Peak retirement

As members of America's baby boom generation come to retirement age, they are experiencing an unwelcome confluence of events that is already causing many to postpone or scale down plans for retirement. The swoon in the world's stock markets, the crash in housing prices, low interest rates that reduce income from savings accounts and CDs, and rising costs for basic necessities such as food and fuel are all bedeviling current and would-be retirees.

In the past these circumstances have been viewed as temporary problems that would pass with the inevitable turn of economic cycles. But with the evidence for a nearby peak in world oil production growing--see David Cohen's excellent piece "Peak Oil is a Done Deal" which suggests a peak around 2011--it's possible that many of the adverse circumstances now beleaguering existing and would-be retirees will become long-term fixtures of the economic landscape. In short, we may be seeing peak retirement as those who are expected to retire in coming years find it increasingly difficult to do so.

Let's examine those adverse circumstances to see why this could be the case. For most people real estate investments really mean the homes that they live in. Of course, the appreciation in home prices until recently has been nothing short of spectacular. But now, real estate prices nearly everywhere in America appear to be in freefall. While the S&P Case-Shiller Home Price Index indicates a decline of about 14 percent nationwide in the last year, some the hardest hit areas are those with high concentrations of retirees such as Phoenix (-18.8%), Las Vegas (-22%), San Diego (-26%), West Palm Beach, Fla. (-32%) and Cape Coral, Fla. (-35%).

Perhaps most at risk are homes built in the outer ring suburbs or in the middle of cornfields which are the furthest from retail or employment centers. An oil peak implies continuing high energy prices that will make such homes less and less attractive over time as the cost of commuting to work and to retail centers explodes. And, no matter where one lives, those high energy prices will add substantially to maintaining a home as both heating and cooling costs rise.

Many retirees want to live in condominiums, rental units or retirement communities where much of the daily maintenance is done by others. But to do this they must often sell their homes first. With home prices plunging and the inventory of unsold homes growing, however, they are having to wait. Ultimately, they may be forced to accept much lower prices than they are hoping for.

Since the presumed reservoir of wealth that is the family home is drying up, many retirees are hoping to find salvation in their retirement savings. Here too the effects of the approaching oil peak are beginning to show. Most of those with various retirement vehicles such as 401K plans and IRAs or with substantial savings outside of these vehicles were advised that the best investment for the long run is stocks. And, until now that has largely been the case.

But both the housing collapse and the high price of energy have recently helped to put stocks on U. S. exchanges into bear market territory. A nearby oil peak implies very slow economic growth for the world as a whole and perhaps economic contraction for many years to come after the peak occurs. This presumably will be accompanied by high inflation as energy prices remain high or go higher. And, of course, high energy prices will feed through into inflation in virtually every other part of the economy. That's because almost nothing can be produced or provided without expending energy from some external source and especially without using oil in some form.

None of this can be good for stocks in general except those linked to rising prices for everyday necessities such as food and fuel. It doesn't mean that stocks can't rally from time to time or that the world economy won't be able to manage spurts of growth occasionally. But economic growth will become increasingly difficult to achieve as first oil, then natural gas, and then coal peak. Unless there is a remarkable political turnaround that puts the whole world on a crash program to build a renewable energy economy, the trajectory for energy supplies looks increasingly like it will begin to trend downward in the decade ahead.

The global economy was built on the premise of cheap, ever-increasing supplies of energy. Energy is really at the root of true wealth. Without energy no resources can be extracted from the Earth or subsequently refined, manufactured into products and shipped to their destinations. So dependent has our modern agriculture become on oil and natural gas that without them it would be impossible to feed the 6.7 billion people on the planet unless we put many more of them to work as farmers, planted many more acres including those available in and around cities, and reduced the amount of feed given to animals. Absent increasing energy supplies, the value of financial instruments such as stocks and bonds that represent claims on the production of goods and services in the economy will become increasingly impaired. Ultimately, what we call money in the modern economy is nothing more than the ability to command energy to do what we want it to do.

All this implies that except for those (probably very few) retirees who have put their savings in investments that benefit from rising energy and food prices or in inflation hedges such as precious metals, most will find their savings inadequate for a comfortable retirement. Many may not be able to retire at all without severely curtailing their consumption.

There are, of course, the payments from Social Security that retirees receive. Some also have company or public employee pensions that pay them a monthly amount instead of a lump sum at retirement. But these streams of payments are dollar-denominated for American retirees, and with the financial condition of the federal government deteriorating daily and the huge trade deficits that have been around for decades, it is doubtful that the dollar will hold its value. Those Americans living overseas in countries with rising currencies who receive pension payments in dollars already understand this only too well.

But it is all currencies which are losing value against the goods and services we need every day. We could, of course, merely be in another cyclical downswing in economic activity and another cyclical upswing in inflation. The era of long-term energy stringency may lie further in the future.

However, mounting evidence concerning future energy supplies and the unfolding developments in the energy markets suggest that a peak in oil is near. And, if this is, in fact, the case, we can expect a peak in the number of people who can afford to live out their old age without working. In other words, peak retirement may be just around the corner.

This poses another problem. In an energy-constrained future, the economy may not be able to provide jobs to all who want them. That means that even those retirees who want to work to supplement their incomes may have a hard time finding as much work as they would like or, in some cases, finding any work at all.