I previously wrote an article highlighting the need for many baby boomers to withdraw prematurely from their 401(k) in order to pay for everyday expenses. the news is getting worse: Today, this Wall Street Journal Article highlights more data on boomers particularly, and their cutting back on retirement contributions:
Regular readers of my blog are not surprised about this data. Using retirement savings is one of the last straws before many consumers will have to “throw in the towel” and just quit. Let’s recap where we are shall we?
1. we have been experiencing higher prices on many items due to resource inflation caused chiefly by rising international demand and our weakened dollar. Subsequently consumers are feeling the pinch and cutting back spending on everything from restaurant meals to vacations.
2. mortgage rate resets have knocked many people out of their homes. You can read about this problem HERE since I already covered it and won’t waste time rehashing it. Furthermore in the mortgage market, home equity lines of credit are getting turned off by the banks, closing a precious faucet of money that many were depending on.
Editor’s note (7.3.08): MUST READ – Mr. Mortgage on Mortgage Modification
3. Companies are laying some people off and cutting back hours on other workers in order to cut costs.
Some consumers, as costs rose and income fell, turned to savings to make up the shortfall – which, with our national savings rate, did not last the average consumer very long.
Then they turned to their home equity loans – Some even paying their HELOC monthly minimum payment with money from the SAME LOAN! When the rates reset or they tapped out, they refinanced their line of credit with another bank – within the past 6 months, these have been getting shut down by most banks as houses are revalued and banks try to reduce their exposure to credit trouble. now this option is no longer available to rescue the consumer.
Then the consumers went to their credit cards – but with most near the maximum limit, and credit cards charging higher fees now on balance transfers & higher rates on problem borrowers, this strategy has become unavailable to many.
The consumer’s last option, before finally giving up, is to tap into his retirement account – and that is where we are coming to NOW – the end of the road. It is burned in many people’s brains not to touch retirement money – so if this trend is increasing, you can be sure we are coming soon to a mini financial armeggeddon.
The 2nd half of this year is going to be most interesting. If the above trend is true, we should see a jump in foreclosures and bankruptcies as consumers finish off their retirement savings. Couple this with the potential wave of Home equity line write offs that should show up on banks’ financial statements by fall, and we could have one ugly second half. As I have said before, we need to go through a period of pain before we can start growing again – the Fed and Congress would love to find ways to avoid this, but they can not – it will probably just cost you more in the end if they continue to try.
I imagine we will still get many calls for the annual “second half recovery” thesis, but I would file that under hot air (See my Fantasy vs Real Life article here). Too many analysts look at “valuation” in stocks and assume that the market is not overvalued and therefore, the market and economy will rise. But never doubt that sometimes, data inputs on an analyst’s model could be mistaken:)
Good luck and hope your week is going well!
FYI – More Reading: Aging Parents Scramble to Save for Retirement