Tuesday, May 26, 2015

Talkin' 'Bout My Generation

People try to put us d-down (Talkin' 'bout my generation)
Just because we get around (Talkin' 'bout my generation)
Things they do look awful c-c-cold (Talkin' 'bout my generation)
I hope I die before I get old (Talkin' 'bout my generation)
The Who

The Baby Boom, my generation. We stepped on the stage with such moral certainty. We just knew we were totally right to protest the Vietnam War and that supporting the civil rights movement would surely cause love to steer the stars. Although a few of my generation are still lost in the Sixties, reliving their glory days, over and over again, most of us have come to realize the world is not black and white, but composed of more than 50 shades of grey—At least those of us who aren’t bald.

I remember in 1973 I met a veteran of World War II who was lost in the skies over Germany, still flying his P51 into harm’s way. In his mind, he was still a young hero facing the pilots of the Luftwaffe, making the world safe for democracy. Unfortunately his P51 was a large expensive station wagon and the only danger he faced came from his unhappy wife. At the time I thought this very strange. I understand him better now that I am older.

We have had such an enormous effect on the culture of not only this country but the entire world. Yet, we have had so little effect on the institutions where we have toiled over the last 40 years. Unlike the wish enunciated by The Who, most of us didn’t die before we got old and we didn’t do a very good job preparing for retirement.

The latest numbers on my generation are out:

40% Have No Retirement Savings!
21% Have Less than $100,000
13% Have Between $100,000 and $250,000

Only 19% Have More Than $250,000

The missing 7% answered, “I don’t know.”

That is pretty dismal. Some of it is our fault. Some of it just happened. It was hard to get any financial traction during the Seventies. Stagflation, oil shocks, and the recession that started the Eighties all took their toll on our pocketbooks. Over the 40 years of our working lives, the defined benefit pension has all but vanished from the American landscape. I couldn’t find a hard number I trust with a quick Google search, but it appears that only around 25% of us have a pension. Almost all us began work with the promise of a pension. Then the world changed.

We were given a really good fifteen year run. Fed Chairman Paul Volcker, a Democrat first appointed by Carter, broke the back of runaway inflation by triggering the recession and the unemployment of the early Eighties. Regan laid the groundwork for economic growth with cuts in tax rates and regulations. Then the Personal Computer and the Internet gave us a first class financial boom. It was crazy. Companies with no price earnings ratio spent money at a fabulous rate. Everyone was chasing the pot of gold at the end of the dotcom rainbow.

It seemed that: This Time It’s Different.

(These are the four most dangerous words an investor can ever hear. Remember them.)

It wasn’t different. When Y2K proved a bust, the boom ended. During the years of plenty, instead of paying off our mortgages and consistently investing in a boring, balanced, well diversified portfolio of stocks and bonds, we bought new cars, resort condos, and took vacations at Club Med.

We had one more shot to get it right, the 10 year housing bubble that started in earnest around 1996. In most metropolitan areas, the price of a single family home began to accelerate at an unusually rapid rate. This spurred the construction of ever larger and more expensive housing. In the Washington DC area many of these new buildings were termed McMansions.

We responded by treating the rising equity in our homes as a personal ATM. Some took out second mortgages to put money in the stock market, just in time for the crash of 2008, but most of my neighbors used those second mortgages to lease new SUVs or take expensive vacations. One of my neighbors was flipping houses. He owned seven or eight properties when the subprime crisis ended the real estate bubble. At one time he owned a Rolls Royce. He lost one job. Then he found another job. Then he lost that job. He was able to arrange a short sale for the house where he actually lived in our neighborhood. I don’t know if he was that lucky with his other properties.

One of the houses in my neighborhood was purchased by highly dubious Hispanic family at the ridiculously inflated price of $410,000. It was clear they were attempting to pay for it by running it as a boarding house. The one family was there all the time. A variety of young single men and their old cars came and went over the months. In another subprime tragedy the family lost the house in foreclosure. The bank eventually sold the property for $205,000 exactly half of the total of the two mortgages used to purchase the house.

A couple more numbers from the survey:

27% are confident they will have enough for retirement (maybe they are the ones with the defined benefit pensions?)

36% said they plan to retire at 70 or later.

Undoubtedly that 36% understands the numbers. Sandwiched between unemployed boomerang children and elderly parents requiring their attention; they will need to work until they are 70 to enjoy the traditional retirement with dignity that was at one time in our history was almost a guarantee. Unfortunately, not all of them will be able to work until they are 70. Already, I have buried a few friends and coworkers; some were younger than me at the time of their deaths. Other friends have heroically battled cancer or suffered life threatening heart attacks, strokes, or the onset of type two diabetes. There is no guarantee that all of the 36% will be able continue working until they have enough money to retire.

It is possible to live on less than the 80% of preretirement income recommended as a minimum by most financial planners. Moving out of expensive urban areas into more rural less expensive areas can allow some to basically maintain their lifestyle with less than 80%. However, many of my generation are facing the prospect of an uncomfortable retirement after 40 years of hard work.

It isn’t pretty, but if you can work another ten years, you can still make it.

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