Are You Ready?

Back in August I recommended that everyone should perform a financial checkup as a part of the financial planning process. Well, did you get your checkup? I would guess that probably fewer the 1% of the population does any kind of annual financial planning.

Recently I discovered a handy little tool that you can use to calculate your retirement income. http://www.dinkytown.net/java/RetirementIncome.html It will only take you a few minutes to fill in the blanks. For starters just use a general estimate of your retirement savings and your yearly contributions. When you work through the process do not use your estimated Social Security payments. It wont be around anyway. Ill talk more about that in a minute.

Use a reasonable return percentage for your investments. Based on my research, most people should reduce their estimates to 5% annually. That a big drop from the 10% we are told by investment advisors that we will get, but I believe it is more accurate for the immediate future.

What most people will find when they work through this process is that they are woefully under funded when it comes to retirement. We have mistakenly been told that we can save one day of earnings to pay for two days of retirement.

The problem is the Federal Reserve continues to inflate the money supply and this results in increased costs for those things we will need during our retirement years.

You should not consider your house as a retirement asset either. If you need a place to live, you cannot sell the house to raise funds without buying or renting something else.

Additionally, we are being warned on all fronts that the housing market has become a bubble and in light of the current market conditions, ripe for the popping.

Consider this. In two weeks a new law goes into effect that drastically limits who can declare bankruptcies. The law also requires credit card companies to change their payback requirements, which will double most peoples minimum monthly payments.

Lenders have begun tightening standards and increasing the margins on all risky home loans. It is estimated that 70% of all loans this year fall into the risky category. Risky loans include option ARMs, short-term ARMs like 5/1s, and interest-only loans. We are definitely entering a more challenging and unstable housing market where prices could drop in many areas of the country by 25-35%.

Ask yourself these questions, if the value of my house drops by 30% how will it effect my retirement, my ability to refinance, my ability to sell, my ability to buy, and my ability to access cash?

There are other factors, which are going to weigh heavily on the economy in coming months or years. As I have been saying for some time, Social Security is not going to be around when most of us reach retirement age. I know that the politicians promise that everything is ok, but they are only trying to protect their jobs until they are ready to leave office and retire.

Lets look at some facts. For the past 13 years the federal government has been borrowing all of the surpluses from the Social Security Trust Fund. All $1.4 billion dollars. Instead of investing in marketable securities such a government bonds, the Social Security Trust Fund has been accepting non-marketable notes, which are nothing more than IOUs.

Social Security cannot sell those notes on the open market; they must redeem them from the government. Fed Chairman Greenspan, in a recent speech warned that the Social Security Fund would begin operating in the red in 2008. At that point, the SSA will have to begin to redeem those IOUs in order to meet demand for retirement benefits, but where will the government get the necessary funds to pay up?

That brings us to our next factor. Lets take a look at the financial condition of our own government. These numbers are available at the governments own web site. http://www.publicdebt.treas.gov/opd/opdint.htm The US National debt is $7 Trillion. US Government Income is $1 Trillion. (This number does not include funds that go into Social Security or Medicare) The US annual deficit is $.5 Trillion. The current interest rate for all of this debt is right at 5%.

Now if we assume that these numbers are fairly accurate and if they remain constant over the next few years, which means no new debt, and if interest rates continue to increase at a rate of just 1% per year, by the year 2011, 100% of the total US income will be paid out as interest to the holders of US debt instruments. Thats just five years from now and if interest rates increase at a faster rate, the day of reckoning will arrive sooner.

Does that put the fear of God in you? It should. It sure does me.

How do we prepare for such an event? More on that in my next post.