Understanding the Retirement Crisis

For many, retirement is a scary thought. Our biggest fear is that we outlive our money. Regardless of whether you are 80 or 18, you need to understand what is happening in the retirement market because it not only affects the retirees - it affects EVERYONE! Demographics is the single biggest factor that moves financial markets. The fastest doubling ever of the world's population took place between 1950 and 1987. In the space of 37 years, the population doubled from 2.5 billion to 5 billion. A large portion of this growth came from the baby boomers and they have shaped the global economy over the past 50 years. When the boomers started to join the labour force in the 1970s, they did what all new employees do - they bought a car, rented a house, bought furniture, household appliances, and clothes, and went on vacation. This placed upward pressure on prices and was the key driver of inflation in the 1970s and 1980s. It was the spending patterns of the boomers that had a profound impact on the global economy. Their parents had been through two world wars - they were austere and did not like to spend. The boomers committed to being as unlike their parents as possible and adopted a consumerist lifestyle. They wanted to be free of the worries that had shackled their parents.

Wall Street saw this and invented the pension plan 2.0. Pension funds had existed before - they had been used during the second world war at a time when salary increases were frozen. Creative employers got around this by contributing extra cash into employees' pension plans, but before Wall Street got hold of them, they operated on the sidelines. Wall Street thrust them into the limelight by specifically targeting the boomers. Wall Street convinced the boomers they did not need to save 20% of their income as their parents did - instead, they needed to give that money to Wall Street, and they would make it grow! This led to the biggest stock market bull market since the end of the war in 1945. Between 1982 and 1987, the stock market gained 289 percent. Reagan helped by cutting taxes. We also saw the start of the credit boom as governments around the world put pressure on banks to extend credit allowing voters to buy homes, and cars and feel wealthy and keep them in power. This access to consumer credit boosted consumption and helped Wall Street expand - and by Wall Street, I am talking about the global financial sector. In 2011, the first boomers hit the age of 65 and were therefore able to retire. From now until 2030, 10,000 boomers in the US will retire every day (that is 3.65 million per year!) If Wall Street had done a good job of managing all that retirement money, there would not be a problem. The problem is that Wall Street has overpromised and will under-deliver. Most pensions are underfunded - they have more liabilities than assets. They do not have enough assets to pay all the obligations to retirees. This may sound like a chronic problem - and it is - but there would have been a simple solution. The generation that followed the boomers (generation X) did not have as many kids as the boomers - and the Millenials are having even fewer than Generation X and this is causing a contraction in populations. In some countries, this population contraction was made worse by government policy (one child policy in China), or a combination of genetics and healthy eating (in Japan, 20 million people (approx 20 percent of the population) are over the age of 90, and almost 100,000 are over the age of 100).

Why is this a pension problem? If you have more old people than young people, it means that there are not enough young people paying into the pension plans that can be used to pay the old people. Most pensions are so underfunded that money that comes in from contributors immediately goes out to pensioners. That is fine in growing populations but falls apart when populations contract.

So what is going to happen? Boomers are being forced to delay retirement. They need to go back into the labour force and compete with their Millenial children. So let's look at the numbers in the US because, as is often the case, they are the only country with deep public data on this. The average boomer needs $46,000 to retire. Their pension can only pay $23,000 and they have access to another $9,000 per annum from their personal retirement savings. This means they have a shortfall of $12,000. The only way to make up that shortfall is to spend less, and the $12,000 less they will be spending every year comes out of consumption. That is their income statement - what about their balance sheet? The average balance sheet of the baby boomer does not look that bad:

• $24k in bonds

• $269k in stocks

• $300k in property

• $107k in cash

• $264k in retirement savings

• $120k in other savings

That is a million-dollar balance sheet. The problem with averages is that the mega-rich distort the numbers. This mega-rich are the one percent - the millionaire and billionaire boomers hold a disproportionate amount of wealth. Instead of the average balance sheet, you need to look at the median - that is the midpoint of the frequency distribution:

• $4k in bonds

• $45k in stocks

• $53k in property

• $18k in cash

• $44k in retirement savings

• $20k in other savings

Another problem is life expectancy, which is increasing. Boomers are not sure how long they are going to live, but they know they do not have enough savings. The only option they have (in addition to cutting their spending), is to take more risk on their investments. In the early 2000s, they did this in the property market, but then they got burned in the 2008 financial crisis. After 2008, they moved their focus to the equity market. They are doing this directly in their retirement savings accounts, and via their pension plans which have record allocations to equities. In a rising equity market, this makes sense because you are clawing back your ability to retire. The problem is that equity valuations are off the charts. We have an extraordinarily overvalued equity market at the moment, and that is a dangerous setup for boomers.

So what does this mean for the global economy? As you get older, you spend less. When you are at peak earnings, you buy that big house, that Rolex watch, the nice furniture, and the house by the beach. You acquire these assets over your life, but as you get older, you spend less. Sure, you may upgrade your car every three to five years, but all the other spending is cut substantially. Also, the older you get, the less you drive. You are unlikely to jump into your car and drive cross country for a skiing vacation. As you get older, your circle gets smaller. You drive to your local store, a local restaurant, and a dry cleaner, but you do not do much outside of this small circle. Demographics also fuels the velocity of money. The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. As the population gets older, the velocity of money declines and it is almost impossible to generate inflation. The inflation that we are currently seeing is transitory - the spike has been caused by higher oil prices which have been aggravated by the war in Ukraine. Inflation therefore should return to its long-term trend of 2 percent. What does this all mean? 1) Baby boomers are going to move in with their Millenial children in order to help them bridge the $12,000 deficit. 2) Governments will continue to print money and will use that money to prop up the stock market, because they know how exposed the boomers are to this market and how important it is to avoid a serious crash. This means that prices will be artificially supported and volatility will be contained.

3) We are seeing changes in consumer patterns. People are eating out less at high-end restaurants and eating more at fast food chains. It is cheaper to eat at Macdonalds than go to the grocery store and cook for yourself. This is good for fast food companies, bad for grocery retailers, and very bad for the health of the average person. This will continue to drive the obesity epidemic and could affect life expectancy.

4) Car sales are going to fall through the floor. Boomers are not going to replace their cars, and Millennials are less likely to buy cars and more likely to use Uber. This is going to put pressure on automakers.

5) The financial industry is going to shrink. Wall Street is going to get smaller. Finance is going to become more decentralized. We are going to move away from the financial economy and towards an entrepreneurial economy. It is obvious that small businesses will hire fewer people than large financial institutions, but this does not really matter because boomers are leaving the job market en masse. #lifecoach#motivation#lifecoaching#coaching#love#mindset#coach#inspiration#selflove#life#success#selfcare#lifestyle#mentalhealth#mindfulness#personaldevelopment#entrepreneur#goals#happiness#meditation#loveyourself#healing#motivationalquotes#lifequotes#positivevibes#fitness#businesscoach#motivationalspeaker#business