News Archive

Last week I read the article linked below about the recent jobs report.  The author’s basic premise is threefold:

• Local and state governments are cutting employment which hurts the economy.
• Government cutbacks are offsetting the additions being made by private industry thus undercutting the efforts of the private sector to increase total employment.
• Cutting government employment isn’t really the answer as the biggest problem with the Federal budget (or lack of budget) is out-of-control entitlement programs.

With all due respect, I disagree with the author’s premise almost across the board.  First, the Federal government has grown in a disproportionate way relative to our overall economy for years.  The chart below, prepared by Jim Bianco of Bianco Research, shows the percent of our total economy represented by Federal outlays.  As you can see, our current position is the highest in history other than during WW II.

As you may be aware, the French held an election yesterday and the socialist candidate won against the current President, Nicholas Sarkozy, a moderate and a supporter of Angela Merkel, the Chancellor of Germany (see first linked article below).  Why should we care about this?

I want to share some thoughts this week on an investing idea that doesn’t get as much attention as I believe it deserves – bonds. Not US government savings bonds – corporate and municipal bonds.

Over the past year or so, I’ve had many people ask what alternatives are available to a CD paying 0.5% or a money market account paying 0.1%. Depending on the person’s circumstances, I have often suggested bonds. Why? Three reasons:

• The interest rate being paid by the bonds’ issuer is guaranteed by that issuer for the length of the bond and cannot be changed. There are a number of bonds available in the market today that have interest rates in the 4-5% range.
• While not backed by the FDIC (which guarantees bank CDs and money market accounts), corporate bonds are backed by the credit worthiness of the corporation which issued them (American corporations have an estimated $3 trillion in excess cash on their balance sheets today) and municipal bonds are often backed by the full taxing power of the municipality. The default rate on both municipal and investment grade corporate bonds has historically been very low – see the table below.
• While bonds are subject to variations in value based on interest rate changes in the markets, their volatility has historically been more subdued than that of stocks and stock mutual funds. By example, the Barclays Capital U.S. Aggregate Bond Index had a volatility index of 5.3% for the period 1989 through 2008 vs. a volatility index of 20% for the S&P 500 Index for the same period.

Several updates ago I raised the question as to the accuracy of reports that boomers were expected to work longer than normal in order to compensate for a) a lack of adequate retirement savings, b) the losses incurred in the 2008 market decline and c) the real possibility that they will live much longer in retirement than they had planned.  My premise was that, while boomers may retire later than they had hoped, it was by no means late.  As the first linked article below points out, recent studies show that over 50% of boomers are retiring before age 62, the earliest they can take Social Security.  That is 3 to 5 years earlier than the average retirement age 20 years ago, despite the fact that average life expectancy (also cited in a previous post) has increased by approximately 8 years during the same period.  So, instead of having a 10 year retirement period, on average, today’s boomers are looking at retirements of from 20 to as many as 35 years!  Obviously, it takes a great deal more retirement income to last over that many years, even if inflation was non-existent, which is certainly unlikely.

This week I want to address a topic that is relatively new – managing debt in retirement. I say it is relatively new because, in the past, few people would have considered retiring while still carrying debt; in reality, people didn’t buy much that they didn’t pay for at the time, with the exception of their house. Regarding the latter, talk to some older folks who will tell you about mortgage burning parties. Since they saved to buy practically everything they purchased, most people only carried one debt – their home mortgage. When that was finally paid, they had a party to celebrate being out of debt and literally burned the mortgage (after it had been stamped “paid” naturally)!