Retirement crisis: From bad to worse

As anyone planning to retire in 10 years or so knows, your biggest nightmare -- the one where you wake up screaming -- is a collapse in the financial markets and the economy in the years just before you retire.

If you've had such a nightmare, take a shower and then buckle down to some serious financial discipline. Bring lunches from home and brew your own coffee instead of rushing out to Starbucks. You know the drill. And invest the extra you save to make up for lost dollars and time.

Or you can decide to make up the difference by making riskier bets in the hope that the gamble will enable you to catch up.

Looking for a shortcut

There's no evidence that we're cranking up the financial discipline, however, and plenty of evidence that we're rolling the dice.

How we'll react to the housing bust of 2007 isn't yet known. But the evidence from how we reacted to the 2000-02 bear market doesn't fill me with confidence. According to the Federal Reserve's 2004 survey of consumer finances, the percentage of families that save anything at all went down to 56.1% in 2004 from 59.2% in 2001. (The Fed does these every three years, and the 2007 survey isn't out yet.)

The Employee Benefit Research Institute reports that the number of people participating in defined-contribution plans, including IRAs and 401(k)s, declined to 52.2 million in 2004 from 52.9 million in 2002.

The housing boom certainly didn't have any of the trappings of a disciplined attempt to reach retirement goals. As home values rose, homeowners withdrew money from these vital retirement assets to use on current consumption. In the early stages of the boom, 2001 through 2004, the average homeowner's equity fell from 58% of home value to 55%. That's during a period when home values climbed 67%, according to the S&P/Case-Shiller index, when equity would have been rising if consumers hadn't been so busy cashing out. According to the Web site RGE Monitor, homeowners pulled $800 billion out of their homes in 2005 alone.

Grim news on several fronts

Sure, that was great for the U.S. and global economies. All that extra consumer spending kept the economies ticking along when Europe and Japan were barely growing. But don't expect the global economy to return the favor now by buying enough from the U.S. to push economic growth back over 3%.

U.S. exports might climb enough to help us avoid a recession, but will they get economic growth back over 3%? Forget it, at least anytime soon. In February, the Federal Reserve cut its forecast for 2008's economic growth to 1.3% and for 2009's to 2.1% to 2.7%. The central bank also noted that growth could remain below "normal" as far out as 2012.

The news doesn't get any better if you look at inflation, where rising prices eat away at the value of retirement assets, the dollar (where a falling dollar raises prices for anything imported, including oil) and investment returns (where low interest rates make it hard to find anywhere safe to put money that's earning a positive return after inflation).

Pretty grim. No doubt about it.

What we can do about it

But there are things we can do as individual investors to increase our chances of escaping the worst consequences of this crisis. Save more, of course, if we can. Keep on investing. And invest smarter.

In coming columns over the next month or so, I'll look at several strategies for investing smarter for retirement:

• How to put more of your portfolio in strong-currency assets.

• Where to find the stability premium that used to work in favor of U.S. assets.

• A new strategy that I'm calling "unfixed income" for finding better yields in a low-interest-rate environment.

• And, in my next column, set for March 11 (no column on Friday, March 7), I'll describe why, in a falling-dollar world, commodities are about as close to a sure thing as you'll ever find.

Continued: Updates to Jubak's Picks

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