troubled assets exceed their capital. Troubled assets are generally defined as:
- 1. Loans at least 90 days past due
- 2. Loans where the bank is not accruing interest, and
- 3. Loans that have already been foreclosed on.
As you can see, none of these are good. If you add all these areas together and they are more than the bank's capital, you have a formula for failure. What caused these problems?
Essentially, they have been the result of three main areas:
- 1. A severe decline in real estate values
- 2. Over zealous lending on the part of the banks, and
- 3. The results of this terrible recession that we have just broken through.
When you combine these factors, we see the results of a perfect storm that is causing a strain on the banking system. Should you worry? NO! The FDIC insures your deposits up to $250,000.00 and usually when a bank does fail, the FDIC finds a buyer that takes over operations of the bank. Bank failures could exceed 200 for the 2010, so get ready.
We're looking at what 50 top economists are looking at for 2010. Last week we looked at GDP. This week we are going to look at interest rates.
The Federal Reserve Bank has the ability to set or have input into short-term interest rates. They meet several times per year and set a target for fed funds, which is the rate that banks are paid for their excess cash. The Federal Reserve targets that rate and also controls the discount rate which is the rate that the fed lends money to banks.
Long term rates are governed by the market, or essentially, what buyers and sellers of bonds are willing to pay. This market is similar to the stock market in that it trades on a bid and ask system. When the economy is heating up, or expanding, higher interest rates are prevalent, which causes the economy to slow down. The reverse is true when we are in a slow economy, or a recession. Interest rates go down. So, if our group of 50 economists think that the economy will improve next year, then interest rates will have to go up!! Not dramatically, but they should be about 1% higher a year from now.
That means a number of things for the economy:
- 1. First, it means that mortgage rates will be higher than they are now, which will most certainly hurt an already crippled industry.
- 2. Second, it means that struggling businesses will have to pay higher rates for their business loans, and
- 3. Third, consumers will have to pay higher rates for personal loans, like car loans.
Good news? Probably not.
With 2009 coming to a close, and possibly, the Great Recession, running its course, let's look into our crystal ball and see what's coming in 2010. It has to be better than 2009!
If we look at what 50 of the top economists are saying, 2010 looks like we might be able to breathe a sigh of relief. Let's start with GDP, or the measure of goods and services in the country. Good news here! We are seeing positive numbers, which means further economic recovery. Not a huge recovery, but the numbers are positive. We saw a huge contraction in the fall of 2008 and the first 2 quarters of 2009. In 2010 we should see a slow recovery but at least it's movement in the right direction.
Their predictions, by the way, are also showing some relief this quarter. We are not looking at a rosy Christmas season but one at least as good as last years. Maybe Santa has been checking his list and at least it's not shorter than last years! Our economic forecasters see some hope here!
The housing tax credit will probably be extended and there may even be some credits for household appliances in an effort to jump start a very weak economy. Preliminary results for the $8,000 tax credit show that it is helping home sales. The real estate industry is only beginning to show some life.
That's GDP. Next week we will look at interest rates and even look at this behemoth of a problem, the banking crisis.
As we hear experts talking about the economic recovery, many of us are left with the realization that we need to recover too. In the coming weeks, we are going to discuss the question we are all asking, "Now what do I do?"
How do I get good advice? How do I invest my money? Should I live on a budget? How much debt is too much? Where do I turn for help? If you have topics, email me. Or comment here. The economy has suffered the worst recession since the Great Depression. Many of us, as a matter of fact, most of us were not around during the Great Depression. Unemployment was at a disastrous 25%! We're now coming out of this latest mess. We should learn from this so we don't have to experience it again.
Today, let's look at three factors that contributed to the recession:
1. Debt--Banks are partially to blame here. Corporate America as well as individuals has borrowed too much money and banks have accommodated them in their zest for growth.
2. Real Estate-We all felt that real estate values would continue going up. Does anything go up forever, other than our age?
3. Greed-We all want more, but at what cost? People like Bernie Madoff are extreme examples but many others crossed the greed line.
Here is what contributed. Let's learn from these factors and prevent this economic mess from happening again during our lifetimes.