April 13, 2018

How Will Younger Generations Be Able To Retire?

Steps to Complete Before Retirement

Recently, I have added a simple poll question on the top right side of the blog. For a period of 6 days readers are asked to pick one of the possible responses. Then, I post another question and collect results. If the responses are sufficiently clear to a particular question, this is a simple way to generate new blog topics. 

A few weeks ago the question asked how your retirement would compare to those in younger generations. Out of the four possible choices, more than half (56%) said, "Worse than me." Another 15% said these folks would never be able to retire. No one thought those who follow us would do better than we are.

That is a conclusive result. Roughly 7 in 10 thought their children or grandchildren would not have the chance to experience a retirement as satisfying as theirs. This is a country where we have always believed those who follow us have the opportunity of a better life. If my completely unscientific poll is even close to right, a majority no longer believes that.

So, the question becomes, Why? What won't younger people have what we do? My answers have to be entirely speculative, since that was not asked on the poll. But, I think I am on pretty safe ground with these thoughts.


1) The lack of company pensions or strong retirement plans. Certainly, the generation before us benefited from a system of pensions and health coverage after retirement. Many older Boomers enjoyed the same benefits. Beginning with changes in tax laws in the 1980's and 90's defined benefit pensions began to be replaced with defined contribution plans. This type of plan is much less generous and provides much less stability to one's retirement planning. 

2) The soaring cost of medical care. On a per capitas basis, health care costs have increased 500% since 1970, or to an average of over $11,000 per person per year. Younger workers have substantially less help in covering health care costs than we did. With the current political climate, it is likely this burden will continue to take away money that might otherwise be invested in retirement accounts.

3) The weak wage growth over the past few decades = poor rates of savings. Average wages have increased 4.63% on an annual basis since 1960. For most, that has not been nearly enough to keep up with the cost of living.

4) Instant gratification and confusing wants and needs. We remain a society driven by consumption. Advertising has one goal: to create dissatisfaction with the status quo. Financial education is lacking, so too many younger folks do not appreciate the need to delay gratification for a long term benefit.

5) A tax system based on what we earn, not what we consume. All the variables are too involved for this post, and I do not pretend to understand all the issues involved. But, a taxing system that emphasizes a tax on purchases, like a VAT tax, seems to be more logical than one based so heavily on taxing income and investments. 


This is a complex problem, one well beyond my ability to suggest a solution that works for everyone. But, the poll I mentioned, along with any number of Internet articles and research reports indicates the ability of younger generations to enjoy retirement like many of us do should be of serious concern.

I sincerely hope that a satisfying retirement is not something that ends when our generation does. It is a stage of life that everyone should be able to experience, if that is their desire. As readers of this blog appreciate, retirement is not just about not working. It is about discovering aspects of one's personality and character that can remain unrealized until the freedom of this phase of life begins.



26 comments:

  1. I can't imagine how the younger folks are going to retire and it's a shame. Many of them are in underpaid jobs and saddled with student debt. TV and advertising promotes fairy tale lives of the rich and famous which some people seem to feel a need to keep up with. Our society and the 2008 debacle has certainly set back our country in terms of security, prosperity and any kind of safety net. Our son is fortunate to be in the state retirement system.

    I think new models of lifestyle will evolve, such as co housing and smaller homes, and just a return to some sanity-- out of necessity. Then we need to tame the cultural push which wants people to feel badly if they can't "keep up" with the unrealistic lifestyles advertising promotes. Our families used to buy ONE HOUSE and live in all their lives. Families shared ONE CAR. A trip to Hawaii was a once in a lifetime treat, not every summer! Moms had an option to stay home and raise their own children,so no day care costs. We did not have cell phone and data bills! No one I knew went to hairdresser every month for $100 "highlights." Vacations were just a drive to the shore.. I don't know if folks today can be happy that way again??? A return to simplicity would benefit individuals as well as society.

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    1. Your comment made me smile and bring back memories of what used to be "normal:" one house, one car, one vacation, one employer for life. Certainly, that is how I grew up. Unfortunately, the changes in society make all that just the plot for a TV show (on Netflix!) like Leave it to Beaver.

      The death of defined benefit pensions, the unrelenting rise in health care costs, corporate downsizing, government paralysis, hyper partisanship, automation......the world younger folks face will not be retirement friendly, even with a stronger sense of economic self restraint, I'm afraid.

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  2. Madeline makes a very good point about how our parents generation lived, versus how our generation lives. I have read that the Boomer generation basically lives/lived off of two sets of savings - their own, plus that which they inherited from their parents. Conversely, their children will likely live off just one set of savings, that which they accrue themselves, because their Baby Boomer parents will not have anything left to pass on. That statement/article really gives one pause, I think.


    In our case, both of our daughters are positioned to be just fine in retirement, though likely not as well positioned as my husband and I. The difference, however, will be a direct result of choices they are making, not because of circumstances beyond their control. One daughter wants to retire extremely early in order to focus on her love of outdoor activities, and is making sacrifices now to ensure that happens. She has an advanced degree (JD), and saves almost 50% of her take home pay in order to achieve her goal. So, she is certainly no victim, even if she goes into retirement at a lower base threshold than her parents did.

    The other daughter and her spouse both work for government entities and will receive healthy pensions at some point. In my humble opinion they live a bit above their means, and save a bit less than they should. So, again, neither are victims should they enter retirement at a lower financial threshold than their parents did.

    I still see tremendous opportunities for those with the gumption to go after big careers. What I do see as being different today is, to quote someone else, 'The days of graduating from high school with a C average and obtaining a high paying low-skill job with pension are long, long gone.' So, that group, and we as a society, will have to think out of the box unless we want to see the divide between the classes, financially speaking, continue to grow, which in the long run isn't good for any of us.

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    1. All good points, Tamara. I didn't know one of your daughters was on the path to early retirement so she can focus on her love of nature, but knowing you and Mike, I'm not surprised. I am sure she will achieve exactly what she wants.

      Personal choices are critical, though the factors I noted above to Madeline make things much more difficult. Still, delayed gratification, patience, and a clear set of goals can take someone a long way toward their desired retirement.

      The foundation of so much of our economic success as a nation is, as you note, gone and not coming back. Manufacturing jobs that didn't require a college education but provided a steady income with full benefits and a decent pension are not available in sufficient numbers to support a generation of workers, regardless of tariffs or other short term fixes.

      What is the answer for those facing economic extinction? I don't know, though providing false hope through political promises only delays the inevitable reckoning. There will have to be a serious dedication to prepare people for what is the future of employment, rather than hoping for a revival of the past.

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  3. One of the issues I see that is not addressed in your list is the advent of the gig/contract/no benefit employer model. My experience is different than Tamara's in that I am surrounded by well educated young people with advanced degrees and professional jobs. In almost all cases jobs are contract or 35 hour jobs where no benefits are provided and I don't mean just pensions. My eldest is an occupational therapist on her way to a doctorate, working with other professionals in a less than full time environment earning no health insurance, no retirement options no vacations or holidays....I could go on. In addition to paying exhorbitant rates on the exchange, she also loses pay if she is ill or needs to see a doctor, there is a three day weekend, or wants a couple days off. We have come to the place where, if you don't work for some kind of government or a VERY large corporation the traditional benefits that I or my parents had, even for basic, average retail or janitorial type jobs are a thing of the past. Add that to the frightening post college expenses that those kids whose parents could not fully put them through college have (raising hand), and the so called disposable income factor for traditional savings is simply not there. Both my kids live frugally but I firmly believe that life should not be on hold now just so you can retire later which I know is how at least one younger friend sees it.

    And these are educated kids with futures. Not high school grads nor single parents raising families on one income, which I cannot even imagine these days.

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    1. Thank you for bringing up that aspect of the problem. My youngest daughter is completely on her own for her present and future. She is a freelance worker who is responsible for her own health insurance and retirement planning.

      She did get out of college several years ago with no loans to pay off. She has no debt of any kind but is still dependent on clients hiring her often enough to pay the bills. On occasion, she loses income because of illness. There is no recouping that lost money.
      When we talk about retirement she is pretty sure she won't have one like mom and dad. But, for now, the freedom of her lifestyle is most important to her and retirement is too far off to make concrete plans.

      Like Tamara, you point to a glaring problem with our economy: no college or no dual incomes makes for a bleak future. Technical careers, like plumbers or electricians can make a nice living but even they must plan for self supporting their retirement. But, for those with no specific skills they are facing a long and very bumpy road.

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  4. I think about this topic a lot and how it will impact our daughter, who is just outside the Millennial age group. She is a hard worker and is doing fine, and with luck we will be one Boomer couple that will be able to leave her a decent amount in an inheritance. In fact, my working hard through much of my life was to try and insure that she would be in good shape after Deb and I are gone. That seems to run counter to what many of our Boomer compatriots feel nowadays, if unscientific polls are realistic.

    There are many things we can point to that have caused the retirement problem, not the least of which is the breakdown of the contract between employer and employee in this country. For decades employees have been looked at as nothing more than a commodity or a piece of machinery by CEOs and others, those same people who then turn around and rape and pillage the companies for everything they can get their hands on. This has caused the erosion of benefits that traditionally gave ballast to the retirement of the generation before us in particular. There appears to be no end to that, so we will have two sets of employees in this country - those who work for in the private industry whose benefits have been marginalized, and those who work in the public sector who continue to receive outsized benefits to their contributions. Something is going to have to give in that respect since I doubt the former group will sit on their hands forever when they also have to pay to support the latter group.

    Others have commented on the consumption society that Millennials and others have bought into, as did the Boomers. Education and priority setting will help as the continual discussion of the seriousness of the retirement crises gets more and more attention. And isn't it unfortunate that the ability to say "no" to many of the advertising world's inducements increases as we get older, when in many cases we have more financial means to play the game. Hope the kids continue to redefine that area so that "things" are not as crucial as people once thought them to be.

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    1. As always, Chuck, you do an excellent job of summarizing the key concerns of a particular issue. Like you and Deb, Betty and I want to leave some of our money for our daughters. After all, my parents left a nice sum for their three sons. Why shouldn't I pay it forward if I can? We will not go overboard in protecting the nest egg, neither will we follow the lead of some: die broke.

      The conflict between private and public employment benefits will not resolve itself anytime soon, regardless of which party is in power. There would have to be a change in what each citizen expects before meaningful adjustments occur. As long as we focus on unbridled consumption, nothing much will happen.

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  5. Hmmm, Bob, good of you to think about this. I've spent so much time worrying about my OWN retirement, I didn't think about the kids. I can see the problems; I don't know the answer except people will have to rely on themselves more in the future than we ever did. BTW, the right margin of your blog is cut off ... anyone else have that problem, or is it just me?

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    1. What are you viewing the blog on, Tom? It is fine on my desktop and laptop computer, but I can adjust the width if others are seeing this. Are you reading on a tablet or smartphone?

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    2. I noticed the left side blue and the right side is cut off, too. Should be an easy fix.
      As for what my kids will do for retirement...both of our sons are married to educators with a pretty solid retirement plan. That's good because they are free-wheelers and need that stability.
      b

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    3. I narrowed the blog width a bit. Otherwise, I have no clue.

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    4. Works okay now, Bob (at least for me). Thx!

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  6. I am a strong proponent of a personal finance course being a requirement for high school and/or college graduation. Too many young people enter the workforce with advanced degrees, an enormous amount of student loan debt and no idea how much that weekend in Orlando actually costs when you're making only a minimum payment on your credit card each month. With the deck of retirement cards stacked so much against the younger generations, we need to be extra vigilant to ensure that our kids become financially literate. While they may choose a path of consumption if they so desire, the choice should be an informed decision, not one made from ignorance. Both our son and daughter (now 23 and 18) elected to take a personal finance course in high school and I recall our daughter saying that some of the students didn't even know what "overtime" was. We teach our kids how to ride a bike and how to drive a car. Do we not owe it to them to provide a solid foundation in personal finance, as well? My apologies for ranting. I'm a former banker and can't help myself. I'll get down off my soapbox now . . .

    By the way, Bob, I've viewed your blog on both my Kindle and my desktop today and everything appears fine.

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    1. I couldn't agree more. Financial literacy is fundamental. It should be the role of the parents, but too many of them are caught up in the spend and consume world we live in. With budget cuts schools can barely cover the basics, much less something that would be considered an elective.

      I have given some thought to writing a book for kids on Financial literacy 101. Something is needed.

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  7. A book that changed a lot of our thoughts was/is "Your Money or Your Life "by Joe Dominguez and Vicki Robbins. Vicki just published an updated version. I think it should be required reading in high school! It's a good start for financial education and turns the consumer society on its head.. lots of practical ideas and case histories.

    I agree with Tamara, about great opportunities out there if you are willing to work hard.My husband and I did have to take out loans for education though not NEARLY the exorbitant amts. we see now.Nursing school at a community college cost me only $3200!!!!!

    But we CAREFULLY looked at career choices and ON PURPOSE chose careers in fields that we would enjoy but that also historically provide good income. I think schools and parents need to do much more realistic counseling with the young folks to help them spend their education dollars towards careers that will enable them to get well paying jobs. Also,Vo Tech schools (EVIT here in the Valley) offer a wealth of training for good paying jobs such as carpentry,dry wall, house painter, computer coding,etc. Not everyone is cut out for a 4 year degree.

    That said,Yes, after insurance laws changed, my nephews had their job hours cut so their employer could NOT provide health insurance. So how's that for trickle down economics!!?

    A lot of food for thought in this post...

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    1. I read an article in last Sunday's New York Times about the growing role of community colleges to educate our children. The quality and facilities are much improved since my day when they were known as junior colleges.

      It is an economical way to get the first two years of basic courses before transferring to a four year school. With top tier private colleges costing upwards of $50,000 a year just for tuition, it is hard to justify that kind of money for core courses that everyone takes in their freshman and sophomore years regardless of where they go to school. Freshman biology is the same material.

      To your point, yes, four years of college are not right for everyone, maybe not even the majority. The trades pay very well and the demand will never go away.

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  8. Do you think our parents wondered the same things in the 1960's and 70's? My husband married me at age 31. He had two duffle bags of stuff and that was it.....YOLO. We did not save for retirement, in earnest, until our late 40s. I know my dad was worried. Interest rates hit an all time high when we were young marrieds. I remember walking away from a house when the interest rate went to 17%! Medical care? We just never really used it.That has not changed much. We did VAT in Europe. You have to be so careful with it or the poor just get totally messed over.

    Our adult offspring/spouses (31-35) seem to have a grasp on what it takes (far better then we did at their ages). They have regular debt (car/house), have one parent at home and are saving (sometimes a great deal) for retirement. All plan on "retirement" around 50-55. They are resourceful and know that if you want to get ahead, sometimes you have to do a job to gain income not because it makes your heart sing. They have kids to put through K-12 school, but plan on each of their offspring to either join the military (almost all of them did) or find alternative ways to get through the higher education they desire. They have government jobs. The salaries are half of their peers- but the pension and medical are worth, to them, the risk.
    Only about 30% of our population graduates from college---so the very vocal few who are in terrible shape because of student loans....well, we all have choices. In our day it was those who chose to be in construction who could never get ahead. Look at them now! I am sure the student loan people will find their way and be just fine.

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    1. I imagine every generation worries about the ones that come after them. But, because of the change in our economy from manufacturing and trades to service and technology I think the ground rules have changed. The average person in his thirties has just $31,000 in savings. By the time they hit mid 40's that has increased to $61,000..woefully short of what will be needed in just 20 years.

      THere will always be those who are super focused on a goal, sacrifice to get there, and will do just fine. But, the majority are not on a path to what you or I may consider a satisfying retirement. That is not always their fault or under their control, but it doesn't change the problems.

      I agree with the student loan problem. Going that deeply into debt makes very little sense to me. Price does not automatically equal a good education.

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  9. Thanks for this, Bob. I have 2 kids that will be moving into the workforce shortly. We have already started to discuss this topic with them. Both of them will likely have the option of either public sector or private sector employment. If retirement at a reasonably young age is a goal of theirs, they will need to make decisions with that in mind from the start. Yes, public sector jobs still seem to offer the best prospects for reliable pensions. But if they choose the private sector, they will need to be prepared to save for their own retirements, in all likelihood. At the end of my public sector career, I was contributing almost 14% of my income to my pension fund, which has allowed me the freedom to retire as early as I have. As difficult as it may seem, they can do that with their own savings even if there is no pension fund. Set up an automatic savings plan that diverts that amount directly into investments and retirement savings. It is easier to live on a reduced amount if you never really see the amount that is being saved.

    Of course, as others have suggested, that will mean accepting that they may not be able to have some of the toys and other things they want in the moment. It comes down to priorities and goals - do they want to enjoy that money now, or later in retirement.

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    1. You and I were on the same path. Betty and I set aside between 15-20% of our income during the years things were going well. Even in lean years we managed at least 10%. That meant we gave up many of the toys that those around us had. It taught us the value of delayed gratification, a lesson we have passed on to both daughters.

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    2. As I once heard some wag say: "The problem with delayed gratification is that it takes too long"

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  10. My thoughts on your points above.

    1) The lack of company pensions or strong retirement plans.
    This was me all the way (you too I bet Bob as you were self employed). The company I spent my last 20 years with did have a DC savings plan but DB plans have all but disappeared except for those with careers in government. I did however take advantage of the registered saving plans that the tax system makes available. Anyone can but not everyone does.

    2) The soaring cost of medical care.
    I live in Canada so this is less of a personal issue for me BUT it is a problem for the government system that provides it. Each year more and more of the government budget is gobbled up by the medical care budget line so it's still an issue, just at a higher level. That said having a "universal" single payer system does bring efficiencies, I think the percentage of GDP spend on health care in Canada is about half of that spent in the US.

    3) The weak wage growth over the past few decades = poor rates of savings.
    This is a problem. The rich get richer and the rest seem to be the ones paying the price. I think ultimately this is going to have to be addressed through the tax system but getting new taxes passed into law appears to be political suicide no matter where you live. I think sometimes we only have ourselves to blame. For perspective back in what we remember as the "golden era" of the 1960s the top tax rate was in the 80% range.

    4) Instant gratification and confusing wants and needs.
    This has always been true and old curmudgeons have always complained about it. It's just that now we are the old curmudgeons so it seems 100% true these days.

    5) A tax system based on what we earn, not what we consume.
    I think you are right. It is a simple and easy way to tax wealth and it is mostly without loop holes -- you buy something you pay. It does have limits as no matter how wealthy you are you are only going to need so many pillows for your bed or whatever. As I said before I live in Canada and we have a VAT type of federal tax called the Goods and Services Tax (GST) set at 5% in addition to any provincial (state) sales tax. It is efficient to collect, applies to almost everything except for some basics like food and medicines, and it is also good for businesses as they get the money refunded on any of their inputs unlike regular sales taxes. It is however just as universally despised by the public -- no one likes to pay taxes -- and it is applied at the till so you see it every time you buy something. When it was introduced the government of the day decided to do it this way to be open and transparent about taxes but if the US decides to move in this direction perhaps it would be better to include it in the price as is done in Europe and elsewhere, they seem to have a lot less friction over this particular kind of tax.

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    1. Yes, I was self-employed for most of my career, certainly during the time when my income was the highest. That made me responsible for everything, the full 15% employment tax, my health care, my retirement savings. Yes, there were some tax provisions that helped but I was still on the hook. That situation motivated me early on to be conservative as to where I put my money and aggressive in how much I put aside.

      I keep saying our healthcare system can't continue the way it is being operated, but every year little changes, or just gets worse. I don't know what the tipping point is, since I would have thought we passed it years ago.

      I am a fan of a form of the VAT tax. Consumption is what pays for much of the cost of government. Also, it draws attention to purchases.

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  11. I think an important part of the problem that is missing here is demographics. The U.S. Social Security system has always been a pay-as-you-go-system, meaning that those who are working today are paying the benefits of those who are retired today. But, as birthrates have fallen, we have fewer and fewer workers to support each retiree. To give a personal example: My parents had five children during the post-war baby boom, and all those children went on to be workers who paid Social Security taxes during my parent's retirement -- a ratio of 2:5 workers per retiree. Their five children and their spouses had a total of 8 children, which gives a ratio of less than one (8 workers paying into the system for 9 retirees). The eight children of my siblings, who are now mostly in their forties, have had a total of 2 children, to support a total of 12 retirees! I don't think my family's demographic story is all that unusual, but clearly those ratios won't work. One solution is immigration, since immigrants tend to be younger than average for the population and to have slightly higher birth rates. Ironically, our national rhetoric focuses on what immigrants cost rather than on what they contribute. -Jean

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    1. Falling birth rates and increases in longevity make the Social Security model fail. As you note, the segment of the population that tends to have higher birthrates are those from other cultures. People look at the short term costs of those extra young people and not the 30 0r 40 years of contribution to the retirement system.

      Even so, Social Security needs a fix. A slow increase in retirement age coupled with taxes on higher levels of income seem reasonable.

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