The Compound and Friends - The Retirement Crisis: Real or Phony? (with Michael and Josh)

Episode Date: April 18, 2019

Two dueling versions of the looming retirement crisis that affects millennials, Gen Xers and Boomers in various ways. Mary Childs wrote that the shortfall is actually worse than we all think. For example: The average saver puts 6.8% of their annual income into their workplace retirement plan... Boomers are saving 8.5% of their annual income, while Gen X workers save 7.4%. Millennials are saving just 5.7% because many of them are more focused on paying down debt, starting a family and buying their first home. Okay, so far this makes sense. But according to the article, "Two-thirds still factor in income from Social Security, in addition to what they’re saving for retirement personally, the survey found. But 42% don’t even believe those benefits will be available to them when the time comes. What’s worse, 27% of American workers have already borrowed against their workplace retirement plan, and 27% have accepted penalties to pull money out." Enable our Alexa skill here - "Alexa, play the Compound show!" https://www.amazon.com/Ritholtz-Wealth-Management-LLC-Compound/dp/B07P777QBZ Talk to us about your portfolio or financial plan here: http://ritholtzwealth.com/ Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/   Subscribe to the mini podcast on iTunes or Spotify Enable our Alexa skill here - "Alexa, play the Compound show!" Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today, Josh and I are going to be talking about the retirement crisis or not. Is it phony? Is it real? There were two contradictory articles written over the weekend. We're about to get into it. Mary Childs wrote about it and she said it's actually worse than we think. And then the editorial group at Wall Street Journal said that the retirement crisis is phony for retirees today and retirees tomorrow. All right. So phony in what sense? That there will be plenty of money and there's no problem? Or that? That and more so that the alternative to what we're currently doing is to juice up the money that the government is spending and look how underfunded the pensions are. So obviously it was a political argument, but leave that aside for a second. Hold on, hold on.

So the argument in the Wall Street Journal is there is no need for the government to do anything because it's not like they could make it better. They could only make it worse when you look at how state pensions are doing. Correct. Okay. Got it. But we have been getting a lot of feedback about this. And one of the arguments that people are making is that, is this really any different than it's always been? To which I say, that's a pretty low bar. Like, shouldn't we be doing better? And yes, I do think it's different. I think that probably the availability of data has made it much more in our face than it used to be.

We probably didn't know how widespread the agony of retirement was. Yeah, nobody was sharing this data. It's not like- It didn't exist. The state of Illinois 30 years ago was not like putting all this data out for people to analyze, and there's probably more accountability now. So the average lifespan in the 60s was I think mid to late 60s.

Yeah. Today it's obviously much higher and the cost that you incur in the later years of your life is devastating. Well, so that's why it's 100% different because when all of these defined benefit pension plans came about, it was like in the 1950s and 60s, and nobody had any idea that a quarter of the population would live to 95 right now. So number one, the architecture of them was not anticipating greatly increased lifespans. And then also, as medical treatment gets better, it costs more. It's a lot of technology that goes into developing drugs and procedures, and it costs a lot. So maybe there will be a retirement crisis. Maybe there won't be. But even if nothing else, if you're just more aware and

more empathetic and grateful for where you are, is that such a bad thing? All right. So this is the part where I agree with you. This is the part where I give you the context that 100 years ago, there was no such thing as retirement. The retirement plan was you drop dead. And 50 years before that, the retirement plan was you died in a tent in the Civil War. The first retirement plan, you know what the first retirement plan in America was? I don't. You know how retirement was invented? I don't.

A sheriff who was a gunslinger protecting a town would take a few bullets and not be able to do his job anymore. He got the first pension. The town said, we got to take care of the old sheriff who can no longer protect us. He took a few bullets for us. We got to put some money aside for him and his wife and children to survive. And you know who collected the money? He did. and his wife and children to survive.

And you know who collected the money? He did. The guy went door to door on crutches, probably still with blood on his clothes, and said, I'm collecting for my retirement. That's the origin of retirement in America. That's like only two centuries ago. So it's all a relatively new phenomenon.

There's no way to say, oh, it's always been like this. So the conversation tends to get very generational. Oh, the boomers left us with all this debt. We're going to be paying for their shit. But does the rubber meet the road? Is there going to be a point in time where something is actually done? Is there going to be legislation? Is there going to be rioting? Yeah.

No, they're going to raise the retirement age. For Social Security? People will flip out. If you look at Europe, do you know anything about the yellow vest stuff or what the Greeks were protesting? One of the biggest flaws in the European Union is that in some countries, the retirement age was younger than others. So you'd have like these industrious Germans looking at Greeks five years younger than them, sitting on the Champs-Élysées in Paris, retired, sipping a cafe. I don't know if that's class warfare. It was like inter-country warfare. So that was an issue. If they do that here, if they say it's not 70 and a half anymore,

it's 72 and a half, the AARP is not going to like. There will be a fight. And the types of people that vote in midterms are the people that are retired. Like the people that it directly affects are the most vocal at the polls. So there will be further class or generational divide? I mean it's not going to be good. And these people have energy now. They're not protesting from a hospital bed. Again, we're living not only longer but more active lifestyles.

So everyone running for president in the last election was relatively on the older side. And this time they're talking about Biden versus Trump. He's an 80-year-old. So what do you say to the people who are like, oh, everything's a crisis. We have wealth inequality crisis, retirement crisis. Yeah. We have avocado crisis. But some stuff is serious. I know. Well, so the thing is that it's not an acute crisis. It doesn't strike on one day.

It's not like on January 30th of 2022, everyone runs out of money. It's rolling. It's rolling. And then the other thing is that some states are economically growing their way out of the problem in a more efficient fashion than others. Some states will never be able to solve it with growth or with increased employment. So you've got the whole spectrum of not only who it affects, but how different regions will deal with it. And it's not going to be simple no matter who you are. So is it a crisis like there's a drop dead date and we need to get to the fallout shelter two days before that date? No. Doesn't make it any

less perilous, I think, as a society. And 100%, these will be issues that we'll be litigating at the ballot box because you're talking about everything from Social Security to Medicare to Medicaid. It's like this whole menu of things that are third rail. Politicians say like, oh, that's a third rail issue. You don't go near that. That's what these issues are. These aren't like, you know, can gay people use this bathroom or transgender. That's

way narrower. These are like the big ones that affect everyone. Not to make this political, but the people that want social services for other people touched are like the people that say government is too big, stay out of my whatever. What do you mean? Like government better stay out of my welfare or my social security or stuff like that. Well, they don't like the government so that when they consume services, they pretend that it's not coming from the government or that they're entitled to it for some other reason.

that they're entitled to it for some other reason. So, yeah, look, without getting into this whole thing about the usage of government funds by red states versus blue states, because that's like a whole, talk about a third rail, you can't call certain things socialist. Like, you can't say this is the good kind of socialism, because politically it just doesn't work anywhere. So you can't tell an Alaskan that the oil fund, that they get a check from every month

just for waking up. You can't tell them, hey, this looks a lot like Norway and it's the good kind of social. They don't want to hear that. So there's a big issue with like perception and the nomenclature of certain programs. But like certain forms of socialism are great. I would argue the VA taking care of veterans, it's socialism. It's the right thing. It's what we're supposed to be doing. People that got injured fighting in a war to protect America, that's where we should be applying socialism. You don't want to call it that? All right, I won't call it that. Wasn't there a guy who wrote a book about who did the campaigning for the Republicans in the early 80s? Who? I forget who I'm talking about,

but I think that little politicians need like linguists and psychologists to frame these issues. We do that. So we do that with our portfolios. Remember, we used to have conservative, moderate, and aggressive versions of our strategic asset allocation. And it was a nightmare. Right.

Because a young person who's made millions of dollars from Google, doesn't have an expensive lifestyle, should have a conservative portfolio. Or could. Could. If you say you're covered, there's no reason to swing for the fences with equity risk, you already have a lot of Google stock, you're getting your equity risk there. So you say, all right, we've solved for what your investment should be. It's a conservative portfolio.

And the kid's sitting there with a nose ring. He's like, I'm not conservative. What are you talking about? I don't want that. I don't want to do that. And then vice versa, someone that really hasn't saved enough. They need to be aggressive. They don't want to be told this is an aggressive portfolio.

It's scary. So for the same reason, when you have these programs and you have retirement benefits at risk at a state level, at a federal level, you have to be careful what you call these things. And doubly so if you're a politician. So, yeah. Look, it's a crisis in that it's going to reshape society. Think about it. We've been fighting over the Affordable Care Act for 10 years. We could fight over this for 30 years.

We will. We will. All right. Let us know what you think. Is this a real crisis? Is this something that we need to worry about? Should we be hiding in the fallout shelter? Leave a comment.

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