The London Associated Press noted today that the 16 countries that make up the European Union or euro zone saw their economies shrink by 2.50% in the first quarter. In fact, Germany, the world largest exporter, saw its economy shrink by 3.80%. It’s the country’s biggest economic contraction since 1970 when West Germany began compiling records.
The governments comprising the euro zone are optimistic that the large interest rate cuts, stimulus spending and aid given to struggling banks will result in the first quarter of 2009, marking the low point of the recession.
Economies, the stock market, and standards of living have historically all grown / increased over time. Expansion is their natural trend. However, they experience periods or cycles of contraction (i.e., recessions), within this long-term trend of expansion. Currently, all of the previous mentioned (i.e., global economies, stock markets and standards of living) are experiencing contraction. However, if we were to view their historical pattern over the last 20, 50 or even 75 years, we would see periods of contraction within their overall expansions. I bring this up because we have all seen and benefitted from the expansion periods, and we have and continue to feel the ill effects of a severe contraction / recession.
In fact, today’s Wall Street Journal noted that economists who participated in their survey see an end to the recession by fall, but say it will take years for the economy to fully recover. Of the 52 economists surveyed, 24 believed it will take the U.S. three to four years before domestic productivity will eliminate the “slack” created by the recession. Thus, almost half those surveyed believe it will be three to four years before we reach prior productivity levels and actually begin expanding again, but at a much lower rate than in the past.
When inflation does eventually heat up, older Americans will be hit especially hard
The U.S. Labor Department’s Bureau of Labor Statistics’ (BLS) created an experimental consumer price index (CPI-E), an index designed to track the cost of living for those aged 62 and older. What the BLS found was that this experimental index rose faster than the costs for the general population. This was due to costs associated with medical care and housing, which are among the top expenses for seniors. These increased more rapidly than overall inflation during their study period.
As such, retirees may be more impacted from future inflation as they often live on a fixed income. This can leave them stuck between a rock and a hard place given inflation can tend to run a bit faster for them than for the general population.
As such, this sector of society may need to become more financially flexible and adaptive in the years to come, which I’ll address in the following paragraphs.
Lagging benefits
The Senior Citizens League, one of the nation’s largest nonpartisan seniors groups, released a study this week that noted senior’s are seeing their buying power diminish. Since 2000, the Social Security cost-of-living adjustment (COLA) has increased average benefits just 31% while typical senior expenses have risen more than 58%. As previously discussed, much of this due to housing and medical care representing two of seniors’ top three costs, and both of them outpacing the general inflation rates.
Due to these results, the Senior Citizens League is pushing for a change in the index used to determine the Social Security COLA. However, I believe it will be hard to argue for any upward adjustments for future COLA. This is especially true when the government announced this week that both Social Security and Medicare are projected to become insolvent sooner than expected, due to the recession’s impact on tax receipts. Currently, there is talk that to stall this ever-increasing problem some or all of the following will be considered: taxes will be increased on both workers and retirees, benefits will be reduced and the age for eligibility will be increased.
What are my living expenses and how can I keep them in check?
This reinforces why it is even more important for retirees to live within their means, which will mean focusing more on their own consumption (i.e., creating a budget and sticking with it). Upon reviewing what your current and future expenses will be, it is important to realize which ones may track at a higher inflation rate, such as health care costs. In addition, it’s likely that you’ll spend more on travel and entertainment in your earlier years and more on health care in your later years.
Investing differently
Inflation is one of the major risks in retirement that is often overlooked. Prices for all goods and services trend up over time. That cruise you took to Hawaii in 1995 may cost double or more today, and will surely cost more in the years ahead. The same goes for food costs, or consider what your real estate taxes are on your home today versus say 10 years ago. On second thought, maybe we don’t want to go there.
The best way to offset the effects of inflation is to diversify and have some of your funds in assets whose value may grow in times of inflation. For example common stocks, inflation-indexed Treasury bonds, commodities and natural resources. Parking all your funds in low-yielding CDs, government bonds or annuities at current return rates of 2% to 4.5%/year will not suffice. The current income will be insufficient and at some point, you will be depleting your principal just to cover monthly living expenses.
For those of us still working or not accessing our retirement funds, we have time on our side. This allows the
growth-oriented investments in our portfolios to recover to higher levels in the years to come. However, retirees are most often tapping their retirement funds to cover current living expenses and desire that these funds remain level or actually grow over time to offset the effects of inflation (as previously discussed).
What are we doing about it?
This is why, for retirees and money currently in cash or money market, instead of focusing mainly on CDs, government and municipal bonds, I am opting for intermediate bond, income-oriented and balanced mutual funds. These bond and income-oriented funds will fluctuate in value, but have current distribution rates or yields ranging from 5.39% to 9.79%. While the balanced funds offer minimal current yields, they do offer the opportunity for double digit returns in the years ahead. As with any investment, there are no guarantees and I don’t expect any one of these investments or a combination thereof to make any of IIA’s clients rich. However, I do expect the asset mix I am selecting to offer much better total returns (i.e., income and appreciation) in the next five years than what we would get from other fixed income options mentioned above.
If you have any questions regarding your investments and any trade tickets you have or will be receiving in the future, please don’t hesitate to call me.
Events
Save the Date!!!! IIA will host a Client Appreciation Event on June 24th at the Deer Creek Apartments Clubhouse from 4:00PM to 7:30PM. This will be a chance for you to connect with our staff and enjoy some fine food and drink. You will be receiving a more formal announcement shortly.
For all other upcoming events, please visit our web site at http://iia-kc.com/events/
Quotes
“If your outgo exceeds your income, your upkeep will be your downfall”
Richard Johnson, PhD
“Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you!” Pericles, Greek statesman (430 B.C.)
“I don’t make jokes. I just watch the government and report the facts.”
Will Rogers, humorist
Tony Moeller, President
Integrity Investment Advisors, LLC
12721 Metcalf Ave., #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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