Retirement no longer in sight?

If you're a baby boomer, your retirement plans have changed. So says the current BusinessWeek cover story. Author Chris Farrell says the hit that your 401k and other investments have likely taken in the last year means you'll be working longer. He demonstrates the impact of an incredibly shrinking nest egg with figures provided by economist Robert Shackleton of the Congressional Budget Office: Assume a married couple is in their early 60s earning $100,000 pretax a year. They need nearly $66,000 a year after taxes to replace 80% of their preretirement income, the standard guideline for retirement income.

If both retire at age 62, they'll receive more than $25,000 in total Social Security benefits and require a portfolio of at least $891,000 to generate the income they need, assuming normal life expectancy. But if the couple waits until age 66 to retire, their Social Security benefits go up, they have more years to feed their portfolio, and fewer years to rely on its earnings, so they need only $552,000 socked away. If they retire at age 70, they need only $263,000.

Anecdotally, I know a couple in their early 60s who were looking forward to retirement in the spring of 2008, nearly a year ago. The economy had gotten so shaky, though, that they decided to hang on a bit longer. That was before the Wall Street meltdown last fall claimed a piece of their savings. They're both still working and have adopted a wait-and-see attitude.

The silver linings? For most people, working keeps the mind sharp and provides a built-in social network. Read the full BusinessWeek story.

Beware the credit counselor

As if we haven't endured enough financial double-talk lately, the airwaves and our email are filled these days with offers to slash our credit card debt. Sounds tempting, but beware. A lot of credit counselors are up to no good.

Don't take my word for it--take the word of Elizabeth Warren, Harvard professor, author, and champion of the middle-class. In "All Your Worth: The Ultimate Lifetime Money Plan, she writes that "...credit counseling has become an industry thick with slick operators who do little more than take your money and leave you deeper in a hole." Some masquerade as nonprofit operations when they're not and many of them are run by big banks and credit card companies, she points out.

Other brands of snake oil identified by Warren: Credit repair offers, FICO repair kits, identity-theft protection and credit-card loss protection. This book was published in 2005, before the credit bubble burst. Its cautionary advice seems even more relevant today.

Adventures in frugality

Retail sales fell twice as much as economists thought they would in December, down 2.7 percent from November, the numbers-crunchers reported yesterday. Compared to December 2007, we consumers spent 9.8 percent less last month.

My guess is that this spending dropoff surprised economists more than the rest of us. With home foreclosures and the unemployment rate climbing, and investment portfolios falling, many of us have revised our shopping lists. We also are revising our shopping methods.

I offer my household as one example. My partner, Harry, and I wanted a carpet runner for our stairs. A few hours in the carpet store pointed to a price tag of $2,000 or so. We figured it was something to think about for a while. As we were thinking, the economy took a tumble down its own set of stairs, inspiring us to be creative with our carpet purchase.

Craigslist came through. We found a brand new carpet runner, purchased years ago but never installed. The owner, who lived five miles away, was moving out, the carpet was still rolled up in the attic, and she just needed to get rid of it. The size, colors, and pattern worked very well for us and the price was less than 10 percent of what we had considered spending last summer. What about installation? We found that on Craigslist, too.

What about you? Any creative shopping (or non-shopping) stories you can share?

Paradox or not, the party's over

Was it only a year ago that we were tsk-tsking over the fact that Americans’ savings rate had fallen below zero? We were spending more than we made, thanks to home equity loans, credit cards, and our vague notion that everything would work out—it always had.

Now, professional econo-watchers are tsk-tsking over the fact that Americans have snapped their wallets shut. In many cases, the home equity and the credit cards and the feelings of well-being are gone—along with the job. Consumer confidence is at an all-time low, down to 38 (100=1985, the year the measurement began).

Oh no, the commentators say, now that people have started saving. In an economy that is two-thirds consumer spending, how can we hope to recover if the consumer won’t consume? They have a name for this: The paradox of thrift. A healthy economy depends on a substantial savings rate; our unhealthy economy can’t recover if people don’t spend.

A critical example is the American auto industry, which suffered an 18 percent drop in sales for 2008 and will see a further 20 percent drop in 2009 sales, if forecasters are correct. If the Big Three American automakers went under, nearly 3 million jobs in the automaking industry and related services would be lost, according to the Center for Autmotive Research. Few people want to see the American automakers go under, but too many of us have been blown off the road, economically speaking. We’re supposed to keep consuming because the economy needs jobs? That party is over.

The country lost more than 500,000 jobs in December alone, a 200 percent increase from the previous December. Housing prices nationwide have dropped 23 percent since the summer of 2006 and are still falling. Credit card issuers are expected to lop $2 trillion off credit lines nationwide over the next 18 months, which translates to a 45 percent contraction in credit lines.
So, between the people who are unemployed , the people who no longer have home equity to tap, the people whose credit cards have shrunk, who’s left to spend?

Those who were savers, those with relatively large, secure incomes? Many of those people have seen their retirement nest eggs shrink, along with the Dow Jones Industrial Average. Many of them look at what has happened in the last year—on Wall Street and on their street—and they’re deciding to just say no to the big vacation, the beach house, the early retirement. Even if their personal balance sheet hasn’t suffered much, after the meltdowns, the bailouts, the Paulson schemes, the Ponzi schemes, who knows what lies ahead?

Most of us don’t have much control over what the policymakers or the macro economy will do next. But we do have control over the micro economy in our household. In this environment we get pretty clear, pretty fast, about what’s a necessity and what’s a luxury. That equation is different for everybody, but it’s a good bet that lavish restaurants, the leased Mercedes, the in-home theater, maybe even the weekly pedicure, are falling off the must-have list. Paradox of Thrift, meet the Need to Survive.

What do you think? Do you feel the need to spend to help save jobs? If not, what has fallen off your must-have list?