Posted by
Jeff R. on Tuesday, August 24, 2010 1:41:14 PM
We are in trouble. I believe that we have a chronic economic problem that no one wants to talk about.
The baby boomers have been driving the economic engine for 30 years and now the engine is sputtering. The cause is that the group with the most assets and who have been the biggest consumers are quickly closing in on retirement.
There were two principles that we were told were as basic as the law of gravity: 1) the stock market always trends upward if given enough time and 2) housing prices always go up. These principles guided our lives. We invested in large homes. It cost us plenty to pay our mortgages and maintain our homes. We bought homes that we could barely afford because it was considered a good investment and the right thing to do.
We held onto stocks from companies that were household names. We also bought technology stock because this was the future. We were told that diverse portfolios could reduce our risk while providing opportunities for great returns as the stock market continued on its historical upward trend. As intelligent investors we bought into the philosophy that we have to have healthy returns on our investments just to beat inflation.
We went to our financial planners as we turned 50 and worked out a plan of attack for the next ten to fifteen years that would allow us to have comfortable retirements. The consultations were expensive but we decided it was worth it since we needed some expert advice. Our financial planners put together plans for us that would help us reach our goals, if we just exercised a little discipline. The plans generally counted on a six to eight percent returns on our investments which meant that the investments would double approximately every ten years.
So here we are either closing in on sixty or just past our sixtieth birthday and suddenly the rules have all changed. Our investments haven’t doubled and our homes have lost a significant amount of equity. Most of us aren’t poor compared to the average American. In fact, many of us are still fairly well off; however we sure don’t feel that way. After a life time of work, saving and investing most of us have a third of what we thought we would have at this time in our life. A third of what our financial planners told us we would have. A third of what we were told we would need to have a comfortable retirement.
I don’t care if a person’s net worth is $100,000, $500,000, $1,000,000, or $5,000,000, having a third of expected assets at retirement age will have a huge psychological impact. Retirement plans will have to be adjusted. Lifestyles that many were accustomed too will no longer be supported.
You may not care whether the wealthy stop shopping at Tiffany’s but the sales people there care. It will become more difficult marketing higher end products as the consumer base for these products shrink.
Soon the aging baby boomers are going to dump their pricy homes as they no longer need the space and no longer can afford the upkeep? The generations that follow the baby boomers can’t afford these homes. The days of the free spending baby boomers are over and the generation that follows will not be able to fill this gap.
People of all income groups from the wealthy to the middle income are beginning to pare back their spending and I can’t think of anything that might prompt them to go back to their previous behavior.
An old tenet was that in retirement we could leave the principal alone and live on the interest. Retirements felt secure since assets would hold out regardless of whether we lived 10 years, 20 years, 30 years, or longer after retirement. This concept has been completely demolished by the low interest rates and poor stock market performance. It’s been a long time since interest rates or safe investments have been at a level which allowed us to maintain our lifestyles and only live on interest or dividends. With people living longer it’s difficult to forecast how much we need for retirement and generally people are going to fall short. Very few people feel financially secure in their retirements and this has a huge impact on spending habits.
We have reached the end of the road in our professional lives. As our careers wind down, we no longer have time on our side to achieve the financial security that our financial planners told us we need to have comfortable retirements. We have to make do with what we have. The baby boomers have driven the robust US economy for decades and the economic decline will be due to the aging baby boomers.