The Retirement Problem: This Generation’s Economic Disadvantage
The Retirement Problem: This Generation’s Economic Disadvantage
Due to the instability of our current economy, saving for retirement has become more difficult. The HSBC (Hongkong & Shanghai Banking Corporation) report that 56 percent of Americans are held back by rising costs (Brandon, 2013). They also report other factors in not adequately saving for retirement, such as no retirement plan at work, the lingering impact of the recession, and traumatic life events (Brandon, 2013). There is also one other staggering reason I believe Americans fail to save for retirement. The American Culture is not to save, it’s to consume.
In terms of the economy’s direct involvement in the hindrance in saving for retirement, there is a significant impact being felt on those who are already financially struggling. In 2013, it has been reported that 28% of those unable to save, cannot due to unemployment (Brandon, 2013). The Director of the CFA (Consumer Federation of America) stated, “Many households, particularly those with low and moderate incomes, have not started to recover substantially. Millions of families have not been able to make progress, especially in their savings” (Brandon, 2013).
Understanding the economy when entering the job market is imperative on the impact you will have on your savings. You should however also be aware of the economy during impending retirement. Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania offers some advice. “Some who expected being able to rely on their own private savings and investments in old age have now awakened to the unpleasant new reality that their future is likely far riskier than they had anticipated” (Brandon, 2010).
The economy’s impact on retirement can be effects of lower investment returns, unplanned early retirement, mistrust in 401(k) investments, fewer employment guarantees. Lower returns in investments means more money needs to be invested in order to yield a return. A stock market slump prior to impending retirement could affect an investment income for years into retirement (Brandon, 2010).
Wellesley College Economists, Courtney Coile and Phillip Levine, have explained in their research that:
“ retirement income increases when there is a run-up in stock prices in the years before retirement. If S&P 500 returns are 100 percentage points higher during the five-year period when a worker is between ages 55 and 60, retirement income is estimated to be about 22 percent or $1,750 higher annually between ages 70 and 79, the researchers found. A similar boost in the stock prices between ages 60 and 65 results in a 13 percent or $1,100 boost in income in the retiree’s 70s. Workers who reach retirement age when the stock market is declining will need to cut their retirement standard of living or delay retirement. “If they work long enough they can in some sense completely fix the problem,” says Levine (Brandon, 2010).
But how much luck is needed for the S&P 500 to have returns that are 100 percentage points higher during the five year period prior to retirement age? Workers who reach retirement age when the stock market is in decline are essentially required settle for a lower quality of life or continue to work deep into their golden ages.
“In some sense, it’s just the luck of the draw. You are born and 62 or 65 years later you hit a labor market that is either strong or weak,” says Levine. “If it’s strong, you can work as long as you’d like and choose the retirement date and level of Social Security benefits that is right for you, and if the labor market is weak that might not be possible. People born at the wrong time are getting lower benefits.” (Brandon, 2010).
Can these issues be remedied? The answer is, yes. Understanding the economy and its role in our financial future, and your own role, can assist in avoiding the pitfalls in inadequate retirement planning. This paper is seeking to analyze the issues relating to adequate retirement and determining some solid alternatives.
This generation is at a severe economic disadvantage. The economy is not as stable as the economy our parents benefitted from. It seems as though less and less people work at a corporation from day one until retirement. Layoffs are more prevalent, corporations are outsourcing jobs, a college education does not guarantee a job or worse, doesn’t guarantee a job that properly compensates the degreed job seeker. This generation is struggling to save for retirement the traditional way previous generations did.
According to a survey of Consumer Finances, when the housing bubble was growing and stock markets were flourishing, they eventually collapsed following a Great Recession and have shown little to no signs of recovery. Households nearing retirement age were worse off in 2013 than they were in 1989. (Madland, et al., 2015). More unfortunate news, younger households showed no significant growth while the economy was flourishing during the late 1990’s…this means today, “households across all age groups have wealth to income ratios that are effectively unchanged from or significantly below the ratio’s achieved by households in the previous decades” (Madland, et al., 2015).
What does this comparison tell us? It tells us that this new generation moving forward needs to do things differently than the approach taken in the past. As business students studying economy, we need to be willing to think outside of the box. To think outside of the box, one needs to truly understand the problem as we have discussed previously. Now that we understand the times, the economy’s role in future financial planning, and our own responsibility of future financial planning, we can brainstorm alternatives that will allow us to come out on top and not sacrifice a better quality of life; especially after a lifetime of hard work, blood, sweat, and tears.
There are several alternatives to approach future financial planning. One of them is to retire debt free. “If you subscribe to the 4% rule, for every $1,000 in income you need each year, you’ll need about $25, 000 in assets. If your house payment is $1,000 per month, you will need $300,000 to generate the payment” (Hearn, 2013). We know that debt and income have strong correlations to one another. You don’t need a chart to understand that the less debt you have in your retirement years the more disposable income will be available.
This means coming away from the consumer culture of America. This means living within your means an not subscribing to every single new technological advance that presents itself. Not getting the new iPhone every time it comes out can be a huge savings to invest in your wealth management portfolio or simply not accruing extra debt.
Paying on your student loans while in school will decrease the interest payment as well as payments that will need to be made post graduation. In this day and age, considering a trade may be even more lucrative than $50,000 in debt and working a job that only pays $34,000 a year because the market is tough.
Instead of financing a $30,000 car which depreciates in value immediately, purchasing a car cash for $6,000-9,000 may be more cost effective. No car note, and lower insurance rates leave more disposable income.
Lastly, people spend a significant amount of time and money on purchasing a home. Many families will spend hundreds of thousands of dollars to live in the best neighborhoods to get their children into the best schools or simply to be nearer to entertainment.
In the global business world, working from home becomes more common, those who are able to telecommute, should consider living abroad where the dollar is stronger and can stretch further. If becoming an expat is too adventurous for you, consider states and cities that have lower costs of living. It’s cheaper to live in Cincinnati, Ohio than it is to live in West Hempstead, Long Island. All of these considerations can have significant and profound effects on how financial savings can be exercised. Cutting down on interest rates on mortgages, car payments, insurance payments, credit cards, over your lifetime will decrease your debt and increase your potential to save and have a better quality of life when you deserve it, in your golden years.
We have discussed interest creating debt and eating away your savings, but inflation is another issue.
“Due to inflation eroding the value of money, it’s not enough to simply let your savings sit in cash. One dollar invested in Treasury bills in 1950 would have only grown to $16 in 2013. However, that same dollar invested in large-cap stocks would have grown to $969, while small-cap stocks would have grown that dollar into $4,260.” (McWhinnie, 2015). There are other ways to invest money outside of stocks, but the point here is that cash is not a good wealth generator over the long term.
Opportunity cost is the money lost when one fails to take advantage of what’s available to them. When this generation fails to change the paradigm in which they live and think concerning retirement costs, they lose. Sacrificing your quality of life during the golden ages is not the time to do so. Being more conservative in your youth would maximize the trade off in saving now and living up later.
Another alternative to consider is taking full advantage of a Tax Advantaged Account. “When you consider opportunity cost, you have to go beyond the capital that you pull out of your tax advantaged account…you also have to look at the money that capital would have earned when you leave it in place”( Marquit, 2015).
This is due to compound interest in which the amount you earn through investing is added to the original principal. Over time your portfolio grows because your earnings begin to earn interest as well. Earning interest is more lucrative than paying interest which is why it’s important to change the way one operates.
This is why cash is a poor wealth generator. Use the cash to contribute to other investment opportunities and assets in saving for retirement.
In conclusion, the bible clearly states, in Proverbs 22:7 “The rich rules over the poor, and the borrower is the slave of the lender” (Biblegateway.com). Is it fair to slave for an organization for 30-45 years only to be a slave to debt and lower quality of living? We as business students with a biblical worldview should be the best stewards of the resources God has blessed us with. This means not consuming everything advertised on television and not keeping up with the Jones’. Living conservatively now, will allow one to live comfortably later. This is the true intended tradeoff and opportunity cost of answering the retirement dilemma with alternative options.
Those who read this discussion shall prayerfully change the paradigm in which they live in order to live better later, and prayerfully leave an inheritance for their children. Proverbs 13:18, “Poverty and disgrace come to him who ignores instruction, but whoever heeds reproof is honored.” (Biblegateway.com). Now, is the time to analyze the best possible alternatives to save for retirement in a shaky economy while being entrepreneurs, full time students, young parents, etc.
Biblegateway.com. The Holy Bible
Brandon, E. (2013). 7 Obstacles to Saving for Retirement. US News & World Report – Money.
Brandon, E. (2010). The Economy’s Lasting Impact on Your Retirement. US News & World Report – Money. http://money.usnews.com/money/retirement/articles/2010/06/28/the-economys-lasting-impact-on-your-retirement
Cowen, T., & Tabarrok, A. (2013). Modern principles of economics (Loose Leaf) (2nd ed.). New York, NY: Worth.
Hearn, J. (2013) 7 Alternatives to Saving for Retirement. Market Watch. http://www.marketwatch.com/story/7-alternatives-to-saving-for-retirement-2013-09-27
Madland, D., Miller, K., Weller, C., (2015). The Reality of The Retirement Crisis. The Center for American Progress. http://money.usnews.com/money/retirement/articles/2010/06/28/the-economys-lasting-impact-on-your-retirement
McWhinnie, E., (2015). Retirement Reality: 8 Charts You Need To See. The Retirement Cheat Sheet. http://www.cheatsheet.com/personal-finance/retirement-reality-5-charts-you-need-to-see.html/?a=viewall