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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.
Baby Boomers:
- 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.
In Conclusion:
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.
Note:
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Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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I haven’t read enough of the Vanguard whitepapers etc to know, but I wonder if this scenario enters into the general prediction of reduced equity returns over the next decade, even absent an outright recession. Also wonder if this scenario leads to less correlation b/t domestic and international equities and therefore some additional upside to ex-US relative to risk.
Interesting take about the international stocks. Gasem on his website has done a lot of posts about how international adds risk without increasing returns and favors a 2 asset approach rather than the Boglehead 3 fund.
Tell me an international market that is poised to do well and I’ll buy it. Japan is dead literally. Their boomer crisis is ten years older than ours and the birth rate is 1.2/couple. EU is carrying 14T in negative yield bonds. The 30 year Bund went negative last week. That means you lend the government money for 30 years and then you get to pay THEM the interest at the end of 30 years. Sound like an economy you want to invest in? Norway is in default the free medical system bankrupted them Sweden and Denmark soon to follow.… Read more »
I have been reading posts on your site as well as FI Physician and I think both of you have outstanding points. My envisioned retirement puts me in the danger zone window FI Physician mentions so it is indeed perfect timing for me to de-risk my portfolio.
Have already laid out some plans that I need to enact in the upcoming week and do so. Thanks for the great commenting as always.
That is an interesting video but he skirts around the fact that unlike US population growth, world population is soaring. Seems to me as US consumption declines world consumption will more than offset. We’ll just sell the things we don’t buy to China, India and the developing world. There are no individual economies anymore. Just a big world economy. And we will let more immigration happen as we need more workers, taxpayers and social security payers.
True point about the global economy considerations that may offset the downturn the US is likely facing. Hopefully the slack can indeed be picked up. On the other hand the US is a major consumer of world goods and if things go south for us and we stop spending a chain reaction leading to a global recession could be a true doomsday scenario.
So do you feel international equities will be a strong player in future growth returns when the US does enter a recession?
Actually this is a wildly inaccurate view. China’s population is actually aging with projected negative population growth. There is not enough buying power and prices of goods and services are under strong deflationary pressures.
https://www.prb.org/2018-world-population-data-sheet-with-focus-on-changing-age-structures/
Appreciate the information. The more I dive into the subject the more it seems that we should be worried about deflation rather than inflation.
Yep, very weak inflation paired with dovish central bank seems to be a strong possibility. M2 velocity along with the strong effects of automation on goods and services seems to point to this. But there are tail risks such as wartime inflation (including cyberwar) that can pull it in the opposite direction.
Very interesting video. I don’t think anyone really knows what will happen. I will say that I follow a 3 fund portfolio and international stocks have greatly underperformed the US stock market in the past decade. I’ve always assumed that they might perform better this decade but who knows. I guess I’ll keep working, saving, and living well below my means. Thanks for another great article.
Thanks VP. I too have done the Boglehead 3 fund when I first heard of index fund investing (actually added a 4th with vanguard reit) so do have decent amount in international. Gasem over at MD on Fire has done a lot of great posts on his site which conclude that international adds more risk without increased value and has instead suggested 2 fund of total stock and bond as the best for efficient frontier. I have entered the 5 yr pre-retirement window and need to start de-risking my portfolio. I do have a sizable real estate syndication stake which… Read more »
I think real estate is at risk as well, especially commercial. It depends on the leverage. If nobody has any money nobody is paying rents certainly increasing rents so it all comes down to being able to service the debt. Isn’t that what crowd source mostly sells, the debt? There is a reason trailer parks are going to do well. Sam Zell bought him some trailer parks not penthouses. I sold some stock and my REITS. When they pay REITS pay well but when they crash they crash hard. I just hope this isn’t a replay of 1937. Took a… Read more »
You just voiced my biggest concern about real estate. Interesting point about BTC. Rauol Paul mentions it as well as a possible play on capitalizing on this changing environment. I have not invested in any myself but perhaps it is time to take a small flier on it.
Oof, people like me with pre-existing anxiety should NOT read this kind of stuff. I don’t know how accurate the predictions are but they’re definitely food for thought. Unfortunately, I don’t have a lot of other options right now for retirement except the stock market. Real estate is going up by leaps and bounds here in Phoenix, so I don’t have the money to go into the rental business just now. So I guess I’ll have to hope that most of this doom and gloom is an overreaction.
I agree it is a bit unsettling to see analysis like this. I am basically within my 5 year retirement time frame and needed to start de-risking my portfolio (I actually did a lot of that today and still fine tuning it). Hopefully this doomsday scenario does not come to fruition but for me I’m starting to take some chips off the table and designing a more conservative portfolio (which you should do anyway when you are 5 years from retirement)
But actually, the boomer crisis is not new – it’s been ongoing for at least a decade. What we’re seeing now — with so many boomers leaving the workforce with much fewer from younger generations to fill those gaps – should have happened last decade, except the financial crisis hit. Boomers delayed their retirements out of necessity, and as the economy recovered, those boomers finally pulled the trigger on retirement. We are still in the midst of a Silver Tsunami and it will continue, but it’s not anything new exactly. The other factor in all this are wages – they’ve… Read more »
Wow. I hadn’t thought about that but you are spot on that if it were not for the 2009 downturn, boomers would have bowed out much earlier. Love the Silver Tsunami descriptor.
I guess market forces will ultimate decide what needs to be done to continue but yes I think with a glut of jobs available, corporations need to do something to make their position more appealing than the next.
Thanks for the great insight.
Thanks for the article. You mentioned, “It is up to the younger generations to navigate these treacherous financial waters so that their “Boom” does not blow up our retirement future.” . I believe, too, that towards the end of the video, Mr Pal suggested that salvation for Millennials lies in entrepreneurship.
-Cheers
Entrepreneurship is one of the areas that certainly can help with the next generation’s financial outlook. There are still a lot of areas that are untapped for financial potential. Hopefully there are a lot of “out of the box” thinkers that can capitalize on them.