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In my continuing series of Financial Disaster Preparedness, I’m going to focus on Synthetic and Systemic problems that have the potential to create financial Armageddon on a national and global economic scale. I’ve broken down these hidden disasters into four types:

  • “Boomer Armageddon”
  • “De-gentrification/Geriatric-fication Armageddon”
  • “FDIC/SIPC Armageddon”
  • “Energy Armageddon”

I’ll focus on the first and most obvious today “Boomer Armageddon.” The “Boomer Armageddon” is recognizable to many financial bloggers and the general public. The main stream media has occasionally mentioned the issue but even more importantly, outgoing Fed Chairman Greenspan made it a point to repeatedly warn Congress that this disaster is headed this way. It’s almost like we all know a Category 5 Hurricane is headed to New Orleans but no one wants to do anything about it….and we all know what happened next.

What is a “Baby Boomer?”

Boomers describe people born between 1946 to 1964 right after the end of WWII. Roughly speaking, there are between 78 – 80 million people “classified” as Boomers. Assuming there was an even breakdown of birth rates per year then this translates into 4.3 million people born each year from 1946 to 1964.

What is “Boomer Armageddon?”

There are roughly 78 million people retiring beginning from 2011 thru 2024. The first batch turns 65 in 2011. This would roughly translate to a work force drop off of 4.3 million people each year from 2011 through 2024. By 2018, there will be roughly 40 million people on retirement and on the dole to some extent.

The implication here is serious and dangerous and here are the reasons why. As a person enters retirement, several things happen such as:

  1. A retired person no longer draws a salary nor does he/she pay as high a level of taxes as during their work year. (The major negative here is the elimination of payroll tax contribution, lower income tax contribution)
  2. A retired non-working person no longer contributes money to his/her 401k and thus subsequently does not support/inflate the various financial markets
  3. A retired non-working person no longer adds to Growth Domestic Product. There is LESS productivity in America because of the shrinkage in workers. Yes, they will continue to consume and spend money but this is NOT PRODUCTIVE contribution
  4. A retired non-working person begins to WITHDRAW money from their investments. Imagine 4.3 million people each year withdrawing $2500/month each year –that’s $10,750,000,000! That is only the first year 2011; add an additional 4.3 million or 10 billion each year after than until 2024 when the bleeding slows down
  5. A retired non-working person begins to take social security benefits. Many will be in for a shock when their paltry checks aren’t enough to feed them, clothe them, medicate them or pay for living expenses. What will happen? They will vote for more tax increases to pay for increases in social security.
  6. A retired non-working person will begin to heavily utilize Medicare/Medicaid. Let’s face it, growing up during “boomer” times many people acted very unhealthily; Boomers smoked in their teens, they lived thru the 60’s drug revolution, sexed themselves through the 70’s, fattened themselves through the 80’s, and indebted themselves through the 90’s. The boomer population doesn’t have the healthiest lungs, livers, bones, or hearts so they WILL tax the healthcare system heavily. Who’s going to pay for all that medical help?

How do you prepare or fix this?

If this were a chess game, I’d say we were two moves away from being check-mated -game over scenario. There are many solutions to the problem but none of them are pleasant.

The most obvious solutions are to extend the retirement age, increase taxes, cut benefits, and reduce personal consumption. All of these things lead to a lower standard of living. In essence, Americans would turn into third world residents and this is why these suggestions are generally rejected by the public.

Other solutions include increasing the immigration rate, amnesty for the 12 million illegal residents in the US, and reduction of outsourcing. Unfortunately, immigrant bashing is in vogue these days and Congress is debating how to throw people out to appease those same voters that will be in desperate trouble a few years from now. I suspect a forthcoming irony over the next 10 years where perhaps people in Latin American countries do fix their economies and government and reduce their migration into the US exacerbating the boomer problem.

So what is there to do?

The goal is to help you try to financially prepare for the disaster so here are some suggestions:

  1. Buy real estate in a foreign country. If you have the cash, I would encourage you to buy a retirement/vacation home in a country with a relative low cost of living. Depending on your language skills, preferences and such you can pick from such places as Costa Rica, Panama, Argentina, or the Dominican Republic or far away places like Australia or New Zealand.
  2. Beginning around 2008, I would aggressively move out of stocks and into cash or Treasury bonds. Forget about trying to get 10 to 20% return from the markets beyond 2010, I just don’t see how that can happen unless so many problems are fixed.
  3. If you’re still working, be prepared to cash in. With a depletion of workforce on such a large scale, there should be a great deal of opportunity out there for those with the right skills and work ethic.