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Today I'd like to revisit a topic we've talked about extensively in the past.
It's a situation so severe that it will impact every investor when it hits.
Whether you have a pension plan or not doesn't matter.
There is a very good chance that you and your money will get taken for a ride within the next five years if you don't heed my warning.
Obviously, I don't want to see that happen, which is, of course, why I've got three very specific investment recommendations for you in a moment.
First, though, let's talk about what this crisis is and why I believe it's so critical that you take steps to protect your wealth immediately.
American Pension Funds Are an Unmitigated Disaster
The 2017 data is not yet available, but I can't imagine the situation is much better than it was in 2016 when state pension funds took in $130 billion from employers and employees and paid out $214 billion in benefits – a net exit of $84 billion that year alone.
People used to think that this was a problem somewhere "down the road," which was always inferred to be a few decades from now. That was certainly the political party line for decades, anyway.
Now, though, Bloomberg's out with a new article backing my assertion that this is a "right now" problem that could surface within the next five years.
People ask me all the time how this could possibly be when the very same pension funds are setting aside assets, income, and net benefits directly from their paychecks?
To which I reply, "Nobody ever went broke on accrual accounting."
It's the cash you want to look at.
A staggering number of pension plans simply don't have the necessary cash on hand, which means they cannot pay this month's checks, let alone those 25 years down the line.
Take New Jersey's state fund, for instance.
Bloomberg points out that the Garden State has approximately $78 billion in its pension coffers and yet has to cover future payments with a present value of $280 billion. Simple extrapolation suggests that New Jersey has less than seven years of cash on hand if you were to freeze the state's pension fund right now… and only 3.6 years if you strip out growth at the same time.
But, freezing is impossible. Politicians whose votes depend on keeping millions of hard-working people happy and distracted will go to the ends of the earth to perpetuate the illusion.
So, they'll do what comes naturally by promising more services even as they cut budgets and implement still higher taxes on damn near everything and everybody. Living within their means would be a rational alternative, but I'm not aware of any politician who understands the difference and is willing to make such a tough call.
The situation is made doubly bad by the fact that current federal bankruptcy code does not allow states to declare bankruptcy, which means there will be protracted legal battles and constitutional arguments ahead… even as the cash I've just mentioned gets spent faster than actuarial types expect.
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When I worked at Wilshire Associates decades ago, the bogey was around 8% a year in total returns for pension fund actuarial planning and investment allocation decisions.
That's dropped to around 7% to 7.5% today, which is still unreasonably high at a time when the average total return for a U.S. pension fund was 1.5% a year in 2016, according to the 2017 annual report from the National Conference on Public Employee Retirement Systems.
Pension funds, incidentally, need 6% to 7% a year just to remain solvent, so this is not inconsequential.
Again, the numbers are hard to come by, but I've seen estimates suggesting that U.S. pension fund systems may be underfunded to the tune of anywhere from $1.8 trillion to as much as $8 trillion.
The following states are particularly at risk: Michigan, Pennsylvania, Florida, Ohio, Oregon, Colorado, Kentucky, and Rhode Island, because they're the ones most likely to run out of cash the fastest, according to Bloomberg's research.
My own research suggests that Illinois, Arizona, Connecticut, and of course, California aren't far behind.
And the vast majority of politicians still can't see the elephant in the room.
The number of retirees is rising faster than it's ever risen before. There were roughly 121 million American's working in 2007 when the Financial Crisis hit. Now there are nearly 126 million.
That sounds great until you realize that the number of folks claiming Social Security has jumped from 54 million back then to 66 million today.
More people are leaving the workforce and/or aging now than at any other point in modern history.
Three Ways to Position Yourself for Protection (and Profits)
Fortunately, you can do something to protect and even grow your wealth when the you know what hits the fan.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.