One aspect of the American Dream has always been the prospect of enjoying one’s golden years in retired bliss. And while everyone knows that the rules of the game have been subject to change over the years, the recent, unprecedented changes in fiscal policy have proved to be a virtual wrecking ball to Americans’ retirement dreams.>
Over the past few years, the Federal Reserve has moved from simple interest rate manipulation to wholesale market interference with the goal of maintaining bank solvency and equity prices. This steamroller-style interference in the markets has had massive consequences. And not just for the Baby Boomers who are now hitting retirement age, but also for their children and children’s children—three American generations whose retirement hopes have been left to swing in the wind on a string of broken promises.
Baby Boomers Get Their Risk On
The Baby Boomer generation (born 1946 – 1964) is quite used to adjusting to ever-changing conditions when it comes to retirement.
For decades, receiving a pension was what one looked forward to for their old age. But as you can see in the chart below, at least in the private sector that idea has become as extinct as a T-rex.
Its replacement became the 401(k) and the IRA—tax-deferred vehicles that let savers take control of their own retirement, for better or worse.
Granted, Americans have built up a sizable nest egg in these defined-contribution retirement accounts—more than $5.4 trillion in IRAs alone—but the cumulative savings fail to tell the larger story. The dire truth is that Baby Boomers are caught in a trap, simultaneously trying to preserve capital and generate yield through wild market swings like 2000’s massive crash, 2008’s 30% correction, and 2010’s flash crash.
The market’s frequent large “corrections” have had a sobering effect on Boomers’ investment behavior. In an attempt to avoid the swings while still making money to live off, Boomers have flooded the bond market with money and significantly reduced their stock market exposure.
As you can see in the right-most bars on the graph above, Boomers who are in their sixties today have significantly reduced the weighting of equities in their portfolios over the last decade—much more so than their peers of just 10 years earlier.
It’s true that since the bursting of the housing bubble in 2007, major indexes have recovered to a point where anyone who stayed put after the crash should have been made whole again. Yet the actual market participation by the Boomers has been considerably lower—thrice bitten, twice shy—meaning many missed out on the equity market’s recovery.
Instead, hundreds of billions of dollars flowed into the bond markets over the past five years, as evidenced by the $50 billion upswing in bond ETF assets in 2012, and the $125 billion in bond-based mutual fund net inflows over the same period.
Following a protective instinct, conservative investors shifted their money from stocks to bonds… at exactly the time interest rates were rapidly falling for most classes of income investments.
Boomers have suffered more losses and settled for lower income than ever before. The double whammy took a serious toll on the retirement dreams of many. But that was OK, because there was always Social Security as a backstop.
It’s become increasingly obvious, though, that Social Security is not keeping up with the times.
By tying its payouts to the Consumer Price Index (CPI)—a measure as flawed at predicting actual consumer prices as a groundhog at predicting the weather (a consumer price that doesn’t include fuel or food?)—as a net effect, the real value of Social Security payouts has shrunk dramatically.
Here’s a chart of official consumer inflation vs. the real numbers calculated by economist John Williams of ShadowStats (he uses the US government’s unadulterated accounting methods of the 1980s). While the official number is 2%, real inflation is in the 9% range.
Washington has been cutting Social Security payments for years, just in a way that wasn’t obvious to most newscasters and taxpayers—at least not until it was time to collect, as increasing numbers of Boomers now are.
Between the downfall of the pension, Boomers’ eschewing of the stock market, and the government’s zero interest rate policy, for many Americans retiring in their sixties has become little more than wishful thinking—and a financially comfortable retirement now requires taking significantly more risk than most are willing or able to handle.