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Bill's Blog

Broken Eggs

We face a looming retirement crisis that will impact millions of elderly and soon-to-be elderly Americans, as well as our children and grandchildren who will have to bail out those generations.

The Facts:

Overall Population

·        78% of Americans live paycheck to paycheck.

·        1 in 4 don’t set aside anything for savings each month.

·        Nearly 3 in 4 say they’re in debt, and over ½ say they think they will always be.

·        Nearly 8 in 10 of Americans are “extremely” or “somewhat” concerned about affording a comfortable retirement while two-thirds believe there is some likelihood of outliving retirement savings. (Northwestern Mutual) 

Pre-Retirees

·         48% of households in America headed by individuals at least age 55 have no retirement savings. 

·        In order to maintain our standard of living post-retirement, we need to have saved at least 11 times our income by age 65. That means saving 15 percent to 17 percent of income across your working life. (Research done by Aon Hewitt and the University of Georgia)

·        60% of pre-retirees in America aren’t on track to achieve even 8 times projected income, a very conservative estimate of bare bones retirement preparedness (National Institute of Retirement Preparedness) 

·        We face a looming retirement crisis that will impact millions of elderly and soon-to-be elderly Americans, as well as our children and grandchildren who will have to bail out those generations.

·        By 2035, and for the first time in U.S. history, Americans over the age of 65 will outnumber our children.  With increasing deficits as far as the eye can see, its unlikely that our kids will be up to that challenge. 

·        The US government is currently spending $1 trillion more every year than it takes in.  With the bulk of that going to defense, social security, Medicare and interest on our $22 trillion in debt, it’s a mathematical certainty that taxes will be higher for future generations than they are today.

·        Even those who think that they are okay may be at risk.  More Americans in history have placed their retirement nest eggs in a single basket – US stocks.  The current bull market is now the second longest in US history and US stocks have never been this expensive by almost any measure.  That begs the question.  What will happen to their nest eggs when a recession strikes and they have no time to recover?

How Did This Happen: 

·        Steadily growing life expectancies is one reason.  Someone who retired in the 1950s probably didn’t expect to live beyond their late 60s or early 70s, but odds are now about 50-50 that someone retiring today will live into their 90s.

·        There has been a dramatic widening of the wealth gap between the top 20% and the rest of America.  While America as a whole has been getting richer, the vast majority of Americans have not.  The 540 billionaires in the US now control 64% of all US wealth.  These 540 people, which could easily fit in an average size movie theater, now have more wealth than the bottom 240 million Americans combined. 

·        For the majority of those 240 million people, the cost of living has risen much more dramatically than incomes.

Average Americans are treading water:  “Despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers.”  --  Pew Research Center 

But the problem isn’t just the cost of living due to inflation; it’s that the “real” cost of raising a family in the U.S. has grown incredibly more expensive with surging food, energy, health, and housing costs.

Researchers at Purdue University recently studied data culled from across the globe and found that in the U.S., $65,000 was found to be the optimal income for “feeling” happy. In other words, this was a level where bills were met and there was enough “excess” income to enjoy life. (However, that $65,000 was based on a single individual. For a “family of four” in the U.S., that number was $132,000 annually.) 

Gallup also surveyed to find out what the “average” family required to support a family of four in the U.S. (Forget about being happy, we are talking about “just getting by.”) That number turned out to be $58,000.

Skewed by the 1%

The issue with the Census Bureau’s analysis is that the income numbers are heavily skewed by those in the top 20% of income earners. For the bottom 80%, they are well short of the incomes needed to obtain “happiness.” 

The chart below shows the “disposable income” of Americans from the Census Bureau data. (Disposable income is income after taxes.)

So, while the “median” income has broken out to all-time highs, the reality is that for the vast majority of Americans there has been little improvement. So, if you are in the Top 20% of income earners, congratulations. If not, it is a bit of a different story.

No Money, But I Got Credit

As noted above, sluggish wage growth has failed to keep up with the cost of living which has forced an entire generation into debt just to make ends meet.

While savings spiked during the financial crisis, the rising cost of living for the bottom 80% has outpaced the median level of “disposable income” for that same group. As a consequence, the inability to “save” has continued.

So, if we assume a “family of four” needs an income of $58,000 a year to “just get by”, that becomes problematic for the bottom 80% of the population whose wage growth falls far short of what is required to support the standard of living, much less to obtain “happiness.” 

The “gap” between the “standard of living” and real disposable incomes is more clearly shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the “gap.” However, following the “financial crisis,” even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $3300 annual deficit that cannot be filled.

This is why we continue to see consumer credit hitting all-time records despite an economic boom, rising wage growth and historically low unemployment rates.

The mirage of consumer wealth has not been a function of a broad increase in the net worth of Americans, but rather a division in the country between the Top 20% who have the wealth and the Bottom 80% dependent on increasing debt levels to sustain their current standard of living.

Nothing brought this to light more than the Fed’s own report on “The Economic Well-Being Of U.S. Households.” The overarching problem can be summed up in one chart:

More Money

Of course, by just looking at household net worth, once again you would not really suspect a problem existed. Currently, U.S. households are the richest ever on record. The majority of the increase over the last several years has come from increasing real estate values and the rise in various stock-market linked financial assets like corporate equities, mutual and pension funds.

However, once again, the headlines are deceiving even if we just slightly scratch the surface. Given the breakdown of wealth across America we once again find that virtually all of the net worth, and the associated increase thereof, has only benefited a handful of the wealthiest Americans. 

Despite the mainstream media’s belief that surging asset prices, driven by the Federal Reserve’s monetary interventions, has provided a boost to the overall economy, it has really been anything but. Given the bulk of the population either does not, or only marginally, participates in the financial markets, the “boost” has remained concentrated in the upper 10%. The Federal Reserve study breaks the data down in several ways, but the story remains the same – “if you are wealthy – life is good.”

The illusion by many of ratios of “economic prosperity,” such as debt-to-income ratios, wages, assets, etc., is they are heavily skewed to the upside by the top 20%. Such masks the majority of Americans who have an inability to increase their standard of living. The chart below is the debt-to-disposable income ratios of the Bottom 80% versus the Top 20%. The solvency of the vast majority of Americans is highly questionable and only missing a paycheck, or two, can be disastrous.

While the ongoing interventions by the Federal Reserve have certainly boosted asset prices higher, the only real accomplishment has been a widening of the wealth gap between the top 10% of individuals that have dollars invested in the financial markets and everyone else. What monetary interventions have failed to accomplish is an increase in production to foster higher levels of economic activity.

It is hard to make the claim the economy is on the verge of acceleration with the underlying dynamics of savings and debt suggesting a more dire backdrop. It also goes a long way in explaining why, as stated above, the majority of Americans are NOT saving for their retirement.

“In addition, many workers whose employers do offer these plans face obstacles to participation, such as more immediate financial needs, other savings priorities such as children’s education or a down payment for a house, or ineligibility. Thus, less than half of non-government workers in the United States participated in an employer-sponsored retirement plan in 2012, the most recent year for which detailed data were available.”

But more importantly, they are not saving on their own either for the same reasons.

“Among filers who make less than $25,000 a year, only about 8% own stocks. Meanwhile, 88% of those making more than $1 million are in the market, which explains why the rising stock market tracks with increasing levels of inequality. On average across the United States, only 18.7% of taxpayers directly own stocks.”

With the vast amount of individuals already vastly under-saved, the next major correction will reveal the full extent of the “retirement crisis” silently lurking in the shadows of this bull market cycle.

This isn’t just about the “baby boomers,” either.

Millennials are haunted by the same problems, with 40%-ish unemployed, or underemployed, and living back home with parents.

In turn, parents are now part of the “sandwich generation” who are caught between taking care of kids and elderly parents.

But the real crisis will come when the next downturn rips a hole in the already massively underfunded pension funds on which many American’s are now solely dependent.

For the 75.4 million “boomers,” about 26% of the population, heading into retirement by 2030, the reality is that only about 20% will be able to actually retire.

The rest will be faced with tough decisions in the years ahead.

What Can We Do?

·        First, individuals and families must make saving for retirement a priority. It can be difficult to think about your 401(k) or IRA when you're living paycheck to paycheck, but putting a little bit away each month will make all the difference. The earlier you start saving, the better off you'll be 

·        The long-term solution lies in the adage "time is money," or at least the opportunity to make money.  If you put in a little bit in savings each year starting at a young age, it will add up to a lot of money by the time you're 65 years old – and much more than if you start saving for retirement when you're 40 or 50 years old. 

·        A recent CNBC.com article showed the benefits of starting saving for retirement at 25 or 30 years old.  A $650 monthly deposit into a 5 percent compounding account will yield $1 million after 40 years.  A little over $10 dollars a day (the price of an average dine-in lunch) would yield half a million dollars.  Run those same numbers over a 20-year period, and the results are $267,000 and $132,000, respectively.  

·        The answer is obvious: start saving early, even if it's a small amount, and get regular tax-free savings.

·        The last day for 2018 contributions to your Roth IRA is April 15th.

   Congress must act as well. 

·        This retirement crisis is not news for policy makers. 

·        Senators Tom Cotton (R-AR), Cory Booker (D-NJ), and Todd Young (R-IN) have developed a bipartisan package of common-sense bills that would help boost retirement security for individuals and families. It was strongly endorsed by the Bipartisan Policy Center. I hope these bills are reintroduced in Congress this session because they are needed.

·        Congress needs to invest in hard working families by helping make sure they can save for retirement now, so they will be set up for success in later years. But it also must be careful to avoid further complicating an already overly-complicated retirement savings system.

·        The dirty little secret is that government can provide all the incentives in the world for workers and families to save for retirement. But none of it will matter unless those workers and families make saving for retirement a priority as well.

·        Lastly, and perhaps most importantly, inequities in our tax system – which were compounded by the Tax Cuts and Jobs Act of 2017 – made a huge problem even worse.  Fixing those inequities will need to become a priority if we hope to avoid serious economic consequences and social unrest.   

Prefer the cartoon version?  “Meet the Broken Nest Egg”:  https://youtu.be/kmtjJVC_niI?t=32

 

What Do I Own and Why Do I Own It? 2019 Update
 

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Comprehensive Money Management Services LLC (“CMMS”) is a Registered Investment Adviser located in Coral Gables, Florida. The firm is registered with the State of Florida Office of Financial Regulation. CMMS and its representatives are in compliance with the current filing requirements imposed upon Florida-registered investment advisers and by those states in which CMMS maintains clients.

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