The two big points made were;
- The retirement of 76 million baby boomers is the most important demographic trend of our lifetime; a seismic shift
- Dividend-paying stocks will outperform growth stocks for the rest of your investing life
However I would think trends that effect 800 million to 1 billion people might be much, much more important; here I am talking about China and India. If you add up the populations of some of the N-11 you get another half a billion people that will gravitate to the same types of trends but maybe on a slightly different time table. In the spirit of Nigel Tufnel; 2.5 billion is more than 76 million.
This is not to say that investing around boomer trends won't be the right thing to do and won't be successful but don't lose sight of other big trends going on in the world.
As to the second point about dividend stocks outperforming growth; hasn't that always been the case over long periods of time? Value (implying stocks that pay dividends) beats growth more often than not. The point made in the article is that boomers will seek out dividends to contribute their income stream which makes sense and I am a believer in dividends to be sure but I would file Mr. Band's comments along these lines under this is how the market usually works.
There is one thing that I think is important to add here; the retirement of the boomers followed by their entitlement payments stands to be a colossal problem. There is too much spin and data mining for me to know when social security will really start to crap out but we have a big problem there. Then don't we have a bigger problem with Medicare at some point for these folks?
These things should be very troubling for all of and offer several very scary outcomes. For now though this is all far enough down the road that the US capital markets can go through at least a couple of complete cycles before this starts to cause visible damage. I'll cover this in depth during the 2020 presidential election season (humor attempt).
For people younger than 50, which includes me, I would suggest saving as much as possible, live below your means, open an HSA account but don't tap it to pay medical bills, make your car last for at least ten years and see to it that your portfolio is globally oriented.
The point is not to scare anyone or be a fear monger. This is something that could hurt us in the future. If this does not pan out negatively well, no problem but we need to learn and study what can go wrong not what can go right.
24 comments:
Excellent post Roger. Too bad the media and pols won't touch these issues with a ten foot pole.
The largest distribution in wealth will supposedly happen with the baby boomers. Inheritance. Then again, can't take it with you. The demographic theme is a lot of grist for the mill but it'll be something from left field that will have the defining impact.
From an article by Ben Stein:
"The average savings for Baby Boom households is less than $50,000, not including their homes. Even including the equity in their homes, it's not much over $100,000. And roughly half of all boomer households have either little retirement savings or none."
http://finance.yahoo.com/columnist/article/yourlife/2449
We're going to see a wave of bankruptcies and boomers scrambling to find ways to tap the equity in their homes. Which makes me wonder what will happen to home prices in 20 years? The experts say "you have to live somewhere", but a 75 year old man doesn't need to live in a $300,000, 3 bedroom home with a yard...especially if doesn't have enough cash for food or meds.
Consider that the boomers are going to inherit a ton of money, and property. Since most are underfunded for retirement, what are they going to do with all that loot and property? Some will spend it all and go back to being broke. But others will seek out investment advice and many will invest in all kinds of things. This idea that the financial markets are going to go to hell because the boomers are going to cash out is way over played. But, what do I know????
RS I agree that the boomers investing habits in the future will not be the problem. Like you I worry about their spending. With the rising cost of health care I wonder if boomers' parents will leave less than what people expect. I do worry, as mentioned in the post, about their entitlement payments.
Ben Stein is one of the few expressing concern. I read his Yhaoo and NYT stuff any time I see it.
What RS said; predictions of market meltdown when the boomers retire is almost ludicrously overblown.
Nearly as overblown are predictions of Social Security meltdown; even the President's own OMB, which typically provides the most pessimistic scenarios for the public trusts and the most optimistic scenarios for tax cuts concedes (in fine print) that the SS trust is at little risk of being underfunded until 2042 (The CBO projects SS to be in balance through 2052). Doesn't take a math whiz to see that will cover a pretty fair chunk of the boomer retirement time-wise.
Clearly SS funding and policy are problems that must be dealt with but those problems are dwarfed, in terms of time-scale at least, by the current dire state of health costs generally and Medicare in specific. In the latter case the Medicare trust -- (rant mode on) which is entirely separate from the SS trust, a fact that appears to escape most pundits who blather about 'entitlements' with no regard for detail or even any recognition that their sloppy language and careless facts could as easily apply to corn subsidies, tariffs, tax deductions, or depletion allowances as they could apply to the dozens of trusts the government maintains (rant mode off) -- is already approaching a crisis; e.g., although the GAO is slightly more optimistic, the Medicare Commission predicts the trust will be out of balance by 2008; http://tinyurl.com/y9o96n
Barring a massive overhaul of Medicare or a more efficient way to handle health care in the US generally, it would probably be prudent to follow Roger's advice regarding HSA plans at least. As to the rest, dividend paying stocks are part of a balanced investment mix as always and a modest over-weighting (for any reason) probably wouldn't hurt anyone provided that is not the sole investment idea they have. JMO
I could be wrong, but I haven't read anything about boomers expecting an inheritance windfall.
The sad fact is most boomers haven't saved enough and most of their net worth is tied up in their homes. Boomers are also living much longer than anyone anticipated and healthcare costs are going through the roof.
I'm thinking a lot of retired boomers are going to downsize by moving into smaller homes, renting apartments, or moving in with their kids. You're going to see a lot of boomerang boomers.
My question is what effect will this have on home prices in 20 years?
How come Boomers paying into Social Security at ever increasing rates and amounts over the last thirty years was never a problem? Nobody guessed that someday the Boomers themselves would retire (duh)? No actuaries work at SS?
Saying the Boomers are the problem is bad framing of the question.
Roger:
Great board!
It always makes me crazy when I hear SS referred to a an "entitlement" program... I am self employed and have been forced into contributing both as an employee and employer. I do not look at it as something I am "entitled" to, but as another piece of the retirement pie that I have contributed to over many years.
I would rather have had that money managed by myself vs. the extremely low rate of return the SS administration produces.
Never-the-less, I would never risk my economic future on the prospects of anyone in our government managing my long term economic security plans.
I realize that in our country today there are far to many people that feel it is an "entitlement"...that in a nutshell is the problem.
SS should be looked at by all as a fraction of their retirement. The thought of it being all, and depending on inheritance is as foolhardy as playing the lottery and praying that you will win. As foolish as this may sound I actually know people who feel that one of those 2 things (inheritance or lottery) will bail them out.
Jim55
RW thanks for the harder data points. One issue with this that is difficult for me is that we are going out so many years that there are so many things that could happen good or bad that a reasonable foward looking analysis today seems tough to do.
TomK I actually first heard about the wealth transferance in 1989 at Lehman Brothers. It is a real thing but to my point earlier I woulder if health costs of boomer's parents will deplete or otherwise alter the magnitude.
Jim55, fair point but the word entitlement does make for easier writing ;-). Personally I have real doubts about it looking anything like it does now when I am eligible but I think people over 50 won't be effected.
As a matter of philosophy I believe in taking this into my own hands; if we get $1900 a month (or whatever) in todays dollar, great but I expect zero, not a fraction.
Maybee too many years as a Red Sox fan?
I'm 46, tail-end boomer, so I don't expect anything (or very little from SS). However, I'm very worried about taxes and rising healthcare costs.
I agree with rw that Medicare is a bigger, near term problem. But I disagree that SS is in good shape. By 2016 the surpluses will expire. Here's an excerpt from an editorial early this year:
The Social Security's Trustees describe the Trust Fund as an "unfunded obligation," and they explain current annual surpluses "will soon become rapidly growing deficits covered by cash transfers from the General Fund of the Treasury." This means that after 2016, Social Security will not collect enough to pay benefits and the difference will have to be made up from the General Fund; in other words through higher taxes or higher deficits, or a combination of both.
You'll need to give a link to the primary source for that Tom. The use of the loaded term "unfunded obligation" (beloved by libertarians) as well as the multiple decade deviation from official out-of-balance date estimates from OMB, CBO and GAO calls the validity of the source strongly into question.
Assuming that actually is a quote from an official SS Trustee report and not simply some Trustee's opinion it would be wise to remember that President Bush appointed many of those trustees and, given Bush's priorities for privatizing SS, there is little reason to expect them to report the current state of the SS trust in favorable terms.
I'll stick with more reliable sources and continue to take the over on the SS funding question for now.
As an addendum, even the Bush administration (using the more pessimistic projections), did not argue that funding from sources other than the SS tax would be required until 2042.
From a White House press release dated February 4, 2005 (http://tinyurl.com/yh9y48):
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I. Will Social Security be "bankrupt" by 2042?
Yes. Bankrupt means “having insufficient assets to cover one’s debts,”1 which applies to Social Security in 2042, according to the Social Security Trustees most recent report.2
Beginning in 2042, the Social Security Trust Fund will be exhausted. At that point, the resources available to the system (payroll taxes plus some income taxes on Social Security benefits), will be insufficient to cover the liabilities of the system (benefits scheduled for retirees, people with disabilities, and other beneficiaries). If nothing is done to correct this problem, benefit payments would have to be reduced by roughly 27 percent.
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PS: I am a 'leading edge' Boomer myself but actually didn't plan on SS so I have more than adequate resources without it; nice to know it's there though and I hope it's there for y'all too when the time comes.
Last summer I received my annual SS statement and decided to throw together a quick "what if?" spreadsheet.
In 1977 I began contributing to SS, so I calculated what I would have earned if all my (and employer) withholdings were invested in an S&P 500 index fund each year through 2005. Then I assumed from 2006 through 2026 I would contribute nothing to the fund, but estimated a 6% annual return. By 2026 I would have saved $1,296,554.
No argument on that score Tom: SS can't match an investment plan, even a basic one, but then that was not its intent.
You may have been somewhat conservative on the return in your spreadsheet projection though. From 1977 to 2005 in a tax-deferred account w/ dividends reinvested (less average transaction costs) the S&P500 would have returned closer to 11% in nominal terms; 6% in real terms (inflation adjusted). Under the same regime in a taxable account the return would have been 8% in nominal terms; 3% in real terms.
I've run a couple projections myself you see (grin).
HSA's are a big disappointment. And, health cost has to be a huge variable for both the boomer and the boomer's parents. The cost per diem at the end of our lives is so skewed the actuarial next door neighbor expresses an amusing willingness to pull the plug on a lot of old timers. Back to HSA's, it's not set up to "save", strictly a putin and takout. Just a glorified flexible spending account and retirees are shut out. Maybe the government will solve health costs and create other costs. FWIW, downsizing will happen. It won't be existing apartments but new housing. There'll be a glut of the old and and a boom for the new...aka boomer villages.
TomK and RW are about ten minutes away frm solving the problem!
Anon 3:16pm agreed hence my put it in but don't use it on expenses comment.
The best part...I had $831 in taxable earnings in 1977. Okay, so I only worked half a year, but I learned I wasn't going to get rich busing tables.
If everyone executed your next to last paragraph in this post, we would be in great shape as a nation.
Unfortunately, the lack of educated financial foresight coupled with a victim mentality ingited by government promises and/or fantasy-island union contracts makes common sense financial planning and prudent living too harsh a lifestyle for most.
T-funny
but so many people like being the victim!
There are loads (can't give you a figure) of people out there without college or high school diploma's. For them, HSA's, saving for retirement, IRA's, 401k's are the things that the 'rich people do.' Subsistance level living is no fun. They do rely on the Govt to help them live a subsistance level life in retirement. Be grateful to God each day that you are not among that group. They have hard lives. They die young. Tom in Indy
Amen Tom. 'T' is absolutely right in the case of those who have the means to follow Roger's excellent advice but there are always those who struggle and who am I to say they received their just desserts.
"There But For Fortune"
by Phil Ochs
(fellow semi-geezes will remember the tune)
Show me a prison, show me a jail
Show me a pris'ner whose face has grown pale
And I'll show you a young man
With many reasons why
There but for fortune, go you or I
Show me an alley, show me a train
Show me a hobo who sleeps out in the rain
And I'll show you a young man
With many reasons why
There but for fortune, go you or I
Show me the whiskey stains on the floor
Show me a drunk as he stumbles out the door
And I'll show you a young man
With many reasons why
There but for fortune, go you or I
Show me a country where the bombs had to fall
Show me the ruins of buildings so tall
And I'll show you a young land
With many reasons why
There but for fortune, go you or I
You or I
Have you heard Harry Chapin's tribute to Ochs, "The Parade's Still Going Past."? Worth a listen if you're an Ochs fan.
Social Security is an entitlement program because so many people collecting Social Security are going to receive benefits far in excess of what they put into the system. This will not be true of younger workers. Medicare is also an entitlement for the same reason. What you pay in Medicare taxes when you're working, and monthly premiums when you're retired, will likely not make up for what the average elderly person will consume as far as health care is concerned.
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