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The Coming Mother Of All Bailouts That Nobody Ever Talks About

30 April 2009 13 Comments

Bailout is a word that you hear a lot these days.  We’ve had bank bailouts, auto company bailouts, even “bailouts” of home owners who are under water with their homes.  We’ve bailed out municipalities and insurance companies.  Arguably, there are more to come.  Perhaps, commercial real estate?  None of these compare to the mother of all bailouts that is a near certainty in our future.  Read on to learn more.

The mother of all bailouts that is coming, or maybe I should call it the mother of all crises, is retirement funding.  The reality is that the vast majority of Americans have nowhere near enough money to live on in retirement, even when social security is factored in.

I did some research, and it looks like the concensus retirement savings for baby boomers (ages 45-62) is somewhere between $50,000 and $75,000.  This does not include equity in a home because, well, most people don’t have any left and if they do, remember people still need to live somewhere when they’re retired.  Lastly, these numbers were taken in many cases before the recent stock market crash and the real estate crash.  The statistics are likely to be way uglier today.

It is absolutely insane how little the average American has saved for retirement.  How this can happen is beyond comprehension.

Social Security

Social security is under water.  It’s a huge ponzi scheme that has no money.  It pays people out by taking new contributions and distributing it out (Hello, Bernie Madoff).  It is ill prepared to take care of the huge increase of retirees as the baby boomers retire.  Plus, if we have any levels of inflation (which are very likely down the road), anyone on fixed income gets killed by inflation because their payments lose purchasing power.

Inflation

While most people have a tough time seeing inflation ahead because of all the talk about deflation, it is unlikely that we will have any level of recovery in our economy without some level of inflation.  This means that purchasing power is lost on savings and fixed income.

All Roads Lead To The Government

Add this ugly picture up and the road leads to one place: government.  With millions broke at an old age, the government and its politicians will not waste an opportunity to “help out” the American people.  The government will more than likely add retirement assistance programs with fancy titles like “The Amreican Rescue and Retirement Success Act” and try to put more money into social security.  There are only two options to fund this: print/borrow money or raise taxes.

Won’t People Just Work Longer?

Yes, some people will.  But, this is a decision that most do not want to make.  How much easier is it to vote for a politician that promises to provide you more assistance so you can enjoy your retirement!  Do you really think this won’t happen?  If you don’t, you must have been asleep for the last six months.

Reality and Action

As a productive citizen in his 20s, I am aware that I along with my peers will be forced to shoulder this burden.  It is likely that I will pay heavy taxes down the road to fund retirements of millions of people.  Also, any additional national debt or printing of money will come with heavy inflation which affects the purchasing power of my currency.  It is this very likely scenario that I must prepare for, and so should you.

While my first instinct is to complain and get pissed off about this scenario, the sad reality is that it won’t do anything.  Worse still, there’s probably nothing I can do to help our society avoid this scenario.  The only thing left to do is prepare for it and hedge against it with my financial decisions today and tomorrow.

To combat future inflation, I must have some of my assets in gold or other inflation-protected assets such as stocks.  Also, to combat the taxation of my money, I need to make as much money as I can now before such a crisis hits.  I need to work hard and save my money.  Unless the government sets its eyes upon savings (which could happen), the money I save now will be very beneficial down the road.  If you already have a nice level of net worth, you may want to consider having some money out of the country (consider it “diversification”).

Lastly, keep your eyes open.  The financial state of this country as a whole down to the level of the individual is overwhelmingly terrible.  When backed into a corner, mankind has a tendency to do whatever it takes to survive including taking from others.

13 Comments »

  • jimbo jenkins said:

    I saw a commercial by the government of Macedonia the other day, they were touting their low tax rate. I can definitely see a mass exodus of business out of the U.S. if the capital gains tax get any higher. The Bahamas sounds enticing as well!

  • Caleb said:

    This is right on! It is nice to hear somebody talking about this in the open. Great article.

  • Tim said:

    “It is absolutely insane how little the average American has saved for retirement. How this can happen is beyond comprehension.”

    Perhaps the systematic degradation of our unions has something to do with it? Or maybe the shipping of our jobs overseas? Or maybe cutting social services that help Americans save more for retirement in order to give tax cuts for people who don’t need them? Or the cost of a college education skyrocketing?

    In the real world, people cannot control everything that happens to them and their retirement funds. Maybe you should examine other possibilities than people just being stupid with their money and getting what they deserve.

  • Kevin said:

    or…… people should stop spending 105% of their paycheck.

    by systematic degradation of our unions, do you refer to the demise of GM/Chrysler? In those cases, you can have a strong union, but there will only be a handful of members since the business model is so terrible. I don’t blame the unions for fighting for their own interests, but don’t complain if those interests impact profitability which impacts the number of employed workers there.

    what do you propose is done about college education costs? I got it… let’s make college free! Then, we can all be smart and rich!

  • zeromoney said:

    $50,000-75,000????

    that’s amazing/remarkable/embarassing

    I don’t understand how anybody anywhere could ever want to rely 100% on someone else to provide their basic essentials needed to survive.

    Canada probably isn’t much better off.

  • Amy said:

    What do you think about investing in TIPS? I’ve been thinking about putting some of my investments in a TIPS based EFT. I’d love to hear what you think about those.

    Also, my husband and I have been looking into opening a bank account overseas so some of our money is kept in another type of currency altogether. I see it as just another way to diversify.

  • Kevin said:

    Amy,

    TIPS are ok. They do the job to an extent, yet remember they are based on the government’s own inflation numbers, mainly the CPI, which I find to be very flawed. Plus, I don’t trust the government on inflation anyways. But, this is a very long discussion.

    If you really want inflation protection, you’re better off with gold. Gold is independent of any one government. If you’re weird about putting all your money in gold, consider buying some TIPS and some gold.

    Check out GLD and the gold mining stocks (GDX, AUY, etc.) which will benefit from higher gold prices.

    Good luck!

  • Johnny said:

    To tell you the truth, I’m strongly exploring the possibility of leaving the United States. We’ve strayed so far from the limited government described in the Constitution and when that causes disasters people just demand more government. It’s a death spiral that I don’t think we’re going to recover from. There are just too many people who were not properly educated about the founding who will never understand and will always vote for the politician who promises them the most.

    Because of my extensive travels abroad I have a lot of friends and family in Asia.

    If I can save enough money to live without working I will buy a condo in Makati City in the Philippines. It’s a very nice area and the real estate and cost of living is surprisingly cheap compared to the US. It would be much easier to retire there than here.

    If I still need to work I will probably go to Hong Kong. Amazingly, the country is run by Communists and the tax burden is far lower than the US. More and more companies will relocate there as the US ratchets down on Corporations due to misguided populism and a government that is burying itself in debt.

    It hurts me to say this. The Founding Documents of the United States describe the greatest government ever created and the last few generations have killed it. I hope someone starts a new country using the Constitution as it’s model. If so, I’ll move there.

  • Everyday Finance said:

    It’s simple; they’ll close the gap in 20 years by “taxing the rich” and reducing our benefits (after we paid into the system in our early years; we’ll see a negative ROI on our SS deductions). Milk ’em for all their worth and since those at the top of the pay scale make up such a small portion of the voting population (while paying the majority of Federal taxes and SS revenues), the politicians don’t care. It’s all about winning the next election via the populist policy move; not about right and wrong or fairness.

  • margharita said:

    I’m really pleased someone is raising this issue. However, l agree with Tim’s views. When I think of the people I know in their 40s and 50s, they are constantly treated by HR as though they are already old and past it. This is absurd. Many of them look not much older than their early 30s and have a huge amount to offer. They’re willing still to take on new challenges, are hip enough with IT and often buzz with energy.

    Of course there are exceptions. But more and more they are the exceptions… So when will society ( that means us too) wake up and realize what damage we are doing to ourselves by treating this age group as have-beens. Society is creating enormous problems by not recognizing the self-destructive nature of ageism.

    Outsourcing is also contributing to the problem. Put bluntly, how can people save in the first place if they do not earn.

  • Kevin said:

    Sure, it’s impossible to save without earning. Most people do have jobs, however (even despite record employment), and until about a year ago, almost everyone had a job yet nobody was saving.

    A word about outsourcing… while nobody likes to get their job cut and outsourced, it’s important to remember that this is reality in a global economy. When your company outsources a part of their operation, it allows them to lower costs which allows them to be more competitive which maybe lets them keep YOUR job. It’s a shame that most people just view outsourcing as a way to put another million in the CEO’s pocket. The job of the CEO and management is to keep the company competitive and profitable. Sometimes, this requires outsourcing. What does a company look like when they lose their competitiveness and thus, profitability? Look no further than GM or Chrysler. Would you rather work for one of them?