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Friday, June 27, 2008

Watching one's retirement savings disappear
Posted by Jill | 7:12 AM
I know it's fashionable for younger people to blame the baby boomers for everything and to think that we're going to somehow be the beneficiaries of huge amounts of cash upon "retirement" after spending our adult lives buying SUVs and McMansions (never mind the reality that in my neighborhood, the boomers are driving Hyundai Accents and Civics and Corollas, while the younger people with little kids are still steaming around in ocean liners on wheels). But for most of us, that's not the reality.

I'm not going to say I did everything right. I moved out of my parents' house a year after graduating college instead of staying home and socking away what little was left after my meager retail management training program salary. Then I insisted on working in glamour industries, toiling as essentially a secretary in an ad agency and a major publishing company before deciding to "sell out" and going to work at Standard & Poor's in 1983. It really wasn't until I was well into my 30's that I was able to put away any kind of significant money for retirement. Today I put away over 10% of my pay and I receive a preposterously generous employer match. My account contains a good balance of stocks and bonds, along with a fixed income component. And almost every penny of both that I have put in this year has disappeared into the disaster that is the United States financial markets.

I know about investing for the long-term, but when you look at long-term fundamentals for this country, they look so bleak that it's hard to blame people for wondering why they should bother investing for future gain when it seems so unlikely that there will be any gain. My long-term timeframe suddenly isn't so long anymore, and it's hard to have any kind of optimism that this mess the Republicans (with the help of spineless, capitulating, corporate whore Democrats) have put us into is going to end in time for my money to not have gone down an empty hole.

Steven Pearlstein, in today's Washington Post:

This thing's going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We're caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of.

Only this will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations.

Since last June, we've seen a fairly consistent pattern to the economic mood swings. Every three months or so, there's a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports. Eventually, things stabilize and there are hints that the worst may be behind us. Stocks regain some of their lost ground, bonds fall and then -- bam -- the whole cycle starts again.

It was only in November that the Dow had recovered from the panicked summer sell-off and hit a record, just above 14,000. By March, it had fallen below 12,000. By May, it climbed above 13,000. Now it's heading for a new floor at 11,000. Officially, that's bear market territory. We'll be lucky if that's the floor.

In explaining why that second-half rebound never occurred, the Fed and the Treasury and the Wall Street machers will say that nobody could have foreseen $140 a barrel oil. As excuses go, blaming it on an oil shock is a hardy perennial. That's what Jimmy Carter and Fed Chairman Arthur Burns did in the late '70s, and what George H.W. Bush and Alan Greenspan did in the early '90s. Don't believe it.

More here.

The real estate crash has hardly even started. Diana Olick at CNBC reports that realtors are telling her that fully a third of sales are distressed properties -- short sales and bank-owned properties.

Here in Bergen County, over a quarter of recent foreclosures have higher judgments than the average purchase price, which means that a good portion of the hammering and nailing and contractor signs and gourmet kitchens with granite countertops that was going on in my vicinity during the last five years and the multiple SUVs in the newly-expanded paver stone driveways was paid for with equity loans taken at the time homes were purchased -- betting on huge price increases in perpetuity.

Houses in my neighborhood are selling once they reach the right price, but so far it looks like many sellers are still not ready to admit that they missed the boat. Not far from where I live, on a main road, is a house very similar to mine, except that it appears NOTHING has EVER been done to it. It started out at peak 2005 price about six months ago, and it's still sitting at a price that's been reduced by over $50,000 -- and is still probably around $30,000 overpriced. One spec house -- a McMansion, of course -- has been on the market for almost a year, and the photos taken by the realtor the builder is now using show a house with bare sheetrock -- not even a coat of primer on the walls. It's listed at close to a million and a half -- still at the original listing price. It has no landscaping and no driveway and it's being sold as having custom landscaping and granite countertops in the kitchen.

And this is an area that hasn't been hard hit yet. But nationwide, a second round of option ARMs is resetting early next year, and then, my friends (as John McCain would say), we are really going to see the feces hit the fan.

It's hard to feel sorry for the very people who would have looked down their noses at me for my cabinet reface job and my refusal to take out a loan to get the "dream" kitchen I would have really wanted -- and are going to find themselves underwater in six months if they aren't already. The problem is that their folly is going to hit everyone around them. It hits in neighborhoods where houses that look as if they were nicely maintained before the bank took them are now boarded up -- affecting the neighborhoods around them. It hits in yesterday's 300-plus-point drop in the Dow, because people are either overextended or afraid that no matter how careful they've been, it's all going to come crashing down around their heads.

Which brings us back to disappearing retirement savings. It's one thing to face that you no longer live in a house worth almost a half million dollars. More than once I've sat in my kitchen with the half-finished reface job and the harvest gold wall oven and the ugly 1970's yellow geometric sheet vinyl floor and said, "No way is this a half-million dollar house." But when we've heard for years from politicians and citizens saying that people who haven't saved enough have no one but themselves to blame, at the same time as we ARE doing what we're supposed to -- foregoing short-term gratification for long-term security -- and seeing the money we're trying to put away for the future disappear as if we were lighting a match to it, it's difficult to judge others who have wanted to at least see trinkets as tangible evidence that they once had cash.


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Blogger J said...
One week while driving to visit my mom, I listened to a very interesting collaboration between NPR news and This American Life, which REALLY broke down how this whole housing crisis came to be, and why the shock waves are as strong as they are. Anyone who's interested can find a free podcast here: http://www.thislife.org/Radio_Episode.aspx?sched=1242

The whole thing truly pisses me off, because people are losing their retirements, and people (aka, my husband) are losing their jobs, and the reason all of this is happening is plain, unadulterated GREED. People working for easy money.

Thankfully, we're conservative with our money, and while we did refinance and take some money out to fix things up (we were hoping to sell...HA! We live in CA!), we didn't take much, and our place is still valued at much more than we owe. I hope it stays that way. We'll see. The key with these things seems to be to ride them out. Sadly, if you're retiring, you may not have time to ride them out. Or if you HAVE to move, another time when you may not be able to ride things out like you may want to.

Anonymous Anonymous said...
I can commesirate with you over lost retirement investments. Note that I did not call it "savings". They aren't savings, savings would be covered by FDIC. I didn't do everything correctly but when my non-profit employer began matching the 403(b) contributions, I started a plan. In the 1st quarter of 2008, it lost all the new contributions I made in 2008. We'll see how it goes for the second quarter. And I have it invested quite conservatively. (If I sound snarky, I don't mean to be. It just pisses me off that investments get called "savings".)

Blogger Taradharma said...
omg, I have not even looked at the performance of my 403(b) plan. I've buried my head in the sand.

I'm going to listen to that podcast jellyjules recommended. I have heard some of the analysis, and much of today's bank/lending issues are the same ones that came out of the 1970s lending collapse. No one learns.

Blogger TinaB said...
My egg isn't growing, because I bailed out of the market as the year opened -- but it hasn't dumped a huge part of its value, either. I have no house, but rent has been stable for 10 years. I'm not doing fabulously, but I'm not being ruined, either.

People still in the market are hurting.

Anonymous Anonymous said...
Came here when I noticed you quoted one of my posts.

For some reason reading other comments on the state of the economy and housing is more depressing than writing about them. Almost makes me want to build a bunker and hide in it.

Unfortunately, a lot of people aren't able to save like you've been able to do. Even with 2 or more jobs in the family some people are still having a hard time making ends meet.

From some of the data I've seen, it was the lower and middle income families that were the ones that were buying homes way above what they should have been allowed to borrow. Whatever savings they might have had went into their home and in many cases they can no longer afford them and they're worth less than what they currently own. In some cases much less.

I knew things were a mess, I just didn't realize how much of a mess until I started looking at some of the foreclosure data here in Bergen County.