How to Survive the Coming Retirement Crisis

 

In my MarketWatch column this week, I laid out why a Retirement Apocalypse could hit during the 2020s.

You can read the whole piece here. But these are my main points:

  • If current trends continue, the Social Security and Medicare trust funds will run out of money over the next 15 years.
  • The 2020s will see a bear market in stocks and an economic recession, which could decimate Baby Boomers’ savings just as they retire.
  • A decade of low returns in stocks, which may follow our current decade of spectacular outperformance, would be disastrous for state and local pension funds and the governments that fund them.
  • Tax cuts and Congress’s recent  spending spree will mean trillion-dollar deficits as far as the eye can see, giving the federal government little wiggle room when a recession and bear market hit.
  • The federal funds rate is still only 2% and the Federal Reserve has more than $4 trillion on its balance sheet, so it won’t have many tools to fight the next recession.

This would be a very, very bad scenario. How should investors prepare? Here are three things to do and not to do.

First of all, reduce your stock holdings. A study by Fidelity a couple of years ago showed a third of its clients who were close to retirement had a higher percentage of equities in their 401(k) accounts than the firm recommended.

After a nine-year-long bull market, it’s way too late to get greedy. Don’t expect a continuing stock boom to bail you out of savings shortfalls in the past. Instead, we’d suggest taking some profits and reducing your equity holdings. Our GoldenEgg Investing® retirement investing plans suggest anywhere from 40% to 50% in stocks, depending on your age and risk tolerance.

Second, avoid emerging markets—period. Emerging market stock markets are getting pummeled as the dollar rises and these indexes’ overconcentration in Chinese stocks exposes investors to the latest bear market in that rigged, corrupt economy. At GoldenEgg Investing®, we don’t recommend stand-alone emerging markets stock funds, but our suggested international stock funds and ETFs give you all the EM exposure you’ll need.

Third, avoid high-yield bonds. Corporations loaded up on debt over the last decade as super-low rates gave them an offer they couldn’t refuse. Now some major companies are overleveraged, and that could be a problem when the next recession hits. High-yield bonds will likely be the first to default if and when the economy goes south.

Every investor should be able to follow these simple rules to protect him or herself in case the worst happens. (See our investing plans for more detail.) We won’t be publishing next week because of July 4th, so happy independence Day!

 

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