Economist House Call: 'I'm Trying To Retire'
Americans are feeling the effects of the financial crisis — whether it's because of a dwindling 401(k) or a home that's lost value or a job that's not so secure. But how do their individual situations connect with the bigger picture, and what can they expect in the coming months and years?
Simon Johnson, a professor at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, helps put listeners' personal situations into a larger global context. Johnson joins Planet Money's Adam Davidson and Laura Conaway to field a question from George Graves of Bala Cynwyd, Pa.
George Graves: I'm trying to retire, but I don't know what my future holds. I was just looking at my portfolio today, and I see that I've lost more money than it currently has, and I don't know if I have enough to live on. I was chief technologist for the QVC shopping network, and I retired in 2004. Last November, we had more than $1 million in our stock account; today, we have $453,000 in equity mutual funds, and we're down to our last $3,000 in the bank. I'm 61, I have five years before Social Security kicks in. We already live modestly, but we're going to need a new car at some point, and I just don't know what to do.
Simon Johnson: Very much like a business, what matters at this stage is your "burn rate" — how much cash do you need per month, and how do you see the financing of that? We're hoping for the stock market to come to back; we don't know the time frame for that.
Graves: I kept asking people in our neighborhood who are fund managers and financial advisers, and I've read it in the money columns, they all kept assuring me that "the end was near, that it was almost over, we should recover any day now." Then a month ago, we found that the end may be near, but in a bad way.
Johnson: That kind of end is not approaching. Because you're holding diversified stocks, they're not all going to go zero. The question is: What will the next five years look like? You have to do a bit of scenario planning. All of us have to be careful not to suffer from a failure of imagination in these circumstances.
Graves: We diversified also by buying a couple of rental properties in Philadelphia. They're bringing in rental income, but we can't liquidate those for cash either.
Johnson: Rental properties may be a pretty good thing to be holding right now. People will delay purchasing of homes. So, if you've got a prime location, that may be a good source of cash flow.
Laura Conaway: Do we have a group of people who come out on the short end of the stick because of the way we fund retirement?
Johnson: A little bit. But there was a decision that was made to keep Social Security from being tied too closely to the stock market. So, we encourage people to save more, but we also have the safety net of Social Security. At this point, that looks like a good combination. If we had taken all that money and invested it in the stock market, we'd be a bit more worried.
By way of contrast, Argentina recently nationalized and expropriated all private pension plans, a shocking, horrible, terrible thing for all Argentines. Something like that is not going to happen in the U.S. We're looking at a two-to-three-year recession; the rest of the world will probably struggle a bit more.
Put your personal situation in a global context by taking part in an Economist House Call. Just e-mail NPR's Planet Money, and be sure to include a phone number where you can be reached.