Tuesday, February 19, 2013

Retirement Strategy: Treat Your Children Well

Retirement Strategy: Treat Your Children Well

Every few months or so, there’s another article on the looming retirement crisis.  This weekend’s Washington Post had an excellent summary of the various studies from think tanks, government agencies, and academia that all reach the same conclusion: the Baby Boomers are woefully unprepared for retirement.[i]   These studies, published in the last six months, show that accumulated savings balances are too low and that aging Boomers are increasingly aware that they’re ill prepared for retirement.

PR Bake Off :Part2 (2009)

If you are wealthy (a couple million in net assets) and don’t care about the social consequences, you can stop reading this post.  If you are in your 50s and 60s and are looking for an investment solution because you don’t have enough money stashed away, you can also stop reading.  In fact, if you fall into this second group you can pretty much stop searching for an investment answer, because the financial markets don’t have one.  That doesn’t mean that mutual funds, brokers, and financial advisors won’t continue to pitch you products.  Remember they always get paid, whether you meet your goal or not.

Ironically, this is one problem that wasn’t caused by the financial markets.  Despite the decline in stock prices in 2008 and 2009, returns on stocks and bonds were more than enough to build up assets.  For example, if the Boomer family began investing in 1980 by setting aside 10% of their salary on  $50,000 in combined income, those salaries grew by about 4% per year (more in the first 20 years, and a lot less thereafter), and they invested in a 60% stock, 40% bond portfolio, they’d have about $1.7 million in savings.  Oops, I almost forgot, their broker had to be paid, the mutual fund charged annual fees, and there were trading costs.  If those expenses were just 2% per year, the nest egg would only be $1.1 million.  Over three decades, Wall Street took away about 35% of the profits.  So, one big culprit has been the cost of investment advice.

Remember when the Boomers lived in 2,000 square feet in 1980 worth $80,000 (the median in a metro area was actually 1,825 sq. ft.)?  Today they’re in 3,500 square feet with a value of $450,000.  Making the big assumption that the mortgage is paid off (it should have been, since more than thirty years have elapsed), it looks like the Boomers have sizable savings built into their home.  However, those 1,500 additional square feet weren’t free.  There were multiple sets of closing expenses and/or building costs that got the Boomers from an a 3 bedroom split level to a master bedroom suite and a bonus room.  The Boomers may have financed the expansion, but in the end, less money was available for retirement savings.   If we extrapolate to other expenses, the Boomers have, quite simply, consumed what should have been their retirement savings.  Fifty and sixty year olds aren’t going to make up this deficit even if they roll the dice on highly risky investments.

The choices made 10, 20, and 30 years ago can’t be undone.  As a result, we have a looming social, as well as economic, problem, staring us in the face.  The Boomers are going to stay in the workforce much longer, which is bad news for the next generation.  Frankly, it doesn’t much matter if Congress raises the retirement age for Social Security because the Boomers can’t afford to retire.  So Gen Xers and Millennials are going to be stymied in the work place.  I suppose the boomers could seek a bailout through an increase in social welfare programs.   However, as the Washington Post article points out, the country doesn’t have the financial wherewithal to finance such a scheme.  

In my view, it’s going to get a more than a bit uncomfortable in the next several decades.  Boomers are going to have to have to reduce their budgets and save for the first time in their lives. When their son or daughter couldn’t find a job after college, hopefully they welcomed them back into the house with open arms.  In ten or fifteen years time, the Boomers will either be moving in with their kids or offering junior the master bed room suite because most boomers aren’t going to be able to make it on their own.

So the advice to boomers is real simple: Cut your expenses and be very nice to your children.

[i] http://www.washingtonpost.com/business/economy/fiscal-trouble-ahead-for-most-future-retirees/2013/02/16/ae8c7350-5905-11e2-88d0-c4cf65c3ad15_story.html?tid=pm_pop


  1. Your advice is right on -- although there may be limits to the largess of (or tolerance from) our children when they realize the taxes they will pay to sustain our entitlements and the likelihood that their own children will not be able to keep the game going.

    And to make things worse, much of our economy appears to depend upon high levels of consumer spending... which in turn depends on a mentality of spend-now-save-later.

    And when Boomers discover that their suburban homes don't sell readily because Gen-Xers and Millenials want to live in the central city, the Boomers won't be able to monetize their real estate to the extent they had expected.

    Here's another fine mess we've gotten ourselves into!

  2. You made some great points. I have always thought that my retirement money would yield me the best results being invested in the market on a varied annuity. But with how unstable the market is I think for those thinking about retirement now should start looking into fixed annuities because at least then you are almost guaranteed a certain amount.