Retirement Investing During Deflation
If a recession becomes severe, dollars may suffer from deflation rather than inflation. This would change the rules you have for retirement investing over the past 30 years. What should retirees consider doing if deflation sets in?
We’re familiar with the effects of inflation. Our dollars just don’t buy as much as they used to. Too much ‘easy money’ from too much credit puts more dollars into everyone’s hands so each dollar is worth less than before. So too many dollars are chasing too few goods and the prices of goods are bid up. In this typical inflationary environment, retirement investing rules are to get rid of cash and hold hard assets like real estate.
But when recession occurs, everyone becomes afraid of consuming. Businesses feel the pinch and people lose jobs. Government may try to ‘prime the pump’ by offering and instigating low interest rates. That reduces the cost of credit and hopefully to get people to begin borrowing and ‘consuming more’.
But if the turn down is too severe, very few people will be enticed to spend money. The money supply actually contracts. The results in a low demand to buy most things and can force prices down. And deflation is the general decrease in the prices of goods. Your dollars are worth more! Rather than get rid of dollars, you want to own them and convert them selectively to assets that have fallen in value (real estate, stocks, etc).
Most retirees have no job to lose. They’re living off Social Security, pensions and their investment earnings. Most of this retirement income may be fixed income. Those in such a circumstance can actually benefit from deflation – mostly from the benefit of lower prices for things.
But under deflation, dollars become more valuable and debt – i.e. owing a fixed amount of dollars – becomes more of a burden. So retirees should reduce the cost of their debt by reducing payments or restructuring.
As deflation sets in you’re paying off debt in more expensive dollars. So any way to reduce the dollars you must commit to debt payments is beneficial.
Restructure your debt payments. With recessions comes falling interest rates. Take advantage of lower interest rates to restructure debt payments you can’t pay off quickly.
Refinance your home. If you have a mortgage, refinance at lower interest rate to cut your monthly costs – or to pay it off over a reduced time period.
Since the value of cash is increasing, holding it will increase your wealth – but only during deflation. Aside from preserving your emergency funds, you’ll want to hold dollars for retirement investment opportunities at low prices.
If you do have extra cash, stay aware of overly depressed investment prices and commodity prices (oil and gold)that will recover after the recession ends and present low risk retirement investing opportunities. Real estate investments – especially condos – are a typical case. It may even be worth a small remortgage of your paid off house for some investments (this strategy is not suitable for everyone as any borrowing will incur a fixed payment commitment while the return on investments is not assured).
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Tags: deflation, retirement investing
February 28th, 2009 at 3:50 pm
With current real estate prices and tightened credit standards there are some excellent opportunities to buy homes as rentals and create passive income as you wait for home values to rise. I have had no problem renting the homes I have bought and the renters are paying the mortgage AND I have income left over at the same time!
March 6th, 2009 at 4:44 pm
Gold and oil are a great buy when thier is deflation. You get the stock or etf at rock bottom prices. You can make some good money when inflation comes back and some funds pay you to wait. Everyone should have some oil and gold and maybe trusts or reits besides stocks and bonds.
Best etf funds lists last blog post..Gold double long etf.
March 22nd, 2009 at 7:17 am
I agree that real estates can be a good investment in this time. It’s a great opportunity but still try to consider if you will love the place.
April 1st, 2009 at 10:19 am
Is real estate a valid part of a self-directed IRA?
April 6th, 2009 at 12:08 pm
Great article. One thing people need to realize is investing during a depression is all about positioning. While deflation of the dollar will negatively impact the masses, with a little careful planning you can easily put it to work for you. There are industries out there that literally pray for depression because it positively effects their cashflow. Find out what these industries are, put you cash behind them. Thanks for the Read.
April 30th, 2009 at 4:07 pm
When inflation picks up Tips would be a good idea. The payment goes up with inflation.
May 18th, 2009 at 7:56 am
Insurance Sectors,Real estates,Gold and oil can be a good investment in this time to make our future best.Since the value of cash is increasing, holding it will increase your wealth, although there is lots of deflection in market but these plans are best on retirement.
July 2nd, 2009 at 4:42 am
While there is definitely deflationary pressures on the economy and it is clearly contracting. I am very concerned with all of the borrowing and other economic policy that the fed is incorporating right now. There is a lot of money that is being created and mostly parked on the sidelines as banks are still to timid to loan. However once the economy turns a corner and things start to move, all of this parked money is going to come roaring on to the scene as people feel good about spending again. I feel that at a certain point, deflation will rapidly turn into inflation. I also feel that the inflation that we are going to experience in a few years will be much larger and much more destructive than the relatively small deflation we are experiencing now.
July 3rd, 2009 at 1:15 am
Real estate i think not good investment this days. Gold prices hike up recently. Maybe its best to start thinking self employment rather than depend on company to raise our salary. Its good investment also with starting small business.
July 7th, 2009 at 12:31 pm
With current real estate prices and tightened credit standards there are some excellent opportunities to buy homes as rentals and create passive income as you wait for home values to rise. I have had no problem renting the homes I have bought and the renters are paying the mortgage AND I have income left over at the same time!
July 16th, 2009 at 6:40 am
If you can find some income from stocks or real estate or use credit to purchase something that pays you then your ahead of deflation. Good post most people do not realize you can use deflation to your advantage.
August 20th, 2009 at 7:44 pm
great post…. I personally think if you have cash your best place is to consume or invest in real estate while its low. There’s not a whole lot of things you can buy that is pretty much guaranteed to go up or can at least support its debt service that I can think of. Business are shacky and blue chip stocks are unpredictable. Real estate is the key.
August 28th, 2009 at 2:12 am
Since inflation is on it’s way up because of the massive dollar printing by the FED and low interest rates, buying gold seems to be a great investment these days as a hedge against inflation and a hedge against declining dollar.
August 30th, 2009 at 9:21 am
This is one of the reasons why having a balanced investment portfolio is a sound idea. Having Real Estate, stocks, bonds, and gold are good as it makes your overall holdings less risky.
September 4th, 2009 at 4:39 pm
William Lemerond here of SLEY Capital Advisors L.P. , http://SLEYCapitalAdvisors.com , I would like to mention for those planning or getting ready for retirement in a deflationary cycle DO NOT load up on bonds too much. I would suggest decreasing your exposure to government bonds, especially longer term >5 years. If you must still have some safe fixed-income investments go with some BBB or AAA rated corporate bonds. Just remember to not become overexposed to bonds because of your fear and risk aversion that comes with deflationary periods.
September 22nd, 2009 at 6:20 pm
I lost a lot of superannuation dollars during the last recession like a lot of people did. Oh wells on track to start building it back up again
October 2nd, 2009 at 11:07 am
These are some great pointers. There are always some great investment opportunities around during deflationary economic times. It is just a matter of finding one. Real estate is always a great option. When it comes to retirement investments security is the key.
October 10th, 2009 at 9:14 pm
Using any kinds of credits, bank dets are just going to get you into more trouble. It doesnot make any difference I must say!!
Ideally, you should just Go, make payemts at the end of every month and hope that things get better
October 21st, 2009 at 10:01 pm
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October 30th, 2009 at 5:41 am
Investing in real estate is a great retirement plan
Just be sure to find great deals and the right the properties to invest your money with..
- Kim
November 1st, 2009 at 10:09 am
A number of commentors above suggest investing in real estate. If predictions of coming deflation are correct, now is NOT the time to purchase real estate. Why? Prices will spiral down. Hold cash, wait for the bottom.
November 6th, 2009 at 11:57 am
This is a great time to invest in real estate. The economy is only going to get stronger in the next few years. Its time to make the move now.
November 10th, 2009 at 1:38 am
I have just stumbled upon this site and have found it to be interesting and informative.
I would have to agree with the comment left by medlaw, he is so right i saying that now is just not the right time to buy into property, not with the crises that we are facing, Prices are going to come down yet again, so rather hold onto your money, and sit it out then buy and also this will bring down your mortgage payments too.
November 17th, 2009 at 10:03 am
Real Estate… Really? Sounds like a lot of real estate brokers and suckers who bought real estate at its peak and are praying for its comeback are on this site.
Bonehead #1
“With current real estate prices and tightened credit standards there are some excellent opportunities to buy homes as rentals and create passive income as you wait for home values to rise. I have had no problem renting the homes I have bought and the renters are paying the mortgage AND I have income left over at the same time!”
Bonehead #2
“I agree that real estates can be a good investment in this time. It’s a great opportunity but still try to consider if you will love the place”
Real estate = Fixed debt service not good see above article.
Rentals = Decreasing rental income, remember deflation.
Real estate values = decreasing, remember DEFLATION
Overall real estate is NOT where you want to be. Many many more foreclosures yet to come over next 5 to 9 years. Values will continue to fall away. Commercial realestate is the next shoe to drop in that sector.
Good luck to all you real estate brokers and suckers!
December 12th, 2009 at 4:07 am
I am very concerned with all of the borrowing and other economic policy that the fed is incorporating right now. There is a lot of money that is being created and mostly parked on the sidelines as banks are still to timid to loan. However once the economy turns a corner and things start to move, all of this parked money is going to come roaring on to the scene as people feel good about spending again. thanks…