Meet the Four Hoursemen of the Retirement Apocolypse: Income Growth, Housing, Jobs, Fund Fees

Investors in 2009 should clearly see the linkage between the decreases in home prices, income, portfolio returns, job growth, and the importance of fees charged to manage your mutual funds.

In a low-growth economy, and in the beginning of a economic scenario which will see a jobless recovery, these critical engines of wealth growth are all working on one cylinder. These returns are then dragged down further by high expenses on your investment portfolios.

If you factor in the losses in housing and portfolios, a decline of about 30% in each, you can get a good idea of why investors should be concerned about every penny they can earn and save.

While there losses have frequently been discussed, not much has been written about the time it will take for investors to recover their biggest losses--in investment portfolios and house prices. Time is a significant element in any financial planning discussion since it deals with the time value of money. For starters, I bet that the current severe recession, caused by the decline in the housing market and incredible consumer debt loads, have combined to wipe out about a decade of economic prosperity.

A decade is half a generation. The slow economy, job losses, investment returns, declines in savings and wage growth rates all come with a price. The best example is in the backlog of housing. The economic research firm ISI estimated that in Florida alone there is about a seven year backlog of real estate inventory. That means too much supply and lower prices in a buyer's market for seven years.

Re-Thinking Real Estate
With national home prices off by a painful 32% from their 2006 peaks, many people should rightly question the role of real estate as a long-term investment and as an engine to fund retirement.

According to a report. any increase in housing prices will be tied to a rise in wage growth. Even when this occurs, the reports by Moody's notes that housing appreciation will be faster in less populated parts of the nation.

With unemployment at record levels, getting a job is a significant problem, let alone seeing any wage growth. Of course, getting a job will see a significant percentage increase in wage growth, but those wages would be used to repair a household's balance sheet first before they can be evident in an savings.

As I noted in my white paper, As a result of the current housing market bubble, any new housing cycle correction could take over 20 years to reach an equilibrium state where buyers and sellers are proportional.

The reason: When baby boomers aged 65 to 75 begin to sell their houses, there will be three sellers for every buyer. This will create a “generational housing bubble” on top of the speculative housing bubble that developed from 2005 to 2007. This shift (more sellers than buyers) could start as early as 2010 and last until 2030. In the past, without this major change in demographics, housing corrections historically lasted three to seven years.

This new generational housing bubble would differ on a state-by-state basis as the number of older homeowners declines relative to younger home buyers, but its overall impact will be the same: there will be too many sellers to sustain house price increases.

Since real estate has been one key driver of retirement wealth (the other is portfolio returns in IRAs, 401(k)s, any disruption of the housing market will have a profound effect on retirement planning.

--Chuck Epsstein
cepstein@prodigy.net