Thursday, July 19, 2018

Financial Security?

I'm getting close to retirement age and have been making preparations for the time when I don't have to get up before dawn and freeze (or sweat) my butt off just to put food on the table. I've worked blue collar jobs most of my life, so I have some savings and a retirement account set aside, but I also know that the concept of “financial security” is a recent invention and is about half myth. I promise, this isn't going to be a political post -- we don't do those here.

Let's look at the basics:
  • Finances are based on money, which in the USA is measured in dollars. Those dollars are backed by faith and trust in our government... the same government that can't live within its own budget, even though it gets to write the tax laws and the budgets.
  • There is no material backing for our money (the system is known as fiat currency) and it has no intrinsic value. It's not allowed to have any intrinsic value. To be blunt, it's imaginary money, and the US Mint is constantly changing our coinage to ensure that the metal content is less than the denomination (pennies aren't copper any more, and nickels are on the list to be changed soon) just so we don't melt them down for a profit. 
  • To make things worse, around 90% of those dollars don't even exist in physical form; they're digits on a computer spreadsheet. If anything were to shut down the communications between the computers that track our money, or the computers themselves, all of that digital currency disappears.
  • Banks loan out up to nine times as much money as they have deposited, a practice known as fractional-reserve banking that is legal and often encouraged by the government. This further decreases the value of the physical currency in circulation.

Security is the second part, and the most mythical.
  • Having money deposited in a bank is only as secure as the system that tracks it. No bank keeps their deposits physically on-hand; it's all digital in today's world. Digits are harder (but not impossible) to steal than physical cash, making banks less prone to robbery. Those deposits are insured through a government-run program (FDIC), but only up to $250,000. That's on the low end of any retirement fund, so don't put all of your eggs in one basket.
  • But I have an IRA/401(k) retirement plan, so I'm good, right? Sorry, but both of those are based on the stock market, which is an entirely different level of imaginary money. The value of a stock/bond/note is only what someone is willing to pay for it, so owning $100 dollars worth of stock today can turn into owning $1 worth of stock tomorrow if nobody wants to buy it. I lost about $80,000 worth of “value” when the stock market took a wrong turn in 2008, so I know how fast stocks can be devalued. There is no insurance for retirement accounts like there is for bank deposits.

Someone out there is laughing to themselves because they bought gold or silver to hedge against losses in the stock market. 
  • Unless you have physical possession of those precious metals, you don't own them. You may have a certificate that says you “own” a certain amount of gold, but unless you can put your hands on the metal, all you have is an expensive piece of paper.
  • Even if you have the metal in a safe or safety deposit box, it's not secure. There is precedent for the confiscation of gold by government decree: in 1933, the US government outlawed the “hoarding” of gold, and forced the sale of most privately held coins and bars to the Federal Reserve. They paid about $21 per ounce for the gold, then set the price at $35 per ounce to boost the holdings of the Federal Reserve. The Federal Reserve is a private bank, meaning it's as much a part of the government as Federal Express.
  • There is also the example of the “Liberty Dollar”, an alternative currency that was shut down by the US government. Although a judge finally ordered that the coins seized be returned to their owners, it took almost seven years for that decision. A lot can happen in seven years.

Bitcoin and some of the other crypto-currencies rely on the Internet and digital communication for their existence. I understand the basics of block-chain encryption and how the coins are “mined”, but they seem to be a fragile vessel for carrying wealth. Any disruption, natural or man-made, of digital communications would place your “money” out of reach or wipe it out completely.

I don't like to be the bearer of bad news, but money is a gamble. Regardless of what the salesmen may tell you, there is no guaranteed method of storing money for retirement. Cash buried in the backyard will lose value due to inflation (which can be astronomical; see Zimbabwe or Venezuela), and can be rendered worthless if the government decides to print new bills.

Real estate is about the only stable way to store wealth, since (volcanoes aside) they're not making any more of it, but I know not everyone has the opportunity or resources to buy land. I have a few family members who had rental properties that were sold when retirement time came. They didn't make a killing, but it was a nice way to ensure that they had something to rely on besides savings and the stock market.

This is one of those topics where I don't have an answer for you, but rather just want to make sure you're aware of the risks. We might all get lucky and the next major crash won't happen until we're all dead and buried, but I don't like to rely on luck.

If any of you have something to add, feel free to leave a comment here or on our Facebook page.

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