People about to retire have been absolutely decimated by the credit crisis. They have been hit on every front imaginable. Let’s take a look at the typical portfolio of a retiree. First of all, their the largest asset is probably their house. In sterling terms, house prices are down almost 20% from their peak. When measured other currencies, the picture is much worse. Measured in gold, euros and US dollars, UK property prices are down 65%, 30% and 50% respectively. This is having a terrible impact on the baby boomers who have mortgages although most are mortgage free. However, their inheritance has been decimated at exactly the same time as their children could use a financial boost.
In terms of their equity investments, baby boomers and other retirees have seen close to 50% falls in their portfolio values. Not only has their income been cut, but it is likely to fall even further and they are likely to suffer from the ravages of higher inflation when the quantitative easing works through the economy.
In addition, their pension funds have been almost wiped out. In the UK today, the law states that before the age of 75 a retiree must buy an annuity with any remaining pension fund. The return on this annuity is calculated broadly by a mixture of life expectancy and interest rates. Since interest rates have fallen substantially, the returns from government bond investments have followed, and annuity rates have in turn followed bonds. Five years ago, a 65-year-old could have expected to get around 6% from an annuity investment. Today, that figure is less than 3%. When this is combined with their loss in equity value, the value of expected pension income has plunged almost 75%. If we factor in the coming inflation, the fall is even greater.
Once glittering retirements now look like they will be barely above the poverty line.
The fourth way in which retirees have been hit is in their cash investments. Many retired people are sensibly advised to move into cash after the age of 55 to protect them from exactly the type of event we have recently witnessed in the stock markets. Even after taking is good advice, they are not cushioned from the blow to their income. With many accounts now only paying 1% or 2% interest, and income which five years ago looked like it was 6%, is now a fraction of that. In many cases, to pay for the rising cost of living, retirees are being forced to spend their cash balances. This impairs their ability to recover from the current financial downturn and will drive them into a much worse retirement in the long term than ever expected to have. How bad it will be will depend on how high inflation goes.
