Don’t Roll the Dice with Your Retirement

The costs of not implementing personalized advice will escalate so watch out for products and overly standardized solutions.

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The S&P 500 has sustained an unusually high 15%+ annual pace of returns over the last three years. Still, U.S. retirement savings and pension plans fall short by multiples of trillions. Our lifestyle, investment returns, and retirement success are partly in the hands of competent and caring central bankers; unfortunately, they are in experimental territory! Despite hope for a “this time will be different” outcome, last night my wife and I experienced another demonstration of well-intended microeconomics gone awry–Family Monopoly Night. Will the global macro-economy have more success in its quest to provide stability for its growing and ageing citizenry? Let’s not assume a complacent path toward GO!

European emergency deals with Greece, signs of disinflation, and a litany of other mixed data points prove constant reminders of burdens resting on the shoulders of the world’s most powerful central banks. The March 18th U.S. Federal Open Market Committee (FOMC) meeting and the associated Summary of Economic Projections and press conference by Chair Yellen come with great anticipation for insights on paths for interest rates, inflation, and global growth.

How can any players evaluate
what is what, or who is on first?

Whether fiscally shaky countries, unstable companies loaded with high yield debt, or individuals afflicted with an addiction to self-dealing blowups, at some point global powers must allow fundamentally sound principals of reward and risk. So-called emergency measures of quantitative easing (QE), market manipulations, and data-spin have created illusions of great prosperity. Can market players truly evaluate the past and future quality of their investment portfolios? How do you prudently plan for future retirement cash flows? Will liquidity exist when massive amounts of investors make the same allocation decisions–see Energy sector? As certain as death and taxes, the FOMC will inevitably trigger a soundness test of our wealth management processes. It will test its own resolve, too.

get-out-of-jail-free-card

Don’t try this at home or on
the global stage!

The primary focus of family game nights is to share equally in the seemingly easy task of promoting fun. To this end, all players are bribed with pleasantries and tasty snacks. Though often too soon, the more formidable Monopoly traders emerge and our micro-economy changes its character. We can now wheel and deal our way to a fortune even faster loading millions onto debit cards instead of cash! Unfortunate bubbles and bankruptcies loom, and we are unsure how this game will unfold. I survey the bubbling emotions of the table and decide to step-in as central banker and quickly implement a few minor tweaks to the rules as relied upon since 1935. Surely, a few rent-free passes around the board, lower mortgage rates and a special one-time QE program are acceptable as a fair trade-off for a prolonged cycle of family fun (and snacks).

monopoly credit cardsUnfortunately, emergency tweaks force a new set of incentive behaviors, and control quickly becomes a rear-view mirror phenomena. The artificial nature of our “new normal” game introduces an evolution of hypersensitivities. Prudent savers shed tears as interest payments and cash flows are severely strained. Formerly on economic life-support, a certain type of grin emerges on the face of wildly aggressive players as fair consequences remain suspended. Never extrapolate current circumstances!

No press conference, but…As the most powerful central banker in the house, I cannot reveal any lack of confidence in how this game may end.

Further details from my reign over family game night shall remain sealed in order to digest the facts as I plan to recall them and to avoid critique. Meanwhile, real life global central bankers, finance ministers, academics, and financial market participants are clearly articulating their own visions for currencies, growth, jobs, and policy options. In fact, seventeen central banks have clearly spoken in 2015 with monetary easing. Sweden slashed its main policy rate into negative territory! Economic battles may ensue as countries try to protect self-interests.

The S&P 500 stands at 2,100 and the
U.S. Ten Year Bond yields 2.14%.

Many managers of wealth agree that broad stock market valuations are elevated and economic cycles cannot be completely eradicated. Nearly seven years since the last U.S. recession, risks of negative asset returns and even lower interest rates are real. At the same time, life expectancy and years in retirement are extending. The EBRI estimates that “at-risk” early baby boomer shortfalls range from $71,299 for married couples to $104,821 for single women.

The costs of not implementing personalized advice will escalate so watch out for products and overly standardized solutions.

Market players put too much faith in the ability of humans (or machines for that matter) to legitimately map desired outcomes with high certainty. The well-intended programs and tools unleashed by global central bankers may produce more future risks than current rewards. Aided an abetted by political dysfunction, demographic trends, geopolitics and a multitude of unforeseen variables, it is impossible for anyone to predict an exact transition from policy-induced tweaks to a self-reliant global economy. Even Dr. Janet Yellen could not have predicted the outcome of our family game night, and this is precisely why it is such an instructive econometric tool!

Like it or not, we were all invited to this global Family Game Night, and an important test looms sometime in the future. No matter the status of your preparation or distance from retirement, take control of your security and freedom with a foundation of financial knowledge, trusted advisory relationships, and methods to review and verify your family’s unique circumstances.

  • Cover the bases of the continuous cycle of wealth management with discovery and understanding, financial and estate planning, strategy implementation, supervision and review.
  • Re-check your human and online advice platforms: Many investors are clearly paying too much and receiving too little OR paying too little and not receiving enough mission critical advice.
  • The National Association of Personal Financial Advisors (NAPFA) is a leading professional association of Fee-Only financial advisors: http://www.napfa.org/
  • The CFA Institute strives to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence: http://cfa.is/1AlqmhE
  • The Employee Benefit Research Institute produces non-partisan data on health, savings, and retirement issues: http://www.ebri.org/

I welcome your comments.

Email l mdhakerem@gmail.com

Twitter | @MichaelHakerem

Michael embodies client-stewardship in all his work and happens to be a passionate expert in securities analysis, asset allocation, economic analysis,
and wealth management solutions.

More than 275 million Monopoly games have been sold worldwide and are available in 111 countries and 43 languages. Your family and the U.S. Federal Reserve should invest in this classic econometric tool for a cost of less than $20.