It is sad and scary, the way this financial crisis has destroyed the value of financial instruments that a lot of people were depending to not only cater for the present incomes, but also future cash flows that would have been used to replace the income earned from employment once somebody decides to retire. This has demonstrated that it is always advisable to have more than one set of skills or sources of incomes to mitigate the effects of loss of income in case of job loss. The following article by Liliane Walder on how the financial crisis has affected the pre-retirement and the retired individuals, and shows ways of surviving a recession when you are about or have retired.
Pension funds have lost about 5 trillion dollars worldwide during 2008. And the disastrous losses do not stop at that amount, because the stock exchanges started the year with further grave losses. The financial crisis will have a serious impact on the way of life of the generations in the age bracket of 50 years and older. The problems have to be differentiated between the following main groups: the pre-retirement age and the retirement age. The close pre-retirement age lasts from 50 to the statutory pension age of between 58 and 65 years in most of the industrialised countries, and the retirement age begins after the statutory retirement from work and the beginning of pension payments.
The risks for the population between 50 and retirement from work
This part of the population lives in an uncertain situation. Most of the pension funds have suffered serious losses. The liabilities exceed the assets of most of the pension funds. Thus, pensions could be cut and be lower than expected in the future. This could result in a weaker purchasing power for the next generation that reaches the pension age within the next 10 to 15 years.
If the people have saved money besides the pension funds of their employer, or if they did not join a corporate pension insurance and rely on other retirement schemes, they also have experienced losses on their assets in stocks, funds or real estate. It is difficult to catch up serious financial losses within a few years. It makes matters worse if they lose their job a few years before reaching the pension age. They still are not eligible to receive a pension income, and they have trouble getting a new job in an advanced age. Some employers might provide them with a compulsory retirement, but this kind of schemes always means a shortage on pension payments. These people even can lose their own homes, if their income is no longer able to allow them to pay the mortgages on their real estate. The situation gets worse if they have to pay back interest rates, and redemption rates on other debts.
How to cope with such a horrible prospect
There is no easy solution:
- The best and simple way would be to invest about a quarter of the savings in gold. Gold seems to become a durable currency that can be converted in any paper currency if needed. There is no confidence in stock investments, and there are doubts in the future value of the money. Many experts forecast inflation.
- People need to be flexible and even to learn something new skills and trades after many years of professional experience, in order to get another job after they have been dismissed. This will be a very tough task, because jobs can get very rare. People are in a favourable position, if they have acquired some practical skills and crafts. There is always a chance to get something to do for people who can repair machines and equipment, can do plumbing, are able to amend clothes, can cook for catering services or care for elderly people. Such jobs could help to gap the time until a person is eligible to receive a national or corporate pension or both of them. The high time is over for bank clerks and investment bankers. It is better to acquire professional skills that can be applied on a variety of jobs, than to stick to a highly specialised profession and the skills are of no use elsewhere.
- Cash is king. People should use the opportunity to use all kinds of tax deferred saving schemes. There is a great choice of such saving schemes that banks and insurance companies of western countries offer. And it is commendable to save much higher amounts than tax exemption rules provide for. The more savings can be accumulated the better. People should start saving at a young age, and intensify it after their children are grown up and educated.
- Saving money is better than purchasing a luxurious car that consumes much fuel, and high maintenance costs.
- Health insurance is a proven prevention against poverty. Most of the Europeans have compulsory health insurance systems. Americans should grasp the chances of getting an overall health insurance system.
- Debts are a dangerous poverty trap. People should budget their monthly consumption according to their income. They should restrain from using loans and overdrawn credit cards and bank accounts.
- It is favourable to live in own property, either a house or a condominium if affordable according to the regular income. It is recommendable to use savings for mortgage redemption in order to lower the liabilities before the pension age is reached.
How to cope with the financial crisis after reaching the retirement age
Most of the above hints are valid for people who are already retired from work. Only few tips have to be added:
- It is tough if people still are compelled to work in order to earn their living, because their pension income and savings are insufficient. Some legislations and pension fund rules allow a deferred retirement and subsequently a higher pension income. This opportunity to receive later a higher pension should be used if the labour market situation allows it. It is fine, if elderly people still can work voluntarily. Work also means to join the social life, and to interact with the younger generation. It is, however, difficult to find a job for elderly people while masses of younger people line up in front of the labour offices.
- Flexible people with some skills for crafts might still get paid by doing some work: e.g. either helping farmers during the harvest season or doing some gardening for landlords. They could assist wards at office buildings. They could help if others are on vacation. Baby sitting or pet sitting are also popular occupations in order to generate some side income.