Saving for retirement

[doodle]

So, two articles I have read recently highlight the meager savings of both the Baby Boomer and Gen X generations.

Baby Boomers:http://www.nytimes.com/2013/06/16/your- ... d=all&_r=0

Gen X: http://www.cnbc.com/id/100834761

What I am curious about is how most people here think we are going to deal with this issue.

If your average baby boomer has only saved 50,000 dollars and draws a social security check of 1500 a month, are we just going to watch as an entire generation of people falls to the poverty level?

While I can understand this persons attitude in the comments section:

I am right on the young edge of this group (50 years old)
I saved my butt off, living below my means ALWAYS, and retired almost 2 years ago.  It can be done, but people don't want to work that hard, or sacrifice getting the latest/fastest/biggest thingy.
I will also attest I didn't have hugely bad luck along the way, which could have changed things.  That being said, I raised 2 kids, was fired twice, and only made over $50k about 5 years.  Started saving in high school, and never looked back.  Started a 401k as soon as I had a job which offered one.  Started an IRA as well, and one for my wife.  Just kept living that way, and here I am, kicking back, while I watch the stories about people not making ends meet. 
Amazing how many people complaining about%2

The reality is that not everyone can save like this if we hope to have a robust job market with exonomic growth.

So, get out your cyrstal balls and make some predictions. We have two generations of broke people...how does this get dealt with eventually?

[Pointedstick]

I predict that it will all work out somehow. 

More seriously, if I pull out my crystal ball, I think the tremendous productivity boost enabled by better mechanization, robotics, and software will allow fewer people to provide for more of society in a similar manner to how most of the food can now be provided by 1% of the population rather than like 70%. Meaning that retirees will be living off other people's productivity more and more, most likely facilitated through more government welfare, I'm guessing.

This will continue to terrify deficit hawks who don't understand that the true debt limit is the underlying productivity of the economy. Both political parties will fight over what kind of welfare is desirable, with conservatives becoming staunch defenders of welfare for old people (social security, medicare), while liberals will defend welfare for young and poor people (food stamps, TANF, student loans).

Taxes will probably not rise, at least not by much. It will be a very interesting society to live in.

[Tortoise]

However things play out, I think it will entail certain segments of society--if not most segments--having to learn how to make do with less.

That entails a possibly painful transition, but I doubt it will be a complete disaster. It won't happen all at once, and human beings are surprisingly adaptable. People will figure out ways of making it work for them and their families.

The demographic and economic transition may also help people rediscover and embrace some human values that previous generations discarded somewhere along the way. That's probably a good thing.

[WiseOne]

I was thinking about these commonly quoted statistics about the low net worth of the "average household."

It's more than a bit misleading to take the average savings of all households and assume that the numbers apply to the group of people about to retire.  "All households" includes college students, kids just starting out with their first job, and the rather large group of people (1/4 of New York State residents, for example) on some form of state welfare that requires less than $2K in assets.

The only sensible way to report these figures is to compare people in the same age group who are either in the work force, or who want to be.  I haven't seen any such figures.

It's probably the case that most people won't be buying luxury properties in South Florida or traveling on cruise ships for 6 months of the year, but I imagine that as long as Social Security and Medicare don't entirely collapse, there won't be as much of a catastrophe as these articles are envisioning.

[WiseOne]

From the NYT article:

the median financial net worth of American households of all ages, excluding homes and cars, is $10,890, as estimated by Edward N. Wolff, an economics professor at New York University. For households headed by those in the 55-to-64 age bracket, it’s $61,300.

Except that this includes the sizeable group of people already on Medicaid or equivalent forms of state welfare (such people make up 1/4 of the New York State population, for example).  These programs cap assets at $2K.

[Pointedstick]

Except that this includes the sizeable group of people already on Medicaid or equivalent forms of state welfare (such people make up 1/4 of the New York State population, for example).

That's not scary already? I think it's actually pretty good evidence for my claim that more and more people are going to wind up on the dole in some capacity while a shrinking pool of people provide more and more of the productivity.

I mean, 25% of your state has less than $2k in assets and is receiving money from government programs? Whoa.

[doodle]

From the NYT article:

Except that this includes the sizeable group of people already on Medicaid or equivalent forms of state welfare (such people make up 1/4 of the New York State population, for example).  These programs cap assets at $2K.

I don't understand your point.  Households headed by 55-64 y/o have a median net worth of $61k, so of course 50% will have a financial net worth less than this (and some far less).  Are you saying this is a good thing?

I think the point Im trying to make is that you have a large segment of our population that will be hitting retirement age over the next 20-30 years with very little in the way of savings. Staying and working longer will not be an option in my opinion because the labor market will be very tight due to constant advances in AI/Robotics. What jobs do exist will have to be vacated to make way for younger generation of workers.

My guess is that eventually the size of social security checks will have to be increased as you cannot sustain a healthy economy when half of your population is living at the subsistence level. 

[doodle]

My hypothesis is that the present conditions make it impossible for there to be a secular bull market in stocks. While robotics and AI provide a great deal of potential for real economic productivity, my prediction is that we will allow our living standards to repressed by tight monetary conditions for quite some time until we see a change in our economic system.  My argument is pretty simple:

1) A large segment of retiring population doesn't have sufficient savings to maintain present spending habits. 2) The labor market will be affected by reduced spending from this retiring generation and increased automation of current jobs. 3) Absent government redistribution, the world will increasingly become economically stratified with an ever smaller percentage of people owning the capital means of production. 4) It will eventually become painfully evident that a capitalist economy cannot function without a cooperative and mutual relationship between capital / labor and producer / consumer. 5) Capitalism will slowly morph into socialism or some type of national dividend type solution in order to address monetary distribution problems which hamper economic growth.

That is my 30 year prediction...

Any competing scenarios?

[doodle]

It doesn't help when you have this type of nonsensical advice being suggested:

http://www.cnbc.com/id/100837518

Instead the BIS has called for reforms by governments to enhance productivity and encourage employment growth. It also urges households and firms to complete the difficult job of repairing their balance sheets and says governments must step up their efforts to ensure the sustainability of their finances.

First off....enhanced productivity seems to run counter to employment growth especially in a situation where private firms, individuals and governments are all engaged in the process of cutting spending to repair their balance sheets.

What kind of morons write this stuff?

[clacy]

Where is all this "tight monetary policy" and balance sheet repair taking place?  Because I'm not seeing it.

[doodle]

Where is all this "tight monetary policy" and balance sheet repair taking place?  Because I'm not seeing it.

When that happens you'll see the stock market crash down to the levels that Harry Dent is talking about.

[shoestring]

If your average baby boomer has only saved 50,000 dollars and draws a social security check of 1500 a month, are we just going to watch as an entire generation of people falls to the poverty level?

Just a point of order: this scenario is hardly poverty.  If this is how it actually does work out (IE the system doesn't fail or whatever) for them it will be fine.

Normally the conversation here is so over my head and someone usually states my opinion, I just lurk, but I’m coming out of the woodwork for this one because I respectfully have to say, and I mean no insult by this, I honestly laughed when I read this being described as poverty.  No vitriol is meant toward doodle here, but I want to point out this situation is actually wonderful for the Boomers.

50k in savings and 1500 a month from Uncle Sugar is luxury in a post industrial economy as of the time of this writing and I will demonstrate using myself as the example. 

I live a fat happy middle class America lifestyle.  I have a smartphone, an absurdly powerful PC, air conditioning, a closet full of things I don't even use, etc.

I budget to spend $2470 every month after all pre tax deductions, 401k, pension deductions, and insurance premiums that are associated with my job, etc.  I have a rule that once I’m out of money I can’t spend any more, so there’s never any debt, it’s basically a cash envelope system.  These are real numbers I track in a spreadsheet, while I am rounding to the nearest $10 I’m not making this up or speculating in way, this is what it actually costs. 

So it sounds like I’m at a tremendous shortfall and will have to downgrade my life considerably if I suddenly go to $1500 a month with 50k in the figurative bank.  Indeed at first blush I would be screwed if the deal was I got $1500 a month and only had 50 grand otherwise.

However let us consider first the impact of being retired on myself.  Of that $2470, at least $250 of it is spent keeping my job: gas to commute/go to sites, clothing, the occassional lunch/fundraisers/take out food.  And I’m very conservative with the clothing and social eating, I want to make it clear most of this is dinosaur juice for having heavy commuting requirements that are a condition of employment.  The real number usually hovers around $300 some months but for the sake of argument I’m assuming $250 like it is in a light month.

Anyway so right away I'm down to $2220 being the amount I actually spend to live as opposed to what I spend for the privilege of working. 

From there, $1025 is my rent.  That does cover trash, water, sewer and local taxes on rentals but not power or any other bills.  It's so high because I live in a large city and it's expensive to buy or rent anywhere to live due to good old supply and demand.    The median rent for a single person is actually $900 so I'm not that far above it.  However I pay that much extra because I found a pretty good location that's only 7.5 miles from my usual job site on a route that shaves a lot of time off my commute.

There's other considerations too, I admit about $100 of that amount was for extravagant amenities I wanted and only about $50 of it is those taxes/fees I talked about.  The bulk of the expense is the location.  That's the reality is I'm paying to sleep and keep things at that location as opposed to one further away from the job.

However if I had no job (at least not one I dependend on for sustenance) I could live anywhere. 

Right now I can think of a place where, if employment was no objective, I could move to literally today and pay only around $600 a month with the same fees included and have all the same amenities, in other words giving up absolutely nothing but the location which a retired person wouldn't need.  I could even stay in the same metro area if I wanted to for that price, if I don’t have to commute into downtown every day my options are suddenly wildly flexible.  I could live 30 miles away from that same downtown way cheaper.

So now I'm at $1795 a month in expenses having moved to a place with lower rent.  I have not in any way downgraded my lifestyle either, I've just cast off the costs of being employed.

Well I currently save $250 a month in cash/taxable for catastrophic contingencies like job loss, to eventually replace my car and maybe someday aspire to something more.  But if I’m retired, job loss isn’t a problem, and I’d move somewhere I wouldn’t drive hardly any at all.

Now bear in mind, I've not reduced my actual expenses I spend to feed, entertain, and amuse myself at all at this point, plus I'm retired in this scenario.  And now suddenly I'm at $1545 a month.  Well expenses exceend income so I'm in a bad way right?

Well If I have $50k in investments, well three percent of 50 grand is $1500, and while it's extremely debatable what the SWR actually is, that's in the ballpark of what most people consider the true SWR to be.  If I put my 50 grand in the PP I should manage it just fine I'd think.

1500 over 12 months is $125 per month.  Combine that with your $1500 SSA benefits and you have $1625 income.  Income exceeds expenses so I could reduce my withdrawal rate from my 50k savings for safety purposes.

And I’m ignoring ideas like you could have some 15-20 hour a week low paid time filling job and still take home $600-$700 a month from etc.  It’s ignoring the fact I’d move away from the expensive city to a cheaper one, etc. 

So this scenario is hardly a problem, they are going to be just fine. Literally if they have nothing else they are going to live in constant air conditioning with high speed internet.

Bear in mind I haven't cut back on anything here, like I could get by on a $7 a month phone expense if I were retired, cutting another $73 off my monthly costs.  And I have things I don't strictly need like my entertainment budget, going out, Netflix, etc.  so there’s about $120 a month you don’t need to spend (I will grant you that money spent keeps me sane however if you had time to constantly go do free things you wouldn’t have to spend it). 

My numbers also assume you still pay rent.  Most people who are Boomers own houses, rental properties, RVs, etc., material wealth they bought with the money they didn't save, and can leverage that to reduce expenses even more.  So again this is not poverty by any means.

I realize this is kind of missing the point that systemically this is a disaster I was just highly amused to see that scenario called poverty.

[doodle]

Shoestring,

I live on 1200 a month and pay for a mortgage. I recognize that $1500 a month isn't "poverty" (Ive seen the real stuff in third world countries). But, if everyone spent like me there would be no jobs. Consumers spending $20,000 a year does stop support a robust service economy.

Can people live on $1500 a month? Sure.

Can our economy grow and provide job opportunities when people spend $1500 a month? I don't think it can.

[shoestring]

Well first of all you have no idea how much I like to hear things like that because it’s motivation to try harder.  I’m actually trying to spend less myself and I wish I had your willpower!  I don’t think I would ever get away with 1200 any time soon but I hope to do better in time. 

I respectfully have to disagree with you however that this idea of everyone paring down to thrift is going to be a problem.

First point:  I don’t mean to be ugly or say bad things about people, but I don’t think it’s likely to happen that people who can’t live in 1500 a month will do so.  In other words your scenario where everyone spends like you just won't happen imho.

I have struggled so hard to be thriftier; I believe something in human psychology represents a barrier to asserting the behavior you’re worried about.  If these Boomers in our example can’t spend less for psychological reasons, they won’t.  They’ll work until they’re dead honestly, and they’ll rack up huge debt, reverse mortgage their houses, etc.  Where there’s a will there’s a way. 

Second, I don’t think this is the problem you think it is.  Building on the first point, not only do I believe most of them will work into their graves (which will create other problems), I believe people who deliberately choose to spend less are thinking, so their actions aren’t necessarily hurting the economy.  I just think deliberate actions mean more than consumer drone behavior.  In fact I believe such people could be responsible for expanding it because they spend money more intelligently.

I’ve heard arguments that saving instead of spending destroys the velocity of money and hurts the economy but I don’t think the velocity of money has to depend on individual people’s savings vs. spending rates. 

Also it goes back to argument I just don't see it ever happening: I don’t see a harmful saving trend ever persisting past some point: someone somewhere will see an economic opportunity for themselves if capital just keeps piling up, because lots of money available for use means it’s cheap to borrow.  It’s the same reason the stock market will never be 100% in index funds.  It just doesn’t make sense for it to happen so long as someone can act counter to the emerging trend for some kind of gain.

The second prong is my philosophy: I believe desiring to spend money is natural and comes easily for most people, but being thrifty is a choice and something most people work at (a few are naturally good at it, I am not sadly I have to work at it). 

But to work at it, you have to start being mindful of the value of money and what it can do if properly directed.  The goal is not to save just to save but to spend reasonably and purposefully.  I believe when people are purposeful in their spending, they can spend less cash but still create an economy that’s prosperous.

I use this example because I think this idea needs context to make any sense at all. 

When I was out of control I used to just buy random video games, the terrible epitome of a perfect consumer drone wasting money.  As I cut back on what I spent however it made me really think about what I really wanted to accomplish by spending this money.  The fact is I cut out buying any games at all for a long time because I realized I was happier saving this money than spending it on this crap, but after a while I realized I missed having new games and I remembered why I liked the things so much to begin with once I wasn’t just consuming them out of habit. 

So now I microfinance independent video games instead of buying existing video games from large producers.  By now quite a few of these games have been hugely successful and made tons of money well in excess of the industry average.  Rather than try to displace existing games and grab market share, they simply create more market and the video game industry is expanding and independents are driving the growth.  These independent games are not only better to play but they’re often much cheaper than mainstream publications.  Additionally many of these independent developers are more transparent and ethical organizations than traditional developers because the people who fund them demand it.  They’re also quick to abandon some of the overused negative genre conventions of other games because they have new and better ideas that large publishers won’t touch because they’re not imitations of existing games.  In so doing they're slowly improving public perception of the whole industry.

It typically costs $35 to microfinance some independent game vs. $60 to buy one; alternatively you can buy an existing independent game for the same price and support all of the above just as easily you don’t even have to wait.  I now spend far less money on games than I did years ago, but by being smarter I’ve helped to create some new companies that turn a nice profit as opposed to throwing money at the big corporate game makers whose stocks mostly travel sideways, so I’m actually expanding the economy and improving the overall state of something I like by thinking about what I spend money on.

Why can't the whole economy work like that?  Why do we all have to spend so darn much on everything just because it's there?  Why can't everyone do something similar as a knowledgeable purchaser?  I just don't see rational directed actions and a good economy being mutually exclusive, or inferior to the masses acting mindlessly.

[MediumTex]

The SS figures above would also need to be reduced by the deduction for Medicare premiums.

There is no doubt that the U.S. economy 20 years from now will look a lot different from today with so many more people either not working at all or working in part-time relatively unproductive jobs compared to what they were doing before retirement.

I don't know if it will be better or worse than it is now, but the tailwinds of the 1980s and 1990s will at least in some cases have turned into headwinds.