Wednesday, November 26, 2014

A Truly Lost Generation(s)

"and all that could not sink or swim was just left there to float"
Ship of Fools
Grateful Dead

Here are a couple of mind blowing (ie., sickening) charts that make you wonder at how a generation of Americans could have frittered their lives away, spending money they didn’t have on things they didn’t need, utilizing easy to acquire debt, and saving virtually nothing for their futures or a rainy day. Have we become a Ship of Fools where too many people are sinking, too few are floating, and fewer still are swimming?
We were all young once. Old age and retirement rarely enter people's minds when they are young. Most people aren’t sure what they want to do for the rest of their lives when they are in their early twenties. Slaving away at your entry level low paying job, chasing the opposite sex, getting drunk, and having fun on the weekends is the standard for most young people. But you eventually have to grow up. Because one day you find ten years have got behind you. No one tells you when to grow up. And based on the charts below, tens of millions missed a once in 50 years opportunity.

Susan and I graduated from college in 1986 and started our entry level jobs. My engineering job paid $30,000 and her CPA firm job paid $25,000. We never had to live at home and were able to afford our own apartments. In my case, paying cash for a modest used car and paying off some student loan debt was easily accomplished. We were still able to go out on the town in Philadelphia with friends and still still save money in

IRAs and 401(k)s. When we got married at the age of 28, we had saved enough to pay for our own wedding and honeymoon. We both were taught the value of investing by our parents and had mutual fund accounts at Vanguard long before we met. We knew retirement by age 50 was an achievable goal. Anyone who entered the job market from the mid 1970s through the mid 1980’s, which would be the late Baby Boomers and early Generation Xers, had job opportunities and the benefit of starting their investing with low stock market valuations.

P/E ratios of the market were single digits in the late 70s and early 80s, versus 20+ today. Dividend yields on stocks averaged 5% for the S&P 500, versus 1.9% today. The Dow bottomed out at 759 in 1980, while the S&P 500 bottomed at 98. A 20 year secular bull market was about to get under way. Baby Boomers and Generation Xers had the opportunity of a lifetime. Even after six years of the bull, when we graduated from college the Dow stood at 1,786 and the S&P 500 stood at 521. We had just begun to ramp up our investing when the 1987 crash wiped out 20% in one day. I remember my divisional GM in hysteria that day as he proclaimed it was the end of the economy as we know it. He didn't have as much time as we had. It meant very little to us. We didn’t have much to lose, and we had time on our side, so we just kept investing.

The 20 year bull market took the Dow from 759 to11,722 by January 2000. The S&P 500 rose from 98 to 1,552 by March 2000. You also averaged about a 3% dividend yield per year over the entire 20 years. Your average annual return, including reinvested dividends, exceeded 17%. Anyone who even saved a minimal amount of money on a monthly basis, would have built a substantial nest egg for retirement. If you had invested in 10 Year Treasuries, your annual return would have exceeded 11% over the 20 years. Even an ultra-conservative investor who only put their money into 5 year CDs would have averaged better than 7% per year over the 20 years.

Even with the two stock market collapses since 2000, your average annual return in the stock market since 1980 still exceeds 11%. That’s 34 years with an average annual total return of better than 11%. Every person who had a job ovr this time frame should have accumulated a decent level of retirement savings. That is why the chart below is so shocking. Over 15% of all people 60 and older and 23% of people 45 to 59 years old ZERO retirement savings. This means 25 million Boomers and Xers are stuck living off a Social Security pittance or on a pension system that is primed to collapse under its own weight. It seems they let 30 years of one of the greatest investing periods in history get behind them. They floated through a period unlikely to be repeated in our lifetime and are now waiting to sink.
I’m not shocked that over 50% of 18 to 29 year olds have no retirement savings. With the terrible job market, declining real wages, massive levels of student loan debt, two stock market crashes and one real estate crash in the space of eight years, and 4% annual returns since 2000, young people today have neither the means nor trust in the system to save for retirement. Their elders had no such excuse. Just a minimal amount per paycheck saved over the last 30 years would have compounded to well over $100,000, even at modest salary levels. It is disgraceful that 25 million people over the age of 45 have saved nothing for their retirement. Far more disgraceful is the median household retirement balance of $3,000 for all working age households. There are 122 million households in this country and 61 million of them have $3,000 or less in retirement savings.

The far worse data points are the $12,000 median retirement balance of aged 55 to 64 households and the $10,100 median retirement balance of aged 45 to 54 households. These people are on the edge of retirement and have less than one year’s expenses saved. There is no legitimate excuse for this pitiful display of planning. These people had decades to save, strong financial market returns, and, if they worked for even a small to medium size organization, matching contributions to their retirement accounts. They didn’t need a huge salary. They didn’t need to save 20% of their salary. They didn’t have to be an investing genius. A savings allocation of just 3% to 5% would have grown into a decent sized nest egg after a few decades of compounding.

We know from the data in the chart, it didn’t happen. The concept of delayed gratification is unknown to the millions of nearly broke Boomers and Xers, shuffling towards an old age of poverty, misery and regret. A 64 year old has a life expectancy of about 20 years. They’ll have to budget “very” frugally to make that $12,000 last. The question is how did it happen. I don’t buy the load of crap that you can’t judge people as groups. I judge people by their actions, not their words. I know you can’t lump every Boomer and Xer into one box. Individuals in every generation have bucked the trend, lived within their means, saved for the future, and accumulated significant nest eggs for their retirement. But the aggregate numbers don’t lie. The majority of those over the age of 45 have squandered their chance at a relatively comfortable retirement. These are the people who most vociferously insist the government do something about their self created plight. It’s their right to free healthcare, free food, subsidized housing, free utilities, higher minimum wages, and a comfortable government subsidized retirement. They are wrong. They had a right to life, liberty and the pursuit of happiness. It was up to them to educate themselves, get a job, work hard, and accumulate savings.

The generations of "live for today, don’t worry about tomorrow" Americans over the age of 45 have no one to blame but themselves. They bought those 4,500 square foot McMansions with negative amortization, 0% down mortgages. They had to keep up with the Jones-es by putting in granite counter-tops, stainless steel appliances, home theaters, Olympic sized swimming pools, and enormous decks. They have HDTVs in every room in their house and must have every premium cable channel, along with the NFL package. They upgrade their phones every time Apple rolls out a new and improved version of iCrap. They pay landscapers to manicure their properties. They lease new BMWs every three years. They have taken exotic vacations on an annual basis. They haven’t packed a lunch for themselves since they were 16 years old. Eating out for lunch and dinner has been a staple of their existence for decades. That morning Starbucks coffee is a given. A new wardrobe of name brand stylish clothes for every season is a requirement because your neighbors and co-workers are constantly judging you. Nothing proves you’re a success like a Rolex watch, Canali suit, Versace boots, or Gucci handbag. If these things had been purchased with cash after savings, then good on them. Unfortunately, the have it now generations got it then and have virtually nothing now because they acquired all of these things with debt.

Real cumulative household income is up 10% since 1980. Consumer debt outstanding has risen from $350 billion in 1980 to $3.267 trillion today. That is a 933% increase. We’ve had decades of faux prosperity aided and abetted by Wall Street shysters, corrupt politicians, mega-corporation mass merchandisers, and Madison Avenue maggots trained in the methods of Edward Bernays to convince willfully ignorant consumers to consume. And consume we did. Saving, not so much. You can blame the oligarchs, bankers, retailers, and politicians for the fact you didn’t save, but it rings hollow. No matter how much propaganda is spewed by the ruling class, we are still individuals with free will. The older generations had choices. Saving money requires only one thing – spending less than you make. Most Boomers and Xers chose to spend more than they made and financed the difference. When the average credit card balance is five times greater than the median retirement account balance, you’ve got a problem. The facts about our consumer empire of debt are unequivocal as can be seen in these statistics: 
  • Average credit card debt: $15,593 
  • Average mortgage debt: $153,184 
  • Average student loan debt: $32,511 
  • $11.62 trillion in total debt 
  • $880.3 billion in credit card debt 
  • $8.05 trillion in mortgages 
  • $1.12 trillion in student loans 
Anyone who entered the workforce around the year 2000 has good reason to not trust the system or their elders. Every asset class is now extremely overvalued due to the criminal machinations of the Federal Reserve. There are far less good paying jobs. Real wages keep declining. They were convinced by their elders to load up on student loan debt, leaving them as debt serfs. The Wall Street/Federal Reserve scheme to boost home prices and repair their insolvent balance sheets has successfully kept young people from ever being able to afford a home. So you have young people unable to save, invest or spend. You have middle aged and older Americans with little or no savings, mountains of debt, low paying service jobs, and an inability to spend. The only people left with resources are the .1% who have captured the system, peddle the debt, and reap the rewards of consumption versus saving. They may be able to engineer a market rally to further enrich themselves, but they can not propel the real economy of 318 million people. Our consumer society is dying – asphyxiated by debt – shorter of breath and one day closer to death.

I’d love to offer some sage advice on how to fix this problem, but it’s too late. Too many people missed the investment boom of our lifetime. By not doing anything extraordinary, Susan and I were able to retire by age 47. No one is going to come to the rescue of people who never saved for their future. The Federal government has already made $200 trillion of entitlement promises it can’t keep. State governments have made tens of trillions in pension promises they can’t keep. They can’t tax young people who don’t have jobs. Older generations who think the government is going to rescue them from their foolish shortsighted choices are badly mistaken. Their benefits are likely to be reduced because the unsustainable just can not be sustained. The 45 to 64 year old cohort who chose not to save can paddle and kick to try to learn how to swim, but it’s too late for this Ship of Fools. They are sinking. Absent a stick save in the form of a rich relative, they are most likely destined for lives of quiet desperation. There is nothing more to say.

Wednesday, November 12, 2014

Obamacare: The other shoe is dropping

In early February of this year we posted about our experience with Obamacare.
Affordable Care Act: The Verdict is in

As two people too young for government healthcare and with no employer healthcare coverage, we are in the group that Obamacare proponents always reference when talking about how good the program has been for the uninsured. We also had to use to obtain our insurance. So we are about as committed to Obamacare as any user could possibly be.

We described the bottom line back in February as follows:
"The good news is that my wife and I are now able to buy a healthcare plan with a $500 deductible. The bad news is that the annual premium is $10,200. before the ACA, we could have purchased a plan with identical coverage and a $3,000 deductible for an annual premium of $2,400. So we're paying an additional $7,800 per year to buy our deductible down by $2,500. Not a great deal."

In that February posting and in this August 2013 post (The Real Healthcare Scam), I covered how both Republicans and Democrats refuse to address the real cause of exploding healthcare costs: the refusal to address the monopolistic and anti-competitive pricing practices of the entire healthcare industry. Everyday, hospitals, pharmaceutical companies, doctors, and insurance companies operate their businesses in ways that would put the managers of any other industry in the US into jail for failure to comply with the nations anti-trust laws. Healthcare consumers in this country bear the burden for this lack of government oversight.

Effectively, all Obamacare has accomplished is make available insurance policies on structured exchanges at higher costs than before. I maintain that until these higher costs hit the employer provided plans, and most importantly, the medicare community, that there won't be much demand for change. Well now the other shoe has dropped and the new plans for 2015 are being rolled out. For us, we're seeing deductibles go from $500 to $10,000 for the same coverage. If we're willing to pay 50% of the costs (up from 0% this year) for all services (doctor visits, lab work, hospital visits, prescriptions, etc.) then we can drop our deductible to $250. That's great as long as we never use the $10,200 annual premium insurance.

So it looks like plans are keeping the premiums the same for 2015, but are drastically passing on the costs of using the insurance on to the policy holders. Alternatively, we could pay about 50% more in premiums ($15,000 annually) and keep our 2014 coverage levels.

Again, when this cost shift starts to happen in the employer plan and medicare markets it's hopefully game over. Maybe then the citizens of this country will start to wake up and demand that our politicians quit bowing to the largest lobby in the country and finally address the real cause of spiraling healthcare costs. I'm not holding my breath though.

In the meantime, we'll continue paying $10,200 per year for coverage that we will try our best to never use. That's when the real costs to us would kick in. Paying 50% of the cost for a criminally priced $40,000 hospital visit would be a real budget buster!