shooperman.com

Photo by dlkinney

About a decade ago, I put together a retirement plan that will yield a monthly income of about $2,500 when I turn 65 in about 25 years.

The recent chain of events in the financial sector and global economies have set me to re-think that plan again.

This post outlines what these economic trends are and they will impact any retirement plan.

1. Commodity Super Cycle

A super cycle is an economic cycle that last for a couple or more decades. Since the 80’s, the world has experienced a 30-year cycle where equities have boomed. If you have bought stocks of companies like GE or IBM at that time, your portfolio will have grown many folds.

The other side of the coin is commodities. In these same 30 years, prices of commodities like grains, oil, base metals and precious metals have consistently dropped. This is mainly due to advancement of technology and productivity.

Circa year 2000, the trends have flipped and we are now in the first decade of a commodity bull run.

2. Peak Oil

The ‘Peak Oil’ phenomenon is observed first in 1956 when Shell oil geologist Dr M King Hubbard observed that the production of ‘cheap oil’ (i.e. oil pumped in liquid form) follow a normal curve. Beyond the ‘peak’, oil production - whether you’re looking at one well, or an oil field or the production of an entire country - will decline.

Peak oil theorist has calculated that the world’s production of cheap oil has peaked in 2005. Today, the majority of the world’s largest production oil fields have crossed peak. And a growing amount of the proportion of the world’s oil demand is being filled by more expensive forms of oil production, e.g. oil sands in Canada.

This means that the $80, $90 and $100 a barrel of oil prices are here to stay. Even the investment demi-god Warren Buffet warns that $300 a barrel oil is possible.

If you can see that the world’s economy is driven by oil, you can then logically deduce that with the increase of price of oil, the price of literally everything else will follow.

3. Money Supply

Ever since Bretton Woods, the US dollar is no longer backed by gold. Which means, the dollar, not just the US alone, is backed in full faith by the government, and nothing else.

I’m not saying that government henceforth prints money out of thin air - there are other forces that refrains them from reaching into this cookie jar. But, without the link to a physical medium that is limited in supply, governments end up taking the easy way out in solving economic hangovers.

The result is what you see today, where M3 (the broadest measure of money supply in a country) of many countries are now growing at double digit rates.

4. Price Inflation

The combination of the above factors result in inflation, which by now, you’d know very well.

Inflation is the single biggest threat to anyone who saves. Since any retirement plan is essentially a savings plan, they are also threatened by inflation.

Let me illustrate.

In 1998, I thought that at 65, $2,500 a month would be enough for me to lead a fairly comfortable lifestyle. My naive thinking is that 1998-dollars is the same as 2033-dollars.

So, my plan revolves around a number of instruments ranging from savings & fixed deposits, mutual funds, blue chip stocks, term insurance and the government-operated pension scheme.

All these still add up to an income of $2,500 in absolute dollars in the year 2033.

But, inflation as reported by my government is 7%. And in my honest opinion, real inflation is even higher, I’d dare say 10%.

Working backwards, my $2,500 a month income in 2033, against an inflation of 7%, will only afford me a lifestyle of about $500 today.

I don’t think I can survive on $500 (2008-dollars) a month. Which means, I have to revise my retirement target up.

5. Stability of Financial Institutions

The almost-bank-run in UK’s Northern Rock was a shock to the financial industry - it was the first in almost 100 years.

The Northern Rock financial debacle was linked to the US property subprime problems. And ever since the US subprime crisis first broke into mainstream news in August 2007, nary a month will pass without another related financial blow-up.

So, you’ve heard of the CDOs, the ABCPs, the monoline insurers, and now SIVs.

I’d be watching the financial results of the world’s biggest banks very closely. Market watchers have been predicting bad to worse results.

As this unfolds, I will be re-considering many of the once-considered secure savings or investment plans.

As I write this, news just broke that CitiGroup is looking to retrenching 10% of it 375,000 global workforce.

6. What to do with Savings and Fixed Deposits

There was once when the almighty fixed deposit is the cornerstone of any good retirement portfolio.

At today’s inflation rates and uncertainty of financial institutions, I am cutting my cash stash in savings and FDs to a minimum.

In Singapore, these yield 0.25% - 2.5%, way below the government’s published CPI rates.

7. What to do with Mutual Funds

There are many funds to choose from. The important thing is that you make your own choice. No matter how big a portfolio you have, understand that fund employees are rewarded based on fund subscription and not the growth of your portfolio.

This is what I call taking your power back.

If you don’t want to make time to understand what’s happening in the world, you really cannot blame anyone when your investments take a beating.

Fund managers will rate their funds based on a risk factor of 1-10. Despite the change of the super-cycle and the advent of the commodity bull cycle, commodity-related funds are still ranked a 10 on risk!

Make your own judgement call and consider switching your mutual funds portfolio to those related to agriculture, metals, energy and infrastructure.

8. What to do with Blue Chip Stocks

Once again, as with mutual funds, don’t buy simply because your stock broker recommends it. Do your own research and make your own calls.

One of the most compelling reasons to invest in stocks is dividends. Look for stocks that have consistently paid out high dividend rates over the last decade. And, always reinvest dividends.

Don’t be limited to only stocks available in your country. Think global and join a local online securities firm that lets you buy stocks from major markets. Check that your country has double-taxation arrangements with the other country so you don’t get taxed twice on your dividends.

My own search for high yield dividends stocks in the burgeoning commodities bull market has taken me all the way to Canada.

9. What to do with your Insurance

Here, I am talking about your investment type insurance. At any time, you should always have sufficient coverage for life and medical purposes.

Run through all your plans with your insurance agents and ask them to explain the risks in the investments that are taken by their firms with your plans.

Consider closing those plans that have invested in the ‘wrong’ markets or are generating less-than-inflation returns.

10. Hedge in Gold or Silver

From the beginning of 2008, gold has gone up close to 14%, and silver in excess of 30%.

Many analysts believe that both are due for a big correction soon. They analyze these precious metals as if they are base metals, e.g. copper and nickel, where normal market forces of supply and demand play a big part in pricing.

I believe people who accumulate gold and silver think of them as a store of wealth. Both are very good hedges against currency devaluation.

The price of oil expressed in ounces of gold has been fairly stable in the past 5 years. And it should be rightly so. Since a barrel of oil, well, is still a barrel of oil. Looking from this perspective, it is the value of money that has diminished.

There’s a lot more that I can write about this topic. In this installment, I hope to convince you that you should take another look at your retirement plan and rework it so that it delivers the results that you want.