Thursday, September 23, 2010

Generation X will Not Have Much of a Retirement

I just wanted to point out a corollary to yesterday's post: most of my generation in the US may be forced into some combination of
  • retiring late
  • working till they drop
  • retiring in poor circumstances 
Generation X is those of us born between 1965 and 1980 (roughly - different commentators define it slightly differently), so entering the workforce between the mid 1980s and the early 2000s.  We are now ages 30-44 (ie entering or in our prime earning years).

The issue is that most of us have only known defined contribution pension plans (eg 401(k) plans).  Depending on individual level of prudence, you might have been contributing something like 5%-15% of earnings to such plans.  Let's say 10% for a round number.  With, most likely, limited stock market appreciation to look forward to, you can multiply that 10% by 40 years of working, and come out with four years of average earnings at the end of it.  

The details vary depending on where you are in the cohort, how prudent you were in your youth, etc, so how much you gained from the 1980s-1990s bull market, how much your earnings have grown over time, etc. But still, life expectancy at 65 is currently about 17 years for men, and almost 20 years for women, and I think it's rather uncertain that most of my generation is going to be able to cover that long at any reasonable fraction of their final earnings.

The one caveat would be if we manage to get another boom going based on some new technological development (comparable in significance to the personal computer/Internet boom of 1983-2000).  It's not clear to me what the basis for that would be - but then such things never are clear in advance, so I certainly can't rule it out.

Absent that, I suggest being nice to your kids: you're going to need them.  And if you think the electorate is pissed off now, just wait.  

I am of the opinion that a lot of us need to be making fairly radical changes in our lives - in particular, to create a seriously large gap between income and expenditure - think tens of percent, not single percentage points.


James said...

I was in Buenos Aires about six months ago. I hailed a taxi downtown one day, and got in and found that the guy driving my taxi was about 72 years old. I remember thinking that I was getting a glimpse of my country's future (and I think Canada will be doing relatively well).

Making certain correct decisions at certain times can be just as powerful as being thrifty throughout most of your life. Someone who got his savings out of Argentina just before the crash would have done himself a great favour. I suspect that the most intelligent and well educated Greeks have moved most of their savings abroad. Unfortunately, this all of course leads to brutal self fulfilling prophesies - but I have seen enough post crash countries that I will certainly be inclined to look out for my own family first.

Uri Moszkowicz said...
This comment has been removed by the author.
suicide kitten said...

Stuart, if you are right, a few things come to mind:

Say you save a large part of your income - what do you with it? How do you counter the various risks in an unpredictable environment?

Does it make any sense to have a pension plan at all? Assuming their managers are inadequate at forecasting the coming difficulties. Does it make sense to save and invest on an individual basis?

Another thought is that while stock markets in the USA may not perform well, others may do better (Brazil? I am no expert).

As you point out, demographics (age pyramids) play a big role in the problem. The most intelligent commentator on age-economy issues to my mind is Edward Hugh from "A fistful of Euros" blog (and several other blogs). But he does see promise in several emerging economies. Admittedly he is blind to the energy predicament.

Personally it seems that, given I am no investor, the most reliable pension plan is a rental property in a place where demand for housing is not going to collapse.

Anonymous said...

@suicide kitten

We should all form our own public bank holding company, then borrow money from the Fed at 0%, leverage it up big time, dump the whole thing into whatever current carry trade makes sense (say, Australian $), sit back and watch the money role in.

Just like the big boys. ;-)

@Uri Moszkowicz

It's probably worse than that because as the boomers age, they'll a) want to sell lots of real-estate to downsize, and b) have to sell lots of assets to live. This does not bode well for the idea of upward price pressure on real-estate. The only things offsetting this are government intervention (Fed, GSOs - most of which are nominally bankrupt, and population growth - which increases pressures on just about everything except wages).

One word. Rent.