What’s a Geezer to Do?
By Robert Higgs • Tuesday August 21, 2012 12:01 PM PDT • 35 Comments
In 1968, I went to work as a faculty member at the University of Washington. Two years later, I noticed that a large deduction had been made to my monthly pay, and I inquired about it. I discovered that it was my personal contribution to a retirement plan. Because I had no recollection of having signed up for such a plan, I inquired further, only to find out that employees at the university had no choice in the matter. Membership in the TIAA-CREF plan was a condition of employment.
I was naturally outraged by this previously undisclosed imposition and set out to challenge it. I spoke to the resident assistant attorney general, who told me that no one had ever challenged the university’s requirement, so he had no idea how the university would defend itself in court if challenged, except that it might cite the U.S. Supreme Court’s decisions upholding the Social Security payroll taxes in the 1930s.
Determined not to take this robbery lying down, I began to canvass my colleagues in the department of economics. To a man, they thought I was nuts to worry about the matter. Displaying a horrible grasp of basic economics, they thought the system was a terrific deal because the university made matching contributions to the retirement plan on my behalf, so I was, as it were, getting something for nothing. None of my colleagues had any interest in signing a petition to challenge the mandatory withdrawal from the employees’ earnings for deposit at TIAA-CREF. In disgust, I gave up my quixotic undertaking and resolved to swallow the monthly deduction from my pay as one more of life’s injustices.
In due course, my colleagues explained that my retirement contributions would eventually put me on easy street when I retired. Those who knew much more about finance than I did opined that by holding, and steadily adding to, a well-diversified portfolio of stocks, one could not avoid a high long-run average annual return in the neighborhood of 8 percent or so. And one doesn’t have to be a financial genius to see how quickly a sum accumulates at such a rate. Visions of a cushy retirement began to dance in my mind.
For the first ten or fifteen years my visions came nowhere near realization in the market, but starting in the mid-1980s the stock market began a relentless climb that took it to dizzying heights by the turn of the century. The swift ascent in the latter 1990s was especially exhilarating. So even though I had left academia in 1994, and therefore no longer made monthly contributions to my retirement fund, its value had reached an amount that made me feel quite comfortable about my ability to avoid a cat-food diet in my golden years.
All good things, they say, must come to an end. I need not describe for you the gory details of the stock crash that ensued when the tech boom turned to bust. About half of my stock value in the retirement fund turned to smoke and blew away. Not content with this loss, I added another 50 percent deduction as part of a divorce settlement. Easy come, easy go.
Yet, as they also say, hope springs eternal, and sure enough, who should ride to my rescue but the Maestro himself, Alan Greenspan, who goosed the housing boom and the prices of related and not-so-related financial instruments mightily for five years or so. By 2007, my stock values (for such stocks as I continued to hold after the divorce) had recovered their losses fully. Again I dreamed of eating bread and butter, instead of cat food, in my old age.
Of course, that dream, too, was made of smoke (and mirrors at the Fed), and again—this time even more quickly and severely than before—my stocks went to hell. As luck would have it, my pathetic financial instincts had told me at the beginning of 2008 that I ought to get out of (most of my) stocks and into bonds (these are the sorts of adjustments the TIAA-CREF plan graciously permits its inmates to make). This switch saved me a large share of my retirement fund’s accumulated value as stock prices plummeted before and after the onset of the recession.
Now, however, as I peer into the abyss of my financial future, I can make out no clear avenue of escape from my predicament. Even now, stock prices in general, after recovering the greater part of their most recent losses, are no higher than they were twelve years ago, and I will not be surprised if another crash occurs before long. (I’m not giving financial advice, you understand, only mulling over my own situation—which, it would seem, bears a strong similarity to that of millions of other geezers.)
The bonds, which were my salvation in 2008 and 2009, now yield next to nothing, so holding them promises no positive real return. They are nothing more than a place to park some money at seemingly low risk. Ah, but there’s the catch! Ben Bernanke assures us that the Fed has sworn an oath and sacrificed a goat to warrant its promise to hold interest rates close to zero for years to come. Therefore, my bond holdings present great risk of capital loss, because when interest rates do begin to rise—as they must eventually, given that they can’t go substantially lower—I stand to lose mightily.
So, as Martin Luther would say, here I stand; I can do no other without taking great risks, which is not what I’m seeking to do as I prepare to leave the workforce and put myself out to well-deserved pasture. Stocks are risky and probably primed for another crash before long; bonds are risky, too, because the Fed’s shenanigans have guaranteed capital losses to bondholders sooner or later. If I were in this situation alone, you might be inclined to write me off as nothing but a silly old geezer who was too dumb to make proper preparation for his retirement.
But be kind, my friend. Like millions of others, I saved a substantial amount of money for my retirement, however much I did so under duress. I followed the best financial wisdom about how to make investments for the long term: you can’t go wrong with diversified stocks and some real estate, the gurus assured us. Now, however, with my departure from the working class an imminent reality, I have no confidence whatever in my capacity to survive on what I will have to live on. I have decided that, as things stand, my best option is to invest in a boxcar load of cat food.
Tags: American History, Economics, Federal Reserve, Poverty 
My wife tried the bond strategy with the same result you got. She gave some thought to some good farmland, figuring that when the bottom falls out we’d at least be able to grow our own food and not find ourselves sharing the morning bowls with the cats. But the politicians, federal, state, and muncipal, are a step ahead of us. Pretty soon, as Bob Dylan observed, “Even your home garden is gonna’ be against the law.”
It looks like we’re caught in an exestential trap, doesn’t it? If we have any rutabagahs left when the push does really come to shove we’d be happy to ship a few to you. I’m told that cats don’t like them very much.
Phil Dillon | Aug 21, 2012 | Reply
Robert.....You should have bought gold and silver coins(Eagles,Maple Leafs and Rands)taken physical delivery and then hid the coins in a safe place outside of the banking system. In the last 12 years alone your investment in 1 ounce and 1/2 ounce coins would have increased,on average,6 fold. Not only would you have increased your portfolio in value but you would have had a great hedge against inflation. Its still a good time to buy gold and silver,as with all the trillions of dollars in money printing going on at this time,paper money will lose more of its value and gold and silver are bound to increase. Once you retire completely just cash in the coins that you need for current expenditures. This can be done at a local coin shop. I’m sure that real money(gold and silver) will fend off the cat food dinners.
libertarian jerry | Aug 21, 2012 | Reply
Libertarian Jerry, I appreciate your advice, but I am convinced that no one knows the financial future, and that investment in commodities such as gold and silver is highly risky, especially for an old person with no means of recouping short-term losses. I have known people who lost huge amounts of money by buying gold and silver. Such losses may well occur again in the future. For those who have made large gains by investing in gold and silver, I say, congratulations. But at my stage, I dare not bet the farm on this type of investment, even if my retirement plan permitted me to make it, which it does not.
Robert Higgs | Aug 21, 2012 | Reply
Professor Higgs,
Your comments about the short term volatility of gold/silver and the potential for enormous losses, are spot on.
Given the value I receive from your work, there have been times I would finish a particularly awesome chapter in Delusions of Power, Against Leviathan, or simply one of your essay online or in the Independent Review, and thought to myself, “If this guy just sent me an email asking for $500 bucks I’d send it over happily and still feel like I had gotten my money’s worth!”
Long story short, while I know this post was tongue in cheek and only making the point that government interference has an extremely disastrous effect on retirement planning, there’s no chance you are going to be resorting to cat food, no matter how badly Bernanke and company blow things up!
Robert Fellner | Aug 21, 2012 | Reply
Robert........Most of the huge losses in gold and silver occurred in the early 1980s speculation. Today it is a completely different world. I will say this: That when the SHTF paper money and paper equities may not even buy you a can of cat food. If anything gold and silver is not an investment it is insurance. For your own security you should always own some hard assets,at least to barter with. In the end,it CAN happen here.
libertarian jerry | Aug 21, 2012 | Reply
Libertarian Jerry – This is, of course, assuming The Anointed One doesn’t just go ahead and follow in the footsteps of his fine predecessor (FDR), and make private ownership of more than two troy ounces of any precious metal a federal felony...
BADKarma | Aug 21, 2012 | Reply
Sorry canned dog food only lasts about three years.
Tim | Aug 22, 2012 | Reply
Mr. Higgs,
Dare I say it, but it seems that you are making the liberal case against the “privatization” (of course it is impossible to privatize something that is funded by a confiscatory tax, but will go with the current Republican talking point anyway) Social Security.
The reality is that for the vast majority of us, having to rely on the whims of the market are the way we prepare for our future life after work. Of course there is the other option, namely to find a way to continue to be employed until we die, in which case we can rely on wage income, or consulting fees, in lieu of retirement. Either way, unless you are in the “Romney” class, you need to have several contingencies to more or less survive old age.
Frank | Aug 22, 2012 | Reply
The fault, Horatio, lies not in the stocks but in the diversification. Keeping everything in a market-weighted S&P 500 index fund made for a poorly diversified portfolio. For one thing, it is entirely invested in the equities of a single country. For another, the market weighting leads to the majority of the account being invested in a tiny minority of the stocks (around 30 stocks, a mere 6% of the total number of stocks, currently represent 50% of the portfolio, and I’m pretty sure it was higher in 2000 at the height of the tech craze).
Just splitting the stock portion between a large cap and small cap index mutual fund on Y2KDay (1/1/00) would have led to the account being worth 30% more today. Further splitting it between US and international stocks, and splitting the international portion between developed and emerging markets, would have led to the account being worth 50% more than the S&P 500 Index portfolio alone. All 4 mutual funds are available at TIAA-CREF.
No need to swear off the businesses that provide the world’s goods and services; if they don’t survive, we’re all sunk. Just be more Hayekian, not placing a gigantic bet entirely on the largest US companies, but admitting ignorance and being as global as reality permits.
As for bonds and gold, they’ve been decent volatility insurance for stockholders but pretty rotten primary investments. Bonds can hedge unexpected disinflation or deflation and gold unexpected inflation or those periodic end-of-the-world panic attacks that plague the irrational pessimist majority, but long-term real returns have been lousy for both.
The late Harry Browne proposed an all-weather portfolio allocated equally to the S&P 500 Index, Long Term T-Bond, Short Term T-Bill, and Gold. Personally, I don’t consider it diversified enough, but use a similar approach for a few of my more volatility-sensitive clients using global stocks, diversified futures, and bonds, percentages adjusted for personal circumstances but always much higher than Harry in stocks.
At TIAA-CREF, the Bond Index fund is probably the only one of the good hedges to which you have access. So if I were the retired architect of the regime uncertainty principle, I’d be split between Large Cap Value, Small Cap, International Equity, Emerging Market Equity Index, and Bond Index.
Of course, the past can’t predict the future and this post is merely for entertainment purposes and anyone who takes free advice from a stranger on the Internet is an idiot and a statist and has bad breath, too.
Antboy | Aug 22, 2012 | Reply
I have half my savings in bank stocks — AUSTRALIAN banks — their dividends have never faltered and they still yield around 4%.
You too could be sitting pretty.
John Ray | Aug 22, 2012 | Reply
Higgs, as I have pleaded with you for some time, you must disclose where you have hidden your boson. This will result in your getting the Nobel Prize. If not , write a best seller
richard | Aug 23, 2012 | Reply
Dear Frank,
I have no idea how you extracted anything about privatization (real or bogus) of Social Security from what I wrote. My point is only that government policies, directly or indirectly, have produced an economic situation in which retirees can rely on neither the stock market nor the bond market to provide them with a positive real return on their life savings at moderate risk. Yes, of course, we can always “man up” and continue to work, getting such compensation as the market affords. For those of us with rapidly waning physical and mental powers, however, this option provides rather chilly comfort. With it, we might still have to subsist mainly on cat food. And it was precisely to avoid having to work until we drop that we saved and invested in the first place.
Robert Higgs | Aug 23, 2012 | Reply
And, for a guy like me living in a small town work means becoming a greeter at our local Wal-Mart. I’ve been working on my script – “Welcome to Wal-Mart, would you like a shopping cart?”
Phil Dillon | Aug 23, 2012 | Reply
Another possibility: TIPS. But if interest rates rise, there is no adjustment to the TIP rate or face value at maturity.
richard | Aug 24, 2012 | Reply
Invest in dog and cat food !!!
John | Aug 26, 2012 | Reply
“Libertarian Jerry, I appreciate your advice, but I am convinced that no one knows the financial future, and that investment in commodities such as gold and silver is highly risky, especially for an old person with no means of recouping short-term losses. I have known people who lost huge amounts of money by buying gold and silver. Such losses may well occur again in the future. For those who have made large gains by investing in gold and silver, I say, congratulations. But at my stage, I dare not bet the farm on this type of investment, even if my retirement plan permitted me to make it, which it does not.”
But that is the good part about owning gold and silver. History shows us that it is money and that over the long run you will see gold retain its purchasing power. Now you could argue that we could see a massive deflation that takes everything down and that under such circumstances gold will also go down. But that would still allow you to eat your bread and butter because they would also go down along with your gold price. Or you could play the arbitrage game and use your gold to buy you a nice living in a retirement haven in a country that has seen its own currency fall against gold. Or you could use a combination of one third bonds, one third dividend paying stocks, one third physical gold and silver to ride out any scenario that you could think of.
I think that you need to step back a bit and look at the bigger picture in context. The US uses a fiat currency that is under pressure by a government and a financial system that need inflation to stay afloat. Deflation takes out the banks and the ability of the government to roll over its debts. It clearly wipes out pension plans as the liabilities go up as the assets collapse. Inflation would ensure that the pensions are paid but only at a loss of purchasing power. And if you look around you find that even in circumstances where gold loses against the USD, you still have options to live in very good areas of countries that have seen their currency fall against precious metals. Keep in mind that even a Paul Volker could not do what he did before because the reduction in the money supply today would lead to a total collapse of the economy and a default by the US government. Under such conditions gold will likely go up than down.
And let us keep in mind that the central banks have been at war with gold since the London Gold Pool in the 1960s. That war has been a disaster for the central banks as the purchasing power of the currencies that they issue has fallen by more than 90% since then. While I would not be surprised to see another attack on gold to try and break the trend and trigger the technical sellers if you have enough income or savings to survive the decline you will still see massive gains as the inevitable becomes obvious to most individuals. When you see people line up around the block to buy gold from the banks you should sell half your position and look to the surviving stocks that pay nice fat dividends. When a hard money system is established get rid of another half of your holdings and look to other investments that make sense. Even though you are an ‘old geezer’ chances are that you will live through such a scenario.
Vangel | Aug 26, 2012 | Reply
Gold’s climb is inevitable as the dollar’s fall. The price of gold climbed in the 1970s because the supply of dollars was no longer tied to the supply of gold. The price of gold collapsed in the 1980s because:
1) Interest rates were allowed to climb to 21%
2) The OPEC nations sold their oil exclusively in dollars
3) The central banks sold portions of the gold they had confiscated when the “gold standard” was “abandoned.”
As far as I can tell, these factors no longer apply.
The arguments against using gold as a retirement fund:
1) In the long run, gold doesn’t gain in value, it merely doesn’t lose value
2) It was outlawed as money before, it can be outlawed as money again.
Sam Lowry | Aug 26, 2012 | Reply
Gold and silver are not investments. They are money which holds its value through time, excellent stores of wealth when financial systems and the common currency are at risk.
Instantly recognizable and salable anywhere in the world. Gold held in the hand has zero counter-party risk. It is the portion of your financial future that YOU manage.
Oscar Cannington | Aug 26, 2012 | Reply
I, too, am an old professor who has lost some of his mental edge and most of his ambition for involvement in institutional projects. I have little confidence that my savings will have value and, even then, they will be taxed at a high rate. I wish I’d invested in whiskey and shovels.
Doug | Aug 26, 2012 | Reply
You could have achieved some safety-net security by adding index annuities to your portfolio. I have two and they steadily grow (if you get the right flavor) even in bad times and track the market upwards in good (not fully, but you have to pay for the downside risk aversion also.)
Absent private retirement savings you are left with Social Security. An annuity scheme run by bankrupts and liars.
No private investment program is totally foolproof or free. Diversification w/ annuities is now recommended by many financial planners along with other investments.
muggles | Aug 26, 2012 | Reply
Amerika today is a Neo-Feudal Casino Gulag Plantation Economy.
The vast majority of people will never retire but will work until they die.
And those are the lucky ones who manage to keep their jobs.
The rest will die in poverty and despair.
Joseph | Aug 26, 2012 | Reply
Excellent post. We should only invest with people who understand this. Peter Schiff’s firm, for example.
Matthew M. | Aug 26, 2012 | Reply
To all that believe in the fiat system and stock market that has put you in the situation that we find...ignorance and faith in that system will make you destitute and beholding to the masters...If you can dispute the 5000 year record of gold and silver...you are beyond help and and have placed yourself and that of your family in s position of poverty
dan | Aug 26, 2012 | Reply
The future is unknown. This has always been the case. Mr Higgs, if you died 15 years ago it would have been a waste to have saved loads of money for retirement (maybe not for your heirs). If you die tomorrow all your problems are solved.
Does Warren Buffet guarantee returns? Nope. So if he can’t and he’s been a successful investor for many years what is the prospect for people that are not full time investors with 50+ years of experience.
Even if the government did not manipulate the economy and markets as it does you still could fall victim of theft/fraud, disaster, bad timing and incompetence.
To cease working is probably the worst financial move one could make. Some don’t have the option to continue. Getting old sucks.
Pescado | Aug 26, 2012 | Reply
You ask what’s a geezer to do? You cast about looking for solutions but refuse to consider the one that The Powerz That Be most want you to eschew. Please note – Gold & silver = Money! Currency = paper promises. You’ve been considerably burned by the Wall St. banksterz but you wail about the volatility of precious metals (which, by the way, are being manipulated by those same jerks)? You know the currency will inflate. Is it going to stop now? No way! Any time soon? Naah! I’m retired. I like PMs. You really can invest in them through quality mining equities although I’m leery of leaving the stocks on the street or having cash in money market funds after the Fed’s rotten MMF move the other day to limit withdrawals to prevent a run on the banksterz. Sweeps are into MMFs. No, I don’t trust ETFs, they are just more paper nonsense. It is best to take delivery of regular physical bullion coins with only bullion value and not have to worry about numismatic value. I suggest gold and silver eagles because they are legal tender and nationally and globally recognized and have less administrative drag to liquidate the coins as needed. Install a well hidden safe in your home or place them in a private depository (NOT A SAFE DEPOSIT BOX WITH A BANKSTER!!!). That way BHO (or “Mittens”) has a harder time to FDR. If you don’t want to convert the whole enchilada then at least convert 10-15% of it and that will probably get you through a major national financial problem.
Chris | Aug 26, 2012 | Reply
Perhaps start a sovereign state of libertarians who will welcome into their homes, and care for, their elders, family or otherwise, who so tirelessly lived honest lives in the pursuit of a free society.
So, all that stands in the way is the question of secession.
Dewaine | Aug 26, 2012 | Reply
Bob: I just turned 62, am self-employed, and a prostate cancer survivor. I thought I was going to have to retire a couple of months ago for health reasons, but I’m OK now and will continue to work.
I have a well-diversified, decent-sized IRA built up of mutual funds. They say you should not withdraw more than 4-5% annually from retirement assets in order to protect the principle. So I did some serious investigating.
Schwab (where I have my IRA), Vanguard, and The Mutual Fund Store (that I’m aware of, I’m sure there are more) offer plans that will send you a check every month from the income that your assets kick off. Schwab and Vanguard, at least, have a choice of 3 risk levels.
Even at these record low interest rates, they are still kicking off at least 4%. Had I been forced to retire I would have gone with one of these plans, or perhaps split my assets between two of the companies for further diversification.
My rules for investing, which have done me well:
1) Always diversify;
2) Never invest in anything that you don’t understand
Good luck!
Bruce L. | Aug 26, 2012 | Reply
11 years ago even gold bugs threw in the towel and capitulated to a downtrend 21 years long. It was a buying opportunity, in hindsight. No one in 2001 was telling us how history favored gold.
Today, what traditional asset class is as beaten down and reviled? Gold? hardly. Stocks? Gasping near all time highs. Bonds? Not with interest rates at near-zero. Farm land? At record highs. Homes? Still looking for a floor after a run-up so large that today’s lower prices may be but a way station on a much deeper dive.
Today there is $50 (or $200?) trillion in credit money, most of it backed by multiple claims on the SAME assets. Should there come a time when sorting out who actually has claim on those assets becomes fashionable, a lot of people who THINK they own “money” will turn out to have empty pockets, much as happened in 1930-32 when the evaporation of excess credit caused a massive decrease in the money supply and prices collapsed for everything that was not “fixed” in price (e.g. gold). Then, gold was money so holding it made good sense. People traded (extortion-prone) productive capital for dead capital (money) and sat on it until the conditions punishing visible capital waned.
Today, seemingly worthless green-stained pieces of paper are deemed “money,” and banks offer us nothing in compensation for lending it to them (in the form of deposits). Each day a new insult emerges from our political masters to owners of productive capital, and the wise may be eying a trade to dead capital during this hurricane of Regime Uncertainty.
How hilarious the paradox if, for but a brief time, it was wisest of all to hold Uncle Sam’s “Monopoly Money.”
dc.sunsets | Aug 27, 2012 | Reply
Doug
I hadn’t thought of that one. A good shot of red eye seems better to me than schlepping shopping carts at our local Wal Mart. Thanks. I’m gonna’ buzz out to the liquor store right now!
Phil Dillon | Aug 27, 2012 | Reply
Don’t comply! Bury it if need be. A black market will develop and you can use it. They can’t kill us all. They need us more than we need them. It is a shame more people don’t get that.
My advice though, is not to just sink a bunch of your money into au/ag, but to buy other hard assets that are useful for barter. Common items people will want and need. I imagine that those who are stocking ammunition and guns for hunting and protection are more likely to lose their stores than those holding au/ag.
Besides, When FDR did it, those metals were actually in use as the money of the nation. Today, the overlords just snicker when someone mentions hard currency. They no longer really care about it.
Jeff Anderson | Aug 28, 2012 | Reply
Bruce L is on point with his advice to never invest in anything you don’t understand.
The stock market was never intended to be a place for the common man to invest. It was for the specialists. Joe Bluecollar or James Whitecollar just put his savings in the bank to draw interest. But the Fed has destroyed that option – even if it was not taxed, interest cannot keep up with inflation. And the banksters know it.
Messianic Theonomist | Aug 28, 2012 | Reply
One more of your fantastic posts, continue the good says...
Eminent Domain | May 6, 2013 | Reply