According to a recent study by Ernst & Young LLP, nearly three out of five middle class retirees will outlive their financial assets. The report, conducted on behalf of Americans for Secure Retirement, found that of those who have only Social Security as a guaranteed retirement income, over 90 percent will outlive their financial assets. That’s a frightening statistic for Baby Boomers who are now beginning to retire.
In the 1970s and early 1980s, on average, American saved about 10 percent of their income. Beginning in the mid 1980s the saving rate began a slow decline that dipped into the negative by 2005. The 2006 savings rate continued the negative trend and produced back-to-back years of negative savings for the first time since the Great Depression. During this period, our standard of living has been soaring, but at what cost? Has this better lifestyle been the result of a growing economy or because we are spending money we used to save?
Spending more than one earns is like a farmer eating his seed corn. When planting season comes back around and he has nothing to plant, he has to turn to others for help. Today, more and more people and industries are turning to the government for help. The problem is, the only way government can help one person is to take from another. The more government takes from people who produce the less incentive they have to keep producing. It’s a vicious cycle where the more government helps, the more they have to take in order to do so.
This may sound a bit crass, but getting from birth to death has a cost to it. That’s a fact of life. What we spend today pays for the days from birth up until the present. It’s what we save and invest today that pays for the days from death back toward the present. When investments are sufficient to provide for the rest of your life, you can retire and not have to work and earn anymore. That doesn’t mean you can’t work if you want to, it just means that when you get up each morning, you get to choose what you will do and not be forced to do what someone else wants so you can earn a living. It’s called financial independence.
A recent story that was broadcast on ABC’s Good Morning America pointed out that on average; retiring Boomers are going to have to reduce their standard of living by at least 25 percent in order to keep from outliving their assets. When I heard that story, I couldn’t help but think about the impact the Baby Boom Generation has had on politics for the past thirty years. It brought back memories of President Gerald Ford saying, “A government big enough to do everything for you is big enough to take everything from you.” When Boomers start having to reduce their standard of living and workers begin feeling the bite the growing number of retirees will put on government, it may produce some significant and hard fought political changes.
As a nation, we have grown fat and lazy. An economy propped up with trillions of dollars of debt can only expand so much before it becomes top heavy and topples. Many factors are in play that could change the way we live forever. Real estate sales are in the tank, oil prices are soaring and the economy is growing increasingly sluggish. T. Boone Pickens is absolutely correct when he says we are seeing the greatest transfer of wealth in the history of mankind.
We send hard earned dollars to other countries to buy oil to make our lives more comfortable. The countries that sell us the oil get our hard earned dollars, but once we consume the oil, we are left with nothing but a craving for more. It’s a disaster looking for a place to happen. We have become a nation addicted to a standard of living we can’t support and we currently lack the will make changes unless they are forced upon us.
President Ford’s focus on long term economic growth was to put more resources toward saving and investments, the crux of long term growth, and less toward consumption. Congress didn’t allow that to happen. Consumption spending ballooned in both the private sector and government programs and gave us a false sense of economic prosperity. Now we are about to get a dose of reality. Unless we are willing to rein in consumption, become more frugal with our money and start planning for the future, we’re going to be in big trouble. As I said earlier, what we spend today pays for today. What we save and invest pays for tomorrow.
All signs point to tougher times ahead for the economy. The real estate crisis is far from over, government economic stimulus checks have done little other than add to the public debt and inflation is beginning to rear its ugly head. About the only good news, is bad news for many consumers, credit is becoming harder to obtain.
Here’s a tip! Unless you’re independently wealthy, you may want to start making some lifestyle adjustments. Look for little ways you trim expenses; eat out less, car pool, keep the house or apartment cooler, stay out of the stores unless you actually need something and then buy only what you need when you do go. Little cuts here and there can add up to a big saving. Whatever you do, don’t add to your credit card balances.
Current economic conditions will eventually improve, but until they do, don’t keep living like things are still booming. They aren’t! We are entering times when a little common sense and frugality can go a long way.
Original text from article for Asheville Citizen-Times, 31st week of 2008
Mike Summey's Blog 