Ready to retire? Think again
Today's Financial News - Posted October 1, 2009
Retirement is part of the American dream. Unfortunately, the nation’s financial meltdown is making the act tougher than ever. Social Security alone won’t pay the bills.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Yesterday evening, I had the courage to do something I have not done in a long time. I opened my 401(k) statement. It was a brave, bold move that made me ponder doubling up on my blood-pressure medicine before ripping the seal off the envelope.
In the end, my ticker was fluttering with beats of joy: up 33% so far this year.
My decision to overweight the small-cap sector in March paid off.
Even with those strong gains, the long-term trend line shows my heart is going to have to keep pumping for a couple extra years before my wife and I are going to retire in paradise. Most retirement accounts, mine included, are nowhere close to where they were 24 months ago.
As the recipient of a defined-contribution plan, my retirement savings are in my hands. That is not the case for the folks still holding defined-benefit plans. These pensions, once considered a low-risk path towards a reliable retirement income, are becoming far riskier than many workers ever imagined.
As corporate balance sheets crumble under the weight of massive debt loads and reduced revenues, many companies are having a tough time coming up with their required pension payments.
Read through the financial rags and you will see companies are unleashing new shares of stock just to cover their obligations, skipping payments and backing out of pension obligations all together. It is not good news for the folks that depend on the funds to put food on their table.
It is also equally not good for those of us that rely on the equities markets.
More trouble ahead
Look at it this way. Institutional investors are responsible for about 20% of total equity assets. Out of that $20 trillion or so, pension funds are responsible for 40% of the trades. That is a lot of cash.
Unfortunately, many corporate and government plans are underfunded, meaning they have some major catching up to do.
A recent study shows over 20% of funds have “significantly higher” required contributions coming up. In many of those cases, the obligations add up to an increase of 50% or more.
That’s a big problem when many of those companies and governments are fighting just to make their weekly payroll.
There is no doubt we will see a wave of payment defaults in the near future. That means less money – much less money – will flow into the nation’s equity markets.
It is still too early to tell just how badly this will impact the markets, but there is no question it will be significant.
Dow 14,000 once again? Not anytime soon if corporation pensions fall apart.
Next Article: TFN eNews 10/01/2009: Long-term gains in this battered Canadian uranium stock?
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