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March 16, 2020
Here are some thoughts from Jim Seifert on the economy and retirement amid the coronavirus crisis.
Jim was a serial entrepreneur from age 17 until age 40. After which he was a financial Advisor for RBC Investments and Merrill Lynch Bank of America from 40 until 58. He has an MBA and CFP(r) and worked with HNW and UHNW in 26 States. He is also a retirement benefits advisor, 338 fiduciary. He has designed and implemented retirement benefit plans for entrepreneurs and professionals (physician and law practices).
For persons with a diversified portfolio of stocks and bonds, retirement shouldn’t be derailed or even necessarily postponed due to a sudden drop in the market value of their portfolio. Typically the equity portion of a re-balanced portfolios recover at the same pace as the market. Time is the critical component that many fail to recognize as a primary driver of portfolio value.
Retirement planning may need to be adjusted to incorporate the current value of the portfolio. The key is whether the portfolio was properly diversified prior to the market decline. For many, a great portion of their wealth is within real estate (their home(s)) and in their tax deferred savings accounts. Rash decisions should be avoided and market portfolios should be re-balanced in light of the market downturn.
For many, portfolio re-balancing is automatic in their 401(k) or other retirement accounts. In the event that it is not, re-balancing should be done manually, ensuring that at least 50% or more of their portfolio is in
equities. Even for older, retirement aged persons, a moderately equity allocated portfolio will outperform a more conservative portfolio even accounting for periodic market decline and recoveries.
Job losses for persons 50 and older can be devastating emotionally and financially but the impact is a recoverable impact. The challenges posed in the statement may be more challenges of “ability to find happiness” rather than “ability to “survive financially”. Financial reversals happen all the time and many financial reversals are “unrecoverable” vs. the financial reversal of a market downturn which, statistics tell us, is recoverable as the market recovers. Divorce, business failure, illness of self or a family member, caring for elderly parents or a disabled spouse or child can be financially devastating and irreversible, yet many survive and thrive despite the event that “resets their world.”
The response to this statement could be, “it depends”. If you are in a job that you love and are fulfilled in the job, then by all means, continue to work. Studies have shown that persons who are happy, fulfilled and feel valued in their work can be less stressed and more healthy than persons who are retired and restless.
Job availability assumes that there is a working economy. Unless the assumption that this COVID issue is an extinction level event that would reverse human technology gains by hundreds of years, economic activity will continue. Human history is full of examples where the workforce is depleted. US domestic workforce in WW2 and post Civil War are two examples. Kaiser Family Foundation statistics show 29% of US population is 55+. Only 19% of the population is19-34, vs. 26% in the 35-54 age range. Job growth (albeit in new industries) will require workers in the 50+ cohort until the youngest cohort (19 and younger and 24% of the population) are fully trained and engaged in the workforce. In my opinion, job availability has more to do with training than with “job availability”. Suddenly retired and not by choice? Take a coding course, be a delivery driver, teach, be a barista.
With the exception of communities that have highly restricted building codes (California) or areas experiencing rapid population growth (Austin, Denver), for the most part, the real estate boom that lead to the 2008 recession has not recovered, mostly because the availability of a cheap mortgage available to low credit borrowers hasn’t been available. Home ownership (home, condo, co-op, townhouse) is no longer a source of significant wealth except for those who purchased their home in a desirable real estate market decades ago.
For those, the decision will need to be whether to monetize their “investment” in their property or stay in their property and accept a retirement lifestyle that is less than what would otherwise be affordable. Historically low mortgage interest rates, coupled with relaxed credit rules may actually spur housing stock appreciation. Whether real estate or any other asset, the fruits of asset appreciation are only realized after the asset is liquidated.
FinTech – I had to google the term – is technology with respect to the financial system. The financial system in general was one of the first industries to incorporate computerization and electronic technology. Before that, the financial system was the first to adopt technology. A banking system of “cheques” or “Letters of Credit” from the middle ages allowed traders to travel without carrying huge amounts of tender. Manual adding machines with a paper tape allowed banks to manage transaction accuracy. FinTech is just natural evolution, not something new. Persons in the financial industry need to enthusiastically adopt change and evolution or perish.
The health care system is already changing. Health Care is a huge, industry and will likely not change easily or readily. That said, there is strong will and desire for health care to be available to all or most. Health care is to some extent a proxy for the choice between a more free society and an society with more governmental control over citizen’s lives. That this issue is highly contentious in American society, which was established on the principals of individual freedom isn’t a surprise. t
Whether you vote blue or red, the reality is that illness is just one other peril that can be insured against. In order to make health care affordable to all, all will need to be a part of the same health care system to some
extent. The premiums that healthy people pay, cover the costs of sick people. The concept is very much like whole life insurance. Whole life insurance is relatively inexpensive life insurance if purchased when very young. If a buyer waits until they are older, statistically at a higher risk for death, whole life becomes cost prohibitive. What makes whole life insurance work is that you pay for it even when you don’t statistically need it, so when you do statistically need it, it’s there.
The concept is no different for health insurance with one exception. Health insurance is for the living. Young healthy persons can save money on health insurance if they purchase low cost limited benefit health insurance. This strategy works great unless the younger person, against the odds, develops a serious illness or has a serious injury, at which time the low cost health insurance becomes useless.
An older person, who is much more likely to have greater health care needs, cannot afford the total cost of their health care. The only way to spread the risk is to require younger workers to “pre-pay” their health care costs for their old age. Whether single-payer, Medicare for some, or ACA, a system needs to be in place for health care costs to be managed at all ages. It’s that simple.
For older Americans the answer is Medicare, which works reasonably well. The missing link is affordable insurance for individuals and families whose insurance isn’t subsidized by their employer. ACA is a step in the right direction, and typically works pretty well for the lowest income levels who qualify for a large ACA subsidy or State Medicaid. ACA fails for the self-employed or gig economy worker or family who typically finds that their medical insurance premiums, deductibles and out of pocket medical expenses that are not included in deductibles can rival their housing costs. In high living cost markets, something has to give and often its health care vs. a roof over your head.
Many arguments can be made that while Pension Plans offer certainty to retirees, they aren’t very efficient financial instruments and often fail to keep pace with inflation, particularly as retirees live longer.
Further, pension plans have default risk. When pension plans (or the company that sponsors the plan) default, the resulting minimum guaranteed benefit is often a small fraction of the original or promised benefit and often occurs at a time where the worker or retiree has no chance to recover financially. Ask United Airlines employees what happened to their pension when United defaulted in 2005.
Families need to communicate and participate in the care of the older members of the family. Conversely, older members of the family need to communicate and ALLOW younger members to care for them. This is much easier said than done in a society that has steadily devalued family relationships over the last century.
Today’s families are impacted by the re-bound generation. Boomer’s children returning to the nest in times of financial or personal stress. COVID-19 career fall out will probably impact many extended families. Having a frank discussion with your kids about how they can manage their finances in the event of a job loss is critical before the event happens. Being prepared to help financially intergenerationally will likely take sacrifice on both ends of the generational spectrum.
Retirement plans, trips or other discretionary expenditures may need to be postponed or cancelled in order to redirect resources to those temporarily affected. It’s important to have the conversation as to whether such help is a gift or a loan so that misunderstandings are minimized once the crisis has passed. For generations looking at retirement within a few years, “couple-event”’ risk is real. Market declines coupled with re-bound kids can create a doubling impact on retirement spending at a time when retirement spending especially needs to be controlled.
See comments above re: FinTech. As always, economies are disrupted by evolving technology; fire, wheel, bronze, iron, Industrial Age, computer, internet, etc. This is a given and from a long-term point of view, you could say that technological evolution is a constant in the equation of economic progress. At the margin, workers, livelihoods and individual economic stability will always be disrupted. From that perspective it is an individual’s responsibility to not be marginalized negatively. Updating skills, education, careers is the worker’s responsibility in our economy. Social safety nets for those who cannot for whatever reason upgrade their skill set is the backstop, not the primary option.
Work is going to change forever. More distributed working, living and learning. Today my wife, a teacher, tutored a student physically located 1900 miles away. This is a good thing. No longer is it necessary to live in the huge city in a tiny apartment. You can move to the country or a small town and have the same career you would have in the city. In the next 100 years we may have a reverse migration back to the country. Automation will likely free workers from mind numbing low paying rote work.
Remember Charlie in the Chocolate Factory? Charlie’s parent’s job was screwing the lid on top of toothpaste tubes. Low to no skill jobs are disappearing forever. It is incumbent on the worker to be educated and have a marketable skill. There will still be a high demand for skilled labor, just as there is now. Control machine operators, trades, hospitality, entertainment are just a few of the many career choices that are skilled and semi-skilled and in high demand.
I’m no economist, but I view economies as an equation with inputs equaling outputs. Consumer Demand, Government Spending, Inflation, Stock Markets and foreign trade all combine to roughly equal the sum of the wages we all earn.
From this perspective, if you ask yourself, how was the economy functioning prior to the COVID-19 Pandemic? And then ask yourself, “What has changed as a result of the COVID-19 Pandemic”? You can realistically frame what the economic impact will be over the long run.
The economy, as a whole, globally, was functioning reasonably well prior to the pandemic. All economies and the global economy itself go through up and down business cycles. Prior to the COVID-19 economic shock the secular bull market and generally positive GDP were still moving ahead. Although there were some signs of a cyclical downturn, those signs were related to factors other than COVID-19. So the economy wasn’t going to immediately fail if COVID-19 had not rapidly pushed it over the brink.
We don’t immediately know the overall effect of the business slowdown that is occurring as a consequence of COVID-19. We can probably draw some reference from other global events that have happened in modern
times. We can look at the Spanish Flu Epidemic, The Great Depression and World War II as three events that dramatically altered or impacted economic activity during the years that they took place. Two of the three were exogenous to normal economic activity and one (the Great Depression) was the result of market forces and a ham-handed government response. However, in all three cases, within a decade or a little more, GDP had recovered and surpassed the economic downturn that had happened.
This gives us hope. Economies, markets, countries, political systems and societies are all made up of humans who are amazingly, remarkably resilient. Even in the depths of the current crisis human ingenuity and a capacity to care for others is, despite political, economic and supply challenges is breaking out all over. Thousands of home sewing machines are churning out millions of cloth masks. Mask manufacturers, in a matter of weeks, have doubled production and are laying production capacity that will be an order of magnitude of what it is today. Liquor manufacturers have literally, almost overnight, switched production to making hand sanitizers by the ton. Engineers are re-tooling production lines to manufacture medical equipment in short supply. All in a matter of days and weeks.
This is where the US shines and how the US will, along with some bumps and bruises, rise, survive and thrive.
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