Green Retirement

Why is the dollar collapsing?  How does it affect you and your retirement?  The reason the dollar is collapsing is very simple, it’s basic economics, the law of supply and demand. The Federal Reserve and the U.S. Treasury are “printing” more dollars, while investors are purchasing fewer dollars, causing the value of the dollar to decline.

The Obama stimulus plan alone, created $787 billion more dollars, not to mention a couple of trillion dollars created by Federal Reserve accounting magic.  There’s a lot of extra dollars in the global economy than were there when the economic crisis began two years ago.  At the same time, foreign buyers of dollars have reduced their purchases, causing the Euro, Yen, and other foreign currencies to rise against the dollar.

And to make matters worse, U.S. and foreign investors who are concerned about a weakening dollar, have been purchasing commodities such as gold and oil.   The price of an ounce of gold has increased by $300, since I wrote “Is Gold in Your Retirement Portfolio” a year ago, and the price of a barrel of oil has doubled.

The reason the dollar has not collapsed even further is mainly because the American people are buying more dollars.  The personal savings rate has gone from near zero, when the economic crisis first began, to a whopping six percent today.  And, all this extra savings is going into money market funds, not the stock market, which buy U.S. Treasuries, in effect dollars.

So, how does a collapsing dollar affect you and your retirement?  Well, the first thing a collapsing dollar does, is cause the price of imports to go up.  Everything from gasoline to sneakers, clothes and televisions, ninety percent of what is on the shelves at Wal-Mart becomes more expensive.  A collapsing dollar, due to increased printing of dollars, causes inflation. Since your salary is not increasing, the amount of money you have left over after shopping is less, you become poorer.

The second thing that occurs when the dollar collapses, is that eventually the Federal Reserve will have to increase interest rates, to entice investors to buy dollars in the form of U.S. Treasuries.   Higher  interest rates is  good news bad news depending on if you are retired or not.  If you are not yet retired, higher interest rates increases the cost of your debts, and causes your stock market investments to lose value.

If you are already retired, higher interest rates increases the retirement income you receive from your U.S. Treasury Bond and bank CD investments.  If interest rates go from 2% to 4%, in effect, your income from bonds will double.  However, inflation caused by the collapsing dollar, will diminish the extra income you receive from higher interest rates.

As long as the U.S. government continues to run large budget deficits, while keeping interest rates low, the dollar will continue to decline.  Should you worry about the falling dollar? Not yet.  There are a lot of Chicken Little commentators yaking in the media that “the dollar is falling, the dollars is falling!” In reality, the dollar has simply returned to it’s pre economic collapse value, and from here will continue it’s slow decline.

Foreign investors, Chinese, Arabs, Europeans, and others, who hold trillions of U.S. dollars and are fed up with U.S. foreign and economic policy, would be hurt by a dollar collapse and won’t let it happen.  Instead, they are meeting to discuss ways to gradually unwind their dollar positions, while at the same time protecting their current dollar investments.

What should you do to protect yourself against a declining dollar?  The most important thing you should do is get out of debt - read “Get Out of Debt by Going Green“.  You should also be using proper asset allocation for your investments.  40% S&P 500, 40% Short-term Treasury Direct TIPS, and 20% Emerging Markets and Gold ETF’s.  (only a suggestion- please consult your financial planner for investment advice)

One last point, you can’t control the dollar, but you can control the amount of savings you need to retire and when you can retire.  Visit the Green Retirement Website, try our free retirement calculator, and our free retirement planning.  Discover how you can retire years earlier than you imagined possible by going green.