Financial planners (not panners) everywhere beat the drum of retirement programs and all of the substantial benefits they offer. The span of this message should not be understated – from popular financial gurus on TV to your local neighborhood financial planner, from local and national newspaper articles to financial magazines and online media, from anywhere to everywhere – it is perfectly reasonable to state that the general consensus holds 401ks and similar type retirement plans are *the* way to plan for a successful retirement.

Relatively speaking, 401ks and similar retirement plan structures are a modern financial creation. Per wikipedia.com:

In 1978, Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. The law went into effect on January 1, 1980, and by 1983 almost half of large firms were either offering a 401(k) plan or considering doing so. By 1984 there were 17,303 companies offering 401(k) plans. Also in 1984, Congress passed legislation requiring nondiscrimination testing, to make sure that the plans did not discriminate in favor of highly paid employees more than a certain allowable amount. In 1998, Congress passed legislation that allowed employers to have all employees contribute a certain amount into a 401(k) plan unless the employee expressly elects not to contribute. By 2003, there were 438,000 companies with 401(k) plans.

While The Financial Panner will not make a general statement about the usage, whether for or against these type of plans, there are several key areas which should be deeply mulled and understood when deciding to leverage them in either an initial entry or long term perspective.

1. Surrendering Control… Powerless to Market Cycles

   Let’s start simple. When you hand over your money to a retirement program, typically you do so with the illusion that there are people smarter than you managing the funds. This process, which again is the defacto standard for retirement today, makes it easy to remove oneself of any personal responsibility for the successful investment strategy of those funds.

   The complexity of the typical 20 or so mutual fund options one may have in the average retirement plan only reduce the possibility that the average participant will take an active role. There is typically little assistance provided for fund selection and if you dig down deep enough, many of these funds significantly overlap each other in terms of holdings.

   Without a significant level of intimate involvement, more often than not, people find their retirement accounts swaying with the cycles of the market. Additionally, younger participants are often persuaded to take more risk for larger returns. This leaves them open for larger potential losses even though they are told that the market averages 7-12% per year.

   The financial sector of course loves all of this, which is one of the reasons why it is pushed so hard. Money is fed to the industry pretty much seamlessly and there can be significant management fees with many of the mutual funds offered. Financial institutions who provide retirement services understand that the game is about control, and when it comes to government regulated retirement plans, they have it and you don’t.

2. Inflation, Inflation, Inflation

   When that popular financial advisor on TV tells you to invest for the long term and that the stock market averages 7-12% per year, point them to the following Wall Street Journal article:

   Many investors realize that stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was, because most people forget about the effects of inflation.

   Despite its 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels.

   Inflation is arguably one of the most important things during retirement planning. Having US$ 1 Million in retirement funds sounds good now, but what if milk costs $100 per gallon 10 years from now?

   

   If you think that is impossible, just ask someone from Zimbabwe where they scavenge for gold grams to buy bread or Venezuela where they recently devalued the Bolivar by up to 50%.

3. Taxes, Taxes, and More Taxes

   One of the primary benefits of government regulated retirement plans is the ability to defer paying taxes. This allows money to grow much faster, and the theory goes that since you will not require the same level of income you can take out a reduced level of annual retirement dollars per year taking advantage of a lower tax bracket. This is fallacious for two reasons. First it ignores the inflation factor previously discussed and assumes that a dollar today will contain the same purchasing power many years from now. Just look at what commodities and things of tangible value cost in the 1980s or 1990s to blow that possibility out of the water. Secondly this logic assumes income taxes will generally remain the same! For a detailed look at just how dire the obligations of the US Federal Government are, please see a previous post entitled “The Empire’s Silent Default”. Once you understand those concepts, the only question you need to ask yourself is – “How does the US Federal Government get out of such a bind without raising taxes?”

4. Changing the Rules of the Game

   Finally one of the most important aspects and rarely discussed wildcard – the government can change the rules of the game at any time! Check out the following article. Under the guise of protecting you from yourself the government is discussing the following:

   The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

   The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

   There is “a tremendous amount of interest in the White House” in retirement-security initiatives, Borzi, who heads the Labor Department’s Employee Benefits Security Administration, said in an interview.

   So this is how they are going to continue to fund those huge budget deficits! They are going to convert government regulated retirement plans into US Treasuries!

   Whether this moves forward or not, do not forget that the rules defined today are not written in stone. The very same thing that makes these plans attractive, the ability to defer taxes, enables the government to be a silent partner with a vested interest.

In conclusion, every individual needs to make his/her own personal decisions about what fits their retirement objectives. The Financial Panner believes that whatever your preference may be, keeping these points in mind can only improve your potential. If you tend to be good at saving and are generally interested in investing, chances are you are better off managing your funds yourself.

UPDATE: Audit the Federal Reserve

http://www.auditthefed.com

• H.R. 1207: Federal Reserve Transparency Act of 2009 now has 317 co-sponsors, flat from 317 last week.
• S. 604: Federal Reserve Sunshine Act of 2009 now has 31 co-sponsors, flat from 30 last week.

January 20, 2010 Competing Currencies

http://www.youtube.com/watch?v=dBaQgZ5PfAg

Faber Interviews Kyle Bass

Sovereign Debt: The Next Crisis – Marc Faber (1/14/10)

http://www.youtube.com/watch?v=i9CSbUXTYqI

Building a Case Against Geithner (1/11/10)

Visit msnbc.com for breaking news, world news, and news about the economy

Rise in jobless claims signals bump in recovery (1/21/10)

Rise in jobless claims signals bump in recovery; leading indicators offer brighter outlook

http://finance.yahoo.com/news/Initial-jobless-claims-apf-3027105474.html?x=0&.v=5

• A surprising jump in first-time claims for unemployment aid sent a painful reminder Thursday that jobs remain scarce six months into the economic recovery.
• “The trend in the data is still discouraging,” Diane Swonk, chief economist for Mesirow Financial, wrote in a note to clients. “Hopes for a positive employment number in January … are rapidly dimming.”

Is There Gold in Fort Knox? (1/20/10)

http://moneywatch.bnet.com/economic-news/article/is-there-gold-in-fort-knox/385523/

• Buried inside a 109,000-acre U.S. Army post in Kentucky sits one of the Federal Reserve’s most secure assets and its only gold depository: the 73-year-old Fort Knox vault. Its glittering gold bricks, totaling 147.3 million ounces (that’s about $168 billion at current prices), are stacked inside massive granite walls topped with a bombproof roof. Or are they?
• It’s hard to know for sure. Few people have been inside Fort Knox, a highly classified bunker ringed by fences and multiple alarms and guarded by Apache helicopter gunships. When the U.S. finished building Fort Knox in 1937, the gold was shipped in on a special nine-car train manned by machine gunners and loaded onto Army trucks protected by a U.S. Calvary brigade. And the fort has been pretty much off limits since then. A U.S. Mint spokesman said in an email statement to MoneyWatch that the accounting firm KPMG, which audits the Mint, “has been present in the vault at Fort Knox.” The Mint won’t comment on exactly how much gold is in there, though.
• That’s why Ron Paul (R-Texas), a 2008 presidential candidate known for his libertarian streak, wants to have a look around. Paul introduced a bill to audit the Federal Reserve, which includes Fort Knox’s gold. “My attitude is, let’s just find out what’s there,” he says.
• The reason Fort Knox will remain a mighty fortress, however, may come down to something Alan Greenspan once told Paul. When Paul asked the former Fed Chairman why the Fed hangs onto its hefty gold reserves, “Greenspan said ‘just in case we need it,’” says Paul. “You hold onto it because it’s the ultimate in money.”

Democrats propose $1.9T increase in debt limit (1/20/10)

http://news.yahoo.com/s/ap/20100120/ap_on_bi_ge/us_congress_debt_limit_11

• Senate Democrats on Wednesday proposed allowing the federal government to borrow an additional $1.9 trillion to pay its bills, a record increase that would permit the national debt to reach $14.3 trillion.
• The unpopular legislation is needed to allow the federal government to issue bonds to fund programs and prevent a first-time default on obligations. It promises to be a challenging debate for Democrats, who, as the party in power, hold the responsibility for passing the legislation.
• The latest increase comes on top of a stopgap $290 billion measure that cleared the Senate on Christmas Eve. Given the country’s finances, that measure would last only about six weeks, lawmakers said, requiring the far larger measure that’s pending.

Consumers’ spending power tumbled in ’09 (1/15/10)

Inflation-adjusted wages fall 1.6 percent – the sharpest drop since 1990

http://apnews.myway.com/article/20100114/D9D7AN7O0.html

• A record 2.8 million households were threatened with foreclosure last year, and that number is expected to rise this year as more unemployed and cash-strapped homeowners fall behind on their mortgages.
• The number of households that received a foreclosure-related notice rose 21 percent from 2008, RealtyTrac Inc. reported Thursday. One in 45 homes were sent a filing, which includes default notices, scheduled foreclosure auctions and bank repossessions.
• The foreclosure crisis isn’t letting up. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year, said Rick Sharga, senior vice president of Irvine, Calif.-based RealtyTrac, which began tracking the data five years ago.
• The same three states that led the nation in foreclosure rate in December also posted the highest rates for the entire year: Nevada, Arizona and Florida. More than 10 percent of Nevada housing units received at least one foreclosure filing in 2009, with Florida and Arizona following with about 6 percent each.

Fed’s Dudley Says Rates May Stay Low for as Long as Two Years (1/14/10)

http://www.bloomberg.com/apps/news?pid=20601087&sid=alMn.vj7PrN8

• New York Federal Reserve Bank President William Dudley said short-term interest rates may remain low for at least six months and possibly for as long as two years.
• The policy of keeping borrowing costs low could remain in place “at least six months,” Dudley said. “It could be a year from now, two years from now. It’s going to depend on how the economy develops.”
• he Fed has held the benchmark rate for overnight loans between banks close to zero for more than a year to pull the economy from the worst recession since World War II and reduce joblessness that’s almost at a 26-year high. Policy makers on Dec. 16 affirmed a pledge to maintain the policy for an “extended period.”
• “We’re doing very well on the inflation side,” he said. “We’re doing not well at all on the employment side.”

Dollar Crisis Looms if US Doesn’t Curb Debt: Experts (1/13/10)

http://www.cnbc.com/id/34848783

• The United States must soon raise taxes or cut government spending to curb its debt, and failure to act will risk a crippling dollar crisis as investor confidence ebbs, a panel of experts said on Wednesday.
• “It has got to be done. It will be done some day. It may be done with enormous pain. Or it may be done more rationally,” said Rudolph Penner, a former head of the nonpartisan Congressional Budget office who co-chaired the 24-strong Committee on the Fiscal Future of the United States.
• “If action is taken soon, the country has a wide choice of options to help achieve fiscal sustainability. All are difficult; but if action is postponed, the options will be fewer and the choices even more difficult,” they said.

U.S. Has Record December Budget Gap of $91.9 Billion (1/13/10)

http://www.bloomberg.com/apps/news?pid=20601103&sid=a8VuOcZLKw4E

• The U.S. registered its largest December budget deficit on record as higher unemployment reduced revenue and the government spent money to help the economy recover.
• The excess of spending over revenue rose to $91.9 billion last month, compared with a deficit of $51.8 billion in December 2008, the Treasury Department announced today in Washington in its monthly budget statement. The U.S. has posted a record 15 straight monthly deficits.
• The deficit will probably exceed $1 trillion for the second consecutive fiscal year, according to estimates by White House and congressional budget officials. The economy lost 7.2 million jobs since the recession started two years ago and the unemployment rate was 10 percent in December, close to a 26-year high.

US must cut spending to save AAA rating, warns Fitch (1/12/10)

http://www.telegraph.co.uk/finance/economics/6969163/US-must-cut-spending-to-save-AAA-rating-warns-Fitch.html

Fitch Ratings has issued the starkest warning to date that the US will lose its AAA credit rating unless acts to bring the budget deficit under control, citing a spiral in debt service costs and dependence on foreign lenders.

• Brian Coulton, the agency’s head of sovereign ratings, said the US is shielded for now by its pivotal role in global finance and the dollar’s status as the key reserve currency, but the picture is deteriorating fast enough to ring alarm bells.
• “Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US’s ‘AAA’ status”, he said.
• Mr Coulton said the US is vulnerable to “potential interest rate shocks” due to its reliance on short-term debt and foreign investors. The average maturity of US government debt has fallen to four years, compared to seven for Europe’s AAA club, and 10 for Britain. “The share of three-month bills has risen very sharply as a result of recapitalising banks,” he said.

China becomes biggest exporter, edging out Germany (1/10/10)

http://apnews.myway.com/article/20100110/D9D5277O0.html

• Already the biggest auto market and steel maker, China edged past Germany in 2009 to become the top exporter, yet another sign of its rapid rise and the spread of economic power from West to East.
• China’s new status is mostly symbolic but highlights its growing presence as an industrial power, major buyer of oil, iron ore and other commodities and, increasingly, as an investor and key voice in managing the global economy.

America slides deeper into depression as Wall Street revels (1/10/10)

December was the worst month for US unemployment since the Great Recession began.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6962632/America-slides-deeper-into-depression-as-Wall-Street-revels.html

• The labour force contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system. The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.
• Realtytrac says defaults and repossessions have been running at over 300,000 a month since February. One million American families lost their homes in the fourth quarter. Moody’s Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully like Steinbeck’s Grapes of Wrath.
• US house prices have eked out five months of gains on the Case-Shiller index, but momentum stalled in October in half the cities even before the latest surge of 40 basis points in mortgage rates. Karl Case (of the index) says prices may sink another 15pc. “If the 2008 and 2009 loans go bad, then we’re back where we were before – in a nightmare.”

• Last January we predicted that there would be another stimulus program this year. Congress has already passed legislation to continue unemployment benefits, which the Senate will approve as well. Those out of work cannot survive without such assistance, as our transnational conglomerates continue to send our jobs to foreign lands. The question is will the unemployed, as a result, receive benefits indefinitely, as these elitist corporations park their profits in tax havens tax-free?
• There is nothing to stop these events because the public doesn’t understand what is going on and Congress answers only to campaign contributions and the call of re-election. The biggest insult is to expect Americans to believe unemployment is 10% under U3, never bothering to mention U6, which is 17.3% and climbing. Of course there will be more stimulus and Fed monetization of Treasury debt. They know if it is not forthcoming the economic and financial system will collapse. Can you imagine what would happen to the mortgage securities market if the Fed stops buying that toxic waste, or if Fannie Mae, Freddie Mac, Ginny Mae and th FHA stop buying subprime and ALT-A type mortgages? The stock market has slowly moved higher as the insiders in the market, who know what is going on, perceive what is in store for 2010. As far as the Fed is concerned they have to continue doing what they have been doing. The purchase of Treasuries, Agencies and toxic waste has to continue as we long ago pointed out. There isn’t enough dollars floating around the world to absorb this debt. That is why the Fed has to continue to create money out of thin air. They may have cut back on M3, but the money spigot hasn’t been turned off and won’t be eliminated. All this money freed up by Fed purchases of Agencies and toxic waste allows banks, Wall Street, insurance companies and corporate America to buy Treasuries to keep the scam going, as Mr. Ponzi said. Incidentally, when my mother grew up she lived across the street from Mr. Ponzi.
• We forecast this two years ago while most economists were sleeping. This past year the Fed bought 80% of new government debt or $1.2 trillion worth as foreigners bought only $300 billion worth. To think this program will end is pure folly. There will be no one to buy the debt, which grows larger with each minute. Deficits will run more than $1.5 trillion a year as far as the eye can see. Revenues continue to fall and spending to rise. Foreigners are dumping dollars not accumulating them. Worse yet many other nations have similar problems. They have to raise money as well. Who will accommodate them? We are talking $10 trillion alone for the G20 countries, some of which are on the edge of bankruptcy. Then again where will the money come from to bail out the likes of California, New York, New Jersey, Florida, Nevada, Arizona, etc.? There just isn’t enough money to go around. The Fed has to increase printing money and issuing credit; there is no other choice short of economic collapse. The price to be paid for this Keynesian profligacy is hyperinflation and you can be sure it is already in the money pipeline.
• If the dollar is doomed to depreciate what is the alternative? It can’t be the euro with the problems in Greece, Spain, Ireland, Portugal and Italy. You could gravitate to the rising Canadian dollar, the Swiss franc, the Australian dollar or the Norwegian korona. You could gain 30% or more versus the US dollar over the next few years. As we pointed out in the gold section in a recent issue all major currencies have lost big over the past ten years versus gold. As you saw in the last issue central banks are buying gold and are no longer selling gold. Doesn’t that somehow ring a bell? They have gone from selling 500 tons a year in Europe to being buyers. Is this not a major change? We say it is. All the gold is no longer coming to market. Even India bought 200 tons from the IMF, or at least they say they did. Anyone in gold and silver related assets over the past ten years, as our subscribers have been, know what it is like not to lose ground against currencies and to retain their purchasing power. Where else would you go if you have any knowledge of economics and history? Markets and bonds may have risen, but they are losers to the depreciation of currencies. Gold is up over 200% versus those currencies.
• On Tuesday gold closed up $7.00 to $1,139.70, as February closed up $7.80. Spot silver rose $0.14 to $18.78, as March rose $0.37. Silver leads the way as both the gold and silver shorts shiver in their boots. The dollar rallied, but so did gold. Technically both gold and silver are acting very well. Gold’s next move will be $1,140, tomorrow and then a move to $1,160. Once that is surmounted it is $1,224. For silver it is $19.25 to $19.30, and once that is broken, it will attack the high as well. Anyone who is paying attention knows government debt is an avalanche and that there is little hope that the monetization will stop. That means inflation will move higher, perhaps much higher. We might add David Rosenberg, Chief Economist and Strategist at Gluskin Sheff in Canada says there is a much more stable outlook for silver as public debt accelerates. The easy silver, like oil and gold has been found, now it is far more difficult to find larger or even medium-sized projects. Silver will be a very attractive investment for some time to come.