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I enjoy perusing the web and reading blog posts and articles that catch my eye.
Some of the great posts I have come across I share with my readers through my Grand Rounds series.
Sometimes a particular article is thought provoking and I thought I could highlight/elaborate on it in a dedicated post.
The inspiration for this post came from a video entitled “The Coming Retirement Crisis” which I highly urge my readers to view in its entirety:
[Special shout out to Gasem who first introduced me to this highly informative/well presented video.]
The CEO and co-founder of Real Vision, Raoul Paul, gives an incredibly articulate breakdown of what the next few generations are facing in retirement, citing macroeconomic forces, the likes we have never witnessed before, that threaten to derail our financial plans.
The underlying crux of the retirement crisis problem is the “Baby Boomer” Generation and their impending economic impact on the world.
- The largest generation of individuals the world has ever known.
- Since the 1970s, when this particular generation entered the workforce, accounted for the majority of consumption of goods.
Raoul goes on to say that we are facing a “Demographic Time Bomb” as this generation is starting to exit the labor force and begin their retirement.
Similar to my thoughts of likening social security to a giant Ponzi/Pyramid scheme, Raoul says that, “there is too few millennials and younger people paying into the system to pay for these retirees.”
Even private defined pension benefit offering are at risk as, “they will never be able to afford to payout the promises they had to the retirees.”
“It’s kind of like a Ponzi scheme. The first people to get out made all the returns. The last people to get out get nothing.”-Raoul Paul.
Raoul goes on to say that we are facing a “Demographic Wall” as the Baby Boomers are now exiting the workforce and transitioning from the accumulation phase to the decumulation phase, which puts economic stress on the world.
Coupled with the rising trend of increased life expectancy creates a double whammy as this aging population will continue to draw from a finite and dwindling government resource.
As we all know, we have benefited from the 2nd longest bull run in recorded history.
The ramifications of this bull run are this:
- Depending on the indicator, current equities are either the highest or second highest of all time in valuation.
- As people are finding themselves near retirement age but without enough assets to do so, they are taking on more risk to try and bridge the gap.
- Entails tilting their portfolio more towards equities.
- This is the second longest economic expansion in history.
- “The clock is ticking and it is moving towards the next recession.” Raoul Paul
These two forces (retiring Baby Boomers and impending recession) can come together and truly create a “Perfect Economic Storm.”
Those of us in the financial movement have had the following ingrained into our very mindset:
The stock market, over the long run, will go up.
We have a subset of investors who see a decline as a buying opportunity and “buy on the dip” purely based on this market premise.
But is that truly a principle set in stone we can bet our financial well-being on?
Japan is a perfect example of a country that was enjoying the benefits of a booming economy with things going great, until they weren’t.
Three decades later, the Japanese financial markets have still never recovered from that 50% decline in 1989.
As Americans do we think we are somehow different and that such a thing could never happen to us?
To do so would be financial hubris.
This demographic wall of retirees we are facing can and will have lasting impacts on the economy:
- Retirees typically spend less as they are now depending on a fixed income.
- “Velocity of money” slows as money is not changing hands as often
- Older individuals tend to save money rather than spend.
This looming fiscal cliff will be hard to avoid because in order to maintain previous consumption levels, the younger generations would have to pick up the slack.
The main problems however are that:
- Younger generations/millennials are already saddled with debt (education) and many things are already priced out of their reach (housing, equities, etc.)
- The earning potential of these generations is still not able to offset the wealth that is leaving by the retiring baby boomers.
Potential bleak/blunted outlook for equities?
Some other interesting information I gleamed from Raoul’s presentation is that the Baby Boomers will have a twofold negative impact on equities during their retirement period.
- As the Boomers are no longer in accumulation phase of their financial life cycle, they will no longer be purchasers of the stock market (decreased demand=lower valuation).
- As the Boomers are now forced to live off their portfolio (which the majority is compromised of equities), they will be sellers of said equities (higher supply=lower valuation).
This is economics 101 with regards to supply and demand and portends the impact on the financial markets that will occur on a global scale.
Does this retirement crisis create financial opportunities?
Although it is hard to anticipate, there are some sectors of the economy that may benefit from this shift in economics.
- As consumption/spending decreases there could potentially be a shift from fine dining (expensive) to fast food (cheap).
- This can worsen the obesity epidemic in America.
- Potential decrease in life expectancy.
- Potential push from traditional housing into trailer park type living as more and more individuals are priced out of real estates and home ownership.
- Raoul also discusses and has an interesting take on the future of cryptocurrency.
My breakdown of this video does not do it justice and I do highly recommend you take the time to view it.
Even if you do not completely agree with what is being put forth, at least you have information that may be contrarian to your current line of thinking and can adjust accordingly.
Do I think the sky is falling?
I admit after viewing this video I have had a bit of a mindshift in my financial plans and outlook for the future.
It almost feels like I just took the red pill choice that was offered to Neo in the Matrix.
The fact is that the Baby Boomers retiring is an unavoidable fact.
It is up to the younger generations to navigate these treacherous financial waters so that their “Boom” does not blow up our retirement future.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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