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Bye, bye credit, hello to a much simpler lifestyle

WHAT TO DO NOW AFTER THE MELTDOWN IN FINANCIAL MARKETS

You must be as happy as I am that this election is finally over. The negativity and even hatred expressed over the last 18 months toward some elected officials was most disturbing. Now, it’s good that a majority of voters believe in President-elect Obama’s message of hope. In these difficult times, psychology plays a big part in the economy and the stock markets.

At least in the short run, there are some positive economic developments. Regardless of how well it may work, a new stimulus package is a virtual certainty. In addition, even China announced a major economic plan to boost its economy. Most encouragingly, the various financial market rescue packages are starting to work. For example, the commercial paper market is open again and the all-important interbank LIBOR interest rate is easing.

Despite a few positive, short-term developments, we need to think about our own financial situation for the longer term. However, before we do that, we should take a look at where we are today. Although we may still be numb from last month’s market turmoil, this is fortunately a once in a lifetime “tell the grandkids about it” moment, when governments around the world decided in unison that it has become necessary to change the very framework in which financial transactions take place and credit is used.

It should also be apparent that what’s happened will change the American way of life permanently. The reality of not being able to get and use credit in the same way that we have done for the past 50 years will have a profound effect on our economy, our institutions and, ultimately, our living standard. When credit was readily available, we as individuals had the choice of how and where to live. Without easy credit, we have lost significant control and flexibility over those decisions.

Therefore, I believe that while our economy, the real estate and stock markets will recover over time, the American lifestyle of the future will move closer to that of France, Germany or the U.K. with much greater government involvement in its citizens’ lives.

Since most of the financial concerns that we now deal with affect not only our investments but our lives, the retirement planning process has become more complex and uncertain than ever. Since election outcomes don’t change reality, we all need to address how to get through the current economic crisis and regain some control of our future.

I believe that one of the first things that we should do is to re-examine our life goals. Although this is an individual effort, we can use some specific examples to illustrate what people might have to deal with depending on their stage in life. The operative principle here is that the longer one’s time horizon, the more control one has to change the outcome.

For example, those in their 50s with kids soon to be in college may face the difficult decision between committing several hundred thousand dollars to their kids’ education or refloating their retirement plans. Obviously, compromises between competing goals may be possible such as, in this example, keeping the kids closer to home in order to reduce college expenses.

For those in their late 50s for whom retirement was a definite possibility before the market meltdown, leaving their profession or selling the business may now have to be postponed for a few years. In addition, much more planning for a significantly changed retirement lifestyle will now need to be considered.

Sadly, retirees are the most seriously affected age group. This group may not have the time to wait until their portfolio or home value recovers enough so that their desired lifestyle can be maintained. As a result, this group may face the agonizing decision of having to invade their capital instead of just living off the income or appreciation. While the idea of leaving less of a legacy to their kids might be acceptable, it becomes a much more difficult decision if there are major life expectancy differences between spouses.

As sobering as all of that may sound, I would like to leave you with a thought that has guided my life. Being optimistic about the future is the only acceptable reality in life and is the only worldview that is supported by history.

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Dieter Thurow, CPA, provides strategic retirement planning services to affluent professionals and entrepreneurs. He is located in Healdsburg and welcomes your comments at dieter@dthurow.com.