Broken Nest Eggs Add To The Turmoil

I've written plenty already about today's unemployment report, but there was one aspect I haven't mentioned that I found a bit puzzling. The labor force size (not seasonally adjusted) decreased in August by around 1.4 million people. At the same time there were 12,000 fewer marginally attached workers (includes discouraged), which implies even more people left the workforce who are in no way marginally attached or just discouraged. What happened? Well according to a New York Times story yesterday, it probably isn't because baby boomers are retiring.

The Times' article paints yet another grim reality for hopes that the ultra-high unemployment rate might decrease as quickly as it increased: older workers are deciding to wait longer to retire. Why? Because they lots so much of their nest egg in the stock market crash and real estate bubble. Now they aren't comfortable parting with their income.

The Times explains the consequence:

As a result, companies are not only reluctant to create new jobs, but have fewer job openings to fill from attrition. For the 14 million Americans looking for work -- a number expected to rise in Friday's jobs report for August -- this lack of turnover has made a tough job market even tougher.

And the Times notes a telling statistic:

A Pew Research survey scheduled for Thursday release found that nearly four in 10 workers over age 62 say they have delayed their retirement because of the recession.

The phenomenon is real. The article goes on to partially blame losses from stocks in 401(k) plans. That makes sense, but for older workers who are closer to retirement, the stock to bond ratio should be relatively low. According to the Times, it isn't:

One study found that nearly a quarter of Americans ages 56 to 64 had more than 90 percent of their 401(k) balances invested in stocks instead of bonds, against financial advisers' standard advice for people nearing retirement age.

This statistic is lunacy. Even my 401(k) stock-to-bond ratio isn't that high, and I'm decades away from retirement. Having an ultra high equity mix near retirement age defies the entire purpose of a 401(k). As a result, I would almost suggest that after the age of 55, if the ratio at which you invest in your 401(k) each paycheck isn't at least 50% bonds (or arguably even higher) then you should not be allowed to make those 401(k) investments tax-free. With a long-term horizon, stocks are a wise investment. With a short-term horizon, they are not.

Of course, real estate was also a problem. I know stories of baby boomers in Florida who thought they would sell their home, move to a smaller condo and retire. Since then, some homes have lost as much as 30% to 50% of their value, and dreams of imminent retirement seem distant. Not only can they not sell their home, but the wealth they thought it provided has disappeared.

In that case, these individuals aren't entirely to blame. While many predicted a real estate bubble, few lost much sleep worrying about it. And almost no one thought it would get as bad as it has. The home price drops we're seeing in some areas are historically unprecedented, while real estate had been considered by many to be one of the safest investments out there. Some might have argued it was safer than even bonds.

With baby boomers reaching retirement age, given that there are so many of them, that could have alleviated some of the job market woes. The jobs they left to retire could have been filled by the unemployed. That's not happening. This just adds another reason why we should expect to see high unemployment levels for quite some time. And as usual, this phenomenon will be even more pronounced for states hurt most by the real estate market's collapse.

So what might we learn from this? Maybe having some money in a savings or money-market account isn't always such a bad thing. I know the moment I say that, inflation will make a fool out of me, but certainly a diverse portfolio, including some money in a something like a money market seems prudent. And the closer to retirement, the larger the percentage of your wealth you should have shielded from risk.