We Are In Trouble: Part One of Our Special Five Part Series
As the presidential election season of 2012 has gotten underway, there is a massive issue that has gotten very little attention: how Americans will sustain themselves in retirement. In 2010, there were 40 million Americans over the age of 65. By 2030, that number is expected to rise to 70 million, which represents 20% of the total population. At the same time, we have moved from a workforce with traditional pensions to one in which each person chooses how much to save and how to invest that money.
Only 42% of American private-sector workers between ages 25 and 64 have any type of retirement plan in their current job. The majority of Americans (67%) who have access to a pension plan have only self-directed accounts such as 401(k)’s and similar accounts (such as 457(b) plans which cover those who work at non-profits or who are employed by the state or local government organizations). A large number of Americans also have IRAs. We refer to these types of retirement plans as Defined Contribution (DC) plans as opposed to Defined Benefit (DB) plans, the traditional pensions that used to be the norm. Continue reading →
One of the defining features of the last twenty years has been a persistent and fairly continuous belief that investing in the stock market was something of a sure road to wealth. The downturns in the stock market in the aftermath of the Tech bubble and, more recently, in the financial crisis, have shaken investors’ faith in the maxim that stocks are inevitably a good bet. The tendency of people to take it as an article of faith that equities will, ultimately, deliver high returns has been referred to as ‘the cult of equity.’ Two recent articles by experts that I respect propose that this phenomenon is dead or dying. Continue reading →
The financial services industry is in a period of substantial change. Low interest rates, new regulations and additional scrutiny are changing the landscape. Perhaps the biggest change is the transition of the first wave of Baby Boomers from working to retirement. Not only is this generation huge, but its also the first “401(k)” generation. The introduction of self-directed retirement accounts, such as 401(k) plans, coincided with the “Baby Boomer Generation” (people born between 1946 and 1964) entering their peak saving years.
Beyond the 401(k)
The 401(k) plan was first introduced in 1980. In 1980, the oldest Boomers were 34 years old and entering the age range at which people really start to save. Not surprisingly, the financial services industry created a multitude of new financial products to pitch to these people. Thus began the era of the mutual fund. Continue reading →
In a recent interview in The Wall Street Journal titled “Bad New for Boomers,” Rob Arnott presents a fairly grim view of the retirement income that investors can expect to generate from their investment portfolios. His thesis is that aside from all of the economic turmoil that may constrain future earnings growth, there is an additional substantial problem for investors: supply vs. demand. As the Baby Boomers retire, they will become sellers of equities as they draw down their life savings to provide retirement income. Having this huge generation steadily cashing out of the market, will increase the balance of sellers vs. buyers of equities and will thereby drive down equity prices.
Social Security is a hot topic in the economic and political landscape these days. Many reports indicate that Social Security’s finances are getting worse as the economy continues to struggle and as the “Baby Boomer” generation begin to retire. To add to the confusion, Texas Governor Rick Perry is standing by his assertion that Social Security is a Ponzi scheme—a fraud being perpetuated on today’s young people by old people. While I’m not sure this is necessarily true, I recently came across a fascinating history of the Social Security program that will help us understand how we got to where we are in the first place.