Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Baby Boom Financial Crisis

I believe there is a financial crisis coming to the generation born after WW II that isn't being discussed and certainly isn't being remedied.

The essence is this:

So what?

My own plan has been to stay in the stock market while the economy improves, continuing to take the risk, on the theory that an improving economy will lead to higher stock prices and higher Treasury yields (and holding several-years' worth of expenses in cash to weather storms along the way).

My hope was to transfer out of stocks into bonds at higher rates to (a) build a do-it-yourself annuity and (b) reduce my stock-market risk.

However, a 30-year bond ladder has an after-tax Internal Rate of Return (IRR) approximately equal to the 30-year Treasury yield and I am currently unwilling to accept an IRR below 5%. I can't afford it, actually.

An analysis of commercially-available annuities from insurance companies shows they are currently even worse: an inflation-adjusted lifetime 5-year deferred annuity yields only a little more than a 1% IRR, and that much only if you live to 99. It was this that drove me to think about holding my own bond ladder since I can do much better for myself, at least analytically.

But will the 30-year Treasury yield ever go back to 5%? And, if so, how long do I have to wait?

I love what the stock market is currently doing for me, VTI and VB are just rockin' n rollin', but I live in daily fear of 2000- and 2008-esque collapses.

There simply does not seem to be any way for people without pensions to annuitize themselves at a reasonable IRR and they are therefore driven into the stock market for an indefinitely-long time into the future.

Anyone in such a position –no pension and long life expectancy— who is unwilling to invest in the stock market will simply run out of money unless they have a very large amount. ($3,000,000 / 30 years = $100,000 per year; neither the 30 nor the $100,000 is adequate given increasing life-spans plus inflation. Pick your own numbers, the conclusion is the same.) Oh, and guess what? The stock market makes no guarantees.

Plenty of people simply turn their affairs over to a "wealth manager" but the predation of such people is widespread and corrosive. My recent experience looking into an HSA is a perfect example: the only benefit of such a thing is the tax deduction and the cumulative fees in the fine print would have eaten that advantage within a year.

So my conclusion: my generation is headed into a crisis but I don't hear anyone talking about it. The Democrats only talk about the poor and the Republicans only talk about the rich, at least in caricature, but there's a very large demographic in between that is headed into a very bad place and some sort of eruption has to be coming. I frankly don't understand why the retirement states of Florida and Arizona are not already in open rebellion, people who moved there on fixed incomes are being reduced to penury.


Yields on the 30-Year US Treasury Bond from 1978 to mid-2014

30-Year Treasury Yield since 1979
$173 per trade! With the value of your assets I bet either Vanguard or Fidelity would charge you $0 for a while and then less than $10. You know I had problems with Vanguard's administration a couple of years ago but they can probably handle a rollover IRA. I analyzed Peggy's "managed account" at Wells Fargo and when you count up all the fees it's 2% per annum for a portfolio that over the last 3 years has had a total return of 1/2 that of mine, which has fees of 0.09% per annum.
Posted by: G4   |   Jun 30, 2014 7:36 PM
I'm not sure I can solve your problem, but I have discovered a small solution to something. As you know, an IRA is required to have a minimum distribution. For that, you generally have to sell something. And to do that, you have to pay a sales commission. Yesterday, I looked at the fine print and discover Wells Fargo is charging me $173 per transaction to sell index funds. So, unless some reader persuades me otherwise, I'm going to move the IRA to either Vanguard or Fidelity, and save myself something like $165 a month. True, I will lose out on Wells Fargo's wisdom, but since they haven't called me in two years, there hasn't been much wisdom aimed at me.
Posted by: G3   |   Jun 30, 2014 6:23 PM

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