Most of us know that we need to save money for the future. Many know this, but do nothing about it. More than 75% of Americans admit that they live “paycheck to paycheck”. More than 10% of those who make more than $100,000 per year cannot make ends meet, and almost 60% of these people are not making enough to pay their bills and debts (CNBC – Jessica Dickler, 10:15 AM ET Thu, 24 Aug 2017). This lack of savings and “live in the moment” attitude is truly frightening.
For those that do save, most put their money into the Stock Market. Due to the near zero interest rates paid by banks for deposits (thanks to the monetary policies of our Central Bank, the Federal Reserve), the stock market seems to be the only place to get decent returns on your money. The problem is that the stock market is seriously overvalued. Currently stocks are priced at about 25 times their earnings. This ratio, called the P/E ratio, has a historical average of 14. Whenever it is above 20, the risk of a sudden drop in prices is significant. When a panic occurs, the ratio can easily drop down to about 5. This today would mean an 80% drop in stock prices.
The retirement of almost all Americans (those who save, and those few who still have pensions) is dependent on the stock market. Most companies stopped pensions years ago, and only “aide” their employee’s retirement by subsidizing their savings into 401(k) plans. These are almost entirely invested in stocks. For those with pension plans, the company is investing the pension funds into stocks, as even they cannot get decent returns on their funds outside of the stock market. Think about what the repercussions are if there is a serious downturn in the stock market.
Even public pensions (like those for teachers, government workers, the police and firemen) are not safe. This is due to the sad condition of finances in most cities and states. States like Illinois are on the verge of bankruptcy. Many major cities are on the verge, and this is well before any kind of downturn in the markets. When it happens, they won’t be able to pay their pensioned retirees.
For those with Federal Pensions, like military and federal retirees, along with Social Security recipients, will either see their pension paid in inflated currency, or see their payments slashed. During the Great Depression, for example, military retirement payments were cut in HALF.
Some have invested in bonds instead of stocks. The risk with bonds is that the issuer has to pay the debts. Junk bonds are called that because the companies issuing them have a high likelihood of going bankrupt and you not only don’t get your return, you lose your principle.
Many government bonds are no different. For years people and institutions put money into bonds from Puerto Rico, due to their high rates of return. These investors didn’t seem to mind that the place is heavily in debt with little means to pay them back. And that was before the huge Hurricane hit the island.
What to Do
Do your best not to speculate with your savings. Try to find some instrument that will maintain its value when the inevitable stock downturn comes. I know that this is hard to do with 401(k) funds, but try. They may not currently have great rates of return, but they might allow you to protect your principle, something that won’t be possible once computer traders hit the trigger points to start selling off stocks.
Even better is to put your savings into some form that will retain value.
Best of all is to avoid debt. Pay off what debts you have. In the end, what everyone needs is shelter and food. Make sure this is financially and physically secure.