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Retirement plans changing as Wall Street uncertainty hits home

With the stock market gyrating wildly, continuing bad news about declining home values, increasing mortgage foreclosures and the proposed $700-billion bailout of financial institutions, concerns about the economy are on the top of most people’s minds.

The disturbing daily headlines aren’t of just academic interest to people in the state. The news has a personal impact on most people, and impacts everything from job security to the best place to invest savings.

The Mississippi Business Journal recently asked people in the state how they have been personally impacted by the financial crisis. Most said they have made changes as a result of concerns about the economy.

Former Supreme Court Presiding Justice Kay Cobb said volatility has caused her to look more at stability instead of the highest rate of return.

“We now make decisions as to where to place our short-term paper based on star ratings for stability and safety of the institution rather than on which one is paying the highest rate of interest,” Cobb said. “Also, we’re more aggressively tracking and bidding on foreclosure and tax sale properties.”

Does a “flight to safety” hold more glamour than it did a few months ago? Cobb said she isn’t sure “glamour” is the right word.

“I think the operative word is ‘necessity’,” Cobb said.

The current situation is at least partly a crisis of confidence. Cobb says while she thinks it is important for people to be “cautiously confident,” she also advises staying informed.

“It would be unwise, even disastrous, to just adopt a Pollyanna attitude,” Cobb said. “We also need to urge our elected officials, both federal and state, to demand accountability from those who are responsible for the developing and implementing the monetary and fiscal policy of our country and our state.”

Cobb, who is chair of the Mississippi Commission on the Status of Women, said there is no doubt women will be more severely impacted by the downturn in the economy. Women traditionally earn less than men, even for the same work. Women have fewer retirement savings and live longer. So reductions in retirement savings as a result of the decline in the stock market could have a bigger impact on women. Cobb said women are also more impacted by the sky-rocketing costs of basic necessities such as groceries, gasoline, utility costs, etc.

Marianne Hill, senior economist for the Institutions of Higher Learning, said the “flight to safety” being seen in the current market holds considerably more attraction that even a short time ago.

“And that is one reason why the Congress has to act,” Hill said. “Once the details of the bailout are made clear, it will be easier to gauge the rate of return on alternative investments. As always, the more secure and higher the rate of return, the better.”

Hill said as the Treasury buys impaired assets under the proposed rescue plan, a shift in purchasing power away from consumers will occur: the institutions involved gain, but the average taxpayer will see the purchasing power of his or her savings decline, and, in addition, will have to cover the cost of the plan. This will be done through decreased federal expenditures in some areas, and through increased taxes.

Personally, Hill is planning to shift towards more bonds that are FDIC insured.

It can be a tough decision because many of the rates on certificates of deposit (CDs) are lower than the inflation rate meaning the value of money will shrink over time.

“Because of this, I have started looking into land acquisition,” said Walter Howell, 72, associate state director for the AARP in Mississippi. “Select purchasing offers a better rate of return over the long run. As to my retirement plans, I had planned to work until 2011, but will wait and see what the economic situation is then. Fortunately, with federal laws giving employment protection to older workers, if one is in good health and enjoys one’s work, staying in the workplace is a personal choice.”

Howell said previous experience is that any type of savings has risks.

“With the turmoil and uncertainty the United States has experienced since 2001, any ‘flight to safety’ is, to me, an illusion,” he said.

Howell agrees there is a crisis of confidence in America today. With the events — the government having to bail out Freddie Mac and Fannie Mae first, then AIG, and now the financial system — there is little wonder people have lost confidence.

“I don’t think it is a loss of confidence in America or the American system, but a loss based on the fear that the people in Washington and those who run Wall Street have run amuck,” Howell said.

Tom Wagner, president, Wagner Consulting Group Inc., who specializes in executive coaching and leadership development, says he is taking an adult, mature attitude and ignoring as much as possible the daily stock market gyrations.

“With a big smile, I’m also advising my clients to do the same,” Wagner said. “They grin back in appreciation. Call me an ostrich! Those wonderful old, boring, FDIC-insured bank CDs now look much more attractive, especially with the options your local bank offers to spread deposits over $100,000 among several institutions to keep the total amount FDIC-insured.

“However, the recent turmoil has convinced me to suspend investments in my retirement accounts (that is, mutual funds) until things become more predictable. Thanks to good advice from my financial advisor, about 60% of my retirement funds are protected by a ‘floor’ that supposedly prevents loss of capital. But this doesn’t prevent the market values on the statement from declining.”

Wagner said he does think the American economy is fundamentally sound, and that we’re overreacting somewhat. He sees the biggest threat now is sound commercial banks being unwilling to lend to creditworthy customers.

“But I have not personally seen this play out, yet,” he said. “None of my clients, who tend to be good credit risks, have complained about loan availability hindering their operations. It’s still the shortage of skilled labor — whether craft or professional — that’s limiting their growth.

“Bottom line: I think we Americans should retain our historic confidence and belief in a brighter future. This epitomizes the American Dream, and I wish more leaders would emphasize this, while still dealing with the serious economic issues we face.”

Younger workers may not have as much to worry about. Jim Beaugez, 30, communications manager for Peavey Electronics in Meridian, said he is more wary about fund performance in his 401(k). He is also researching educational investments, such as Coverdell ESAs, with more scrutiny than a few months ago.

He doesn’t think this is the time to sell stocks.

“The knee-jerk reaction is always to disengage from the market — if you’re losing money, you obviously want to do whatever it takes to preserve your principal and gains,” Beaugez said. “The downside is that by the time you realize you’ve lost money, it’s often too late. Hopefully the market is nearing the bottom and we can all feel better about our retirement prospects soon.”

He also doesn’t think it is the time to buy into the stock market. v
“It’s a disheartening situation, but right now the market is just too volatile for most people to risk losing their hard-earned savings,” Beaugez said.

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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