Multiple crises sabotage retirement plans
The banking crisis and credit crunch
With high profile bank failures a weekly occurrence, many Americans have been thinking twice about their bank deposits. Created by the Glass-Steagall Act of 1933, the Federal Deposit Insurance Corp. guarantees the safety of checking and savings account deposits. The $100,000 limit was recently increased to $250,000. While no one has ever lost money on an FDIC-insured account due to a bank failure, the recent news of doom and gloom is enough to scare some into running for cover.
Adam hasn't seen many clients running out to the banks to withdraw their cash but she says the problems in the financial sector have a hard impact on retirees because many of them own financial stocks. Some of those stocks that were once considered conservative investments have lost half their value in recent months.
"For someone keeping cash in the bank, I don't think it is a problem, but the financial components have been hit very hard and investors have really taken a hit."
While the credit crunch will have a minimal impact on most retirees, it can be extremely damaging to those who may be upside down in their mortgages or to those who took out an adjustable rate mortgage. Those who were planning to downsize may also have to settle for selling their house for much less than they expected, not just because the housing market is declining but because it is harder for prospective homebuyers to get loans.
Fear of the unknown
Most financial planners agree that it isn't necessarily the financial crisis that can do the most damage, but a person's drastic moves based on emotion and fear instead of careful planning. Adam says that as people see banks failing, stocks tanking and corrupt business executives slashing pensions while lining their own pockets, they begin to lose faith in the system. And when they lose faith in the system, they want to hold on to their cash and invest less.
"It is confidence in the system that is the most profound price we are paying. People have a hard time believing in their elected officials and the people running companies and when they lose faith, they don't want to participate anymore," says Adam.
Christine Fahlund, a senior financial planner with T. Rowe Price, says there could be a silver lining in the fear that the doom and gloom is creating. Considering that most Americans don't even save adequately for retirement, Fahlund says that the constant news make awaken some people from their debt-laden, cash-strapped slumbers.
"People are starting to wake up and realize that they aren't doing enough. If you are in your 40s, this is a real blessing and might be the wake up call that you needed," says Fahlund.