$6.6 TRILLION Cause Big Ripples

Boston College’s Center for Retirement Research reported on CNBC that Americans ages 32-64 are $6.6 TRILLION short of what they will need to retire. Earlier this week we wrote, as we have several times in the past, “The baby boomer is ill-prepared for retirement and simply cannot continue with her/his reckless spending. Debt will continue to be paid down, spending growth will be modest, and economic activity will be subdued.”

In my book A Million Is Not Enough, I wrote about the “egonomics” of an I-deserve-it generation. A generation of baby boomers endured more stressful, jam-packed, over-scheduled, over-stimulated lives than any previous generation. They no longer retreat to the family table at 6pm for a home-cooked meal as Walter Cronkite confidently reports the events of the day. They are barraged by calls and emails and texts wherever they are and by a constant flow of information on their cell phones, laptops, and numerous flat-screen televisions. Dinner, often from the microwave, has become just another item to be checked on the daily to-do list. This is the generation of “retail therapy.”

Over-stressed, this generation reached for those comforts that might be purchased. It started out as a rental car or hotel room upgrade and morphed into an extra $1,800 stereo for the new Cadillac Escalade. Bills crept higher even as incomes did not. Home equity loans were fun as housing prices soared, and credit card balances increased. In 2007, the savings rate in the US was very close to zero! As home and stock prices fell, average American balance sheets deteriorated dramatically.

Beyond the audible gasp over an incomprehensible $6.6 trillion figure (aforementioned retirement shortfall), there is a major ripple effect for the US and global economies. Seventy percent of US GDP is consumer spending. Roughly 15-17% of global GDP is US consumer spending. Many have reported that the US consumer, struggling with monthly payments, is in contraction mode after assuming a lot of debt, but this retirement shortfall is another major longer-term headwind.

Baby Boomers are the largest US demographic and are in their peak earning years. This slice of the American population earns and controls a huge and increasing amount of earned income and assets. As they reassess their progress towards a secure retirement, they now have to save more. They need to invest more. As they age and become more conservative, and in light of the recent housing and stock market drops, they are investing in more conservative areas like bonds, which does little to support real, sustainable economic growth. Therefore a large part of the population that had been driving economic expansion is now in retreat and will be a good deal more subdued for a while to come. But it is important to remember that these same baby boomers will not reach their retirement goals through investment in bonds yielding 2.5%. At some point, boomers must return to the stock market in order to achieve their retirement, inheritance and philanthropic goals.

On one level, this is a normal part of an economic cycle: contraction after expansion. The near-term will remain volatile and frustrating, but I believe the long-term will be positive. A year ago we were watching the rate of decline slow. This year we are watching a fragile, positive economic renaissance. We are moving in the right direction but the depth of this decline created an intimidating long road to recovery. The additional headwind of eviscerated retirement savings will be with us for many years, and, I believe, will mandate longer working careers until most are well past the age of 70. But we will adjust to the new realities.

In the more intermediate term, we remain defensive.
We believe it is likely that housing prices have further to fall, and we believe the consumer is engaging in a more permanent shift in her spending/saving patterns. The baby boomer is ill-prepared for retirement and simply cannot continue with her/his reckless spending. Debt will continue to be paid down, spending growth will be modest, and economic activity will be subdued. In this type of environment, we believe quality, defensive blue chips will outperform.

Hang in there,