06 April 2009

Some more on the stock market

In regard to turning any portion of Social Security into an investment portfolio, I am against it, while Jack, for one, would like to give it a try. One point I wasn't trying to make, but could, is that the American public in general (and government programs have to work "in general") does not move on an historic timeline. A few years of poor returns plays hob with most people's retirement plans. In today's Washington Post there is an interesting Q & A regarding financial advice with Jeff Mortimer, chief investment officer for Charles Schwab Investment Management.

Anonymous: I am retired now, have lost half of my 401-k. Please! What do I do right now?

Jeff Mortimer: You are not alone. Understand that I have been traveling the country and have spoken to many in similar situations. I know this may not make if any easier for you, but wanted to at least share that information w/you. Regarding what you can do about it. Here is what you shouldn't do. Don't expect the equity market to quickly return to 14,000 and all your issues to go away. Don't increase your allocation to stock looking to get it back. Instead you should modify your lifestyle to live with less. This is difficult answer to hear, but become the best option out of many. A part time job, a consulting gig, some other ways to bring in money may also ease some of the stress you're feeling. Spend less. Save more. Focus on the liability side of your balance sheet. Touch medicine, I know. But it is the best advice I have to offer.

That seems to make the point clearer than I could. 401-ks are in trouble and the fact that over the next 10, or 5, years they will improve doesn't seem to be much help according to these two. But as an economist, I make a good historian.

of course, if those guys were so smart ....

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At 07 April, 2009 11:53, Blogger jack perry said...

Several things come to mind when I read this.

(1) None of us has the right to live the life we'd like, even the life that we thought feasible only a few years ago. (I myself am learning this the hard way.) The advice that someone should modify his lifestyle to live within his means used to be considered common sense, and if our society hadn't lost that general bit of conventional wisdom, we wouldn't be in the fix we're in.

(2) When someone nears retirement age—not reaches, but nears it—all the advice I've read on the subject is to convert a substantial portion of one's stock portfolio to relatively safe investments that pay a decent return: i.e., bonds, inflation-protected bonds, etc. No one who follows that advice would have lost half his 401(k). Now that the individual has lost half his 401(k), he should do exactly what Jeff Mortimer suggests.

(3) The option for private retirement accounts was, as I recall it, precisely that: optional, not mandatory. Anyone could remain within the usual Social Security system; and even those who opted for the private accounts would still receive some Social Security, but at a reduced benefit.

Likewise, the person bemoaning the disappearance of half his 401(k) is still receiving Social Security. He's almost certainly not reduced to abject poverty.

I, on the other hand, am not likely to receive Social Security benefit levels comparable to today's recipients, as a consequence of simple arithmetic: the money won't be there. What I find most objectionable about the situation is the insistence of those in power that we twiddle our thumbs and pretend that there is no problem, or the problem can be fixed using the same methods as in the past—while at the same time they exacerbate the problem by trying to "fix" other problems with deficit spending. But, hey, they'll get their retirement, no matter what.

(4) What Mortimer is saying doesn't seem to disagree with what I had said previously.

Plus a bunch of other thoughts, which I deleted.


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