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  • Rescuing Retirement

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    I came across this news story about Millennials and retirement. I have not read the book yet (although I just ordered it and will read it shortly) but the idea seems pretty straightforward. Being a millenial, and having a client base that skews heavily millenial, I thought it would be worth a few minutes to give a few ideas and pointers on something like this.

    First, understand this (retirement, taxes, fiscal and monetary policy) is a complicated topic. You have a lot of bad ideas that do good things and bad things that are really a good ideas. You have a lot of trade-offs between independence and state sponsored paternalism. You have bad actors potentially profiting heavily but also legitimately solving a problem.

    So, let me start by stipulating that there is no clear good or bad. This is, to use one of my favorite sayings, a morass of maybes.

    The idea is simple: we require, by law, that all full time workers save (pay a tax) equal to 1.5% of their income. It is capped at a total contribution of around $3700. There are some tax subsidies involved to help support lower income folks. This is put directly into an investment fund, managed by approved vendors and that fund will pay out an annuity to you at retirement. It is not clear what that amount would be, but given the math involved, which I know a little about, it will likely be a pretty solid middle class type income. Enough to live on, but likely not in “luxury”.

    Let’s break this apart into pieces, shall we?

    Thought #1

    This is Social Security.

    In this version, however, we have privatized the management of the money. This is likely to be rife with corruption. But even after the kickbacks and fees that will come from fighting to manage the money it will likely produce FAR better returns in the long run. That is a good thing. Corruption? Not so much. At least in this case future congresses can’t “tap it” for spending.

    Thought #2

    Why wouldn’t I just do this myself?

    There is a lot of old information in the article: companies don’t have pensions, people move jobs and lots of jobs don’t have 401(k)s. All this we know. I would challenge the point that the reason millennials don’t save more is because of access to 401(k)s. The contributions on this are maxed at something like $3700 per year. That is in the range of a Traditional IRA. Which you can open online at any number of places and set up to automatically pull money from your account and invest it. It REALLY isn’t that hard. I would argue that access to accounts is not the main reason millennials don’t save. The real reasons are lack of money and education.

    Education

    Their educations, which they spent a LOT more money on than any other generation, aren’t adequately preparing them for the world in which we now live. Take a look at labor productivity rates - whatever we are teaching people is not helping.

    We also do a dismal job of educating people about money. I can tell you that nearly 75% of the questions that people have are considered VERY basic in the finance world. Any high school student could understand them. Why we don’t teach people about investments, retirement, taxes and personal finance is beyond me. Insert “mitochondria is the powerhouse of the cell/what are taxes meme”.

    Money

    That decrease in productivity leads to lower incomes (except in a few very specialized skill sets like programming). Pair that with higher debt (from that really expensive education) and the need to buy into high costs houses relative to that income (which have been inflated by cheap government debt, see Thought #4) and you have a pretty severe cash crunch.

    Thought #3

    The required savings rates can actually be pretty minimal only 1.5%? That’s not bad! But is forcing people the way we want to go?

    Only 1.5%? Yeah, if you save at least 2% or so of your income from the very start, and invest in it decently, you can create a pretty basic pension plan for yourself. Most of my clients are doing this, and some are doing dramatically more.

    But not to be too arrogant, if you can afford me, you can afford to retire as long as you don’t completely screw it up.

    The truth is most people are not even going to save this most basic little bit. So the natural solution is to force them to do it. You get into some pretty classic conservative versus liberal arguments here. We will provide for people but forcing them to do it takes away accountability and makes people reliant on the government and others. Is that good? Is that giving up of “freedom” a worthy sacrifice for the guarantee of security? Only you, the individual, can answer that.

    Thought #4

    Wait, we already HAVE a Social Security system - why do we need another one?

    ...sigh…

    This, to me, is the giant alarm bell here. Our financial system, most notably Social Security, is SO broken that the giant insight is to tear it down and rebuild it.

    Think about that - you pay around 7.5% of your income into Social Security and Medicare. Already. As it is right now. And the solution is that we need another 1.5%?

    This is the part where I lose all my Baby Boomer clients. But screw it, I believe it is the truth.

    Yes, Baby Boomers have bankrupted the system. And the only solution is TEAR IT DOWN and start over.

    That’s some bullshit right there. And let’s not even include the $2 TRILLION in deficits we’ll have to pay back along the way the proposed tax cuts and spending. There will be another whole article on this problem.

    It is pretty cliche to be a young person angry at older people. And I HATE to use cliche statements. But I honestly believe this: if you are a millenial and are not angry, you are not paying attention. Baby Boomers have racked up more debt than anyone can even comprehend. They so badly managed our entitlement systems that redoing a new Social Security system seems like a good idea. You can lambast millennials for wanting avocado toast all day long. But when you spent your entire adult life making short term decisions that bankrupted a government program and left a debt load larger than any in history to fund short term consumption and under productivity - all I see is the kettle calling the pots they made black. Millennials inherit a government with more debt, fewer options, a less productive workforce, and more obligations than any other in history. You could argue it is worse, in most respects, than they inherited. I think Baby Boomers should be embarrassed.

    I don’t think Baby Boomers are bad, and there is a LOT that goes into managing an economy. We could argue this all day long. And I sometimes do - feel free to let me know where I went wrong.

    I mostly make these statements as inflammatory as I do because I think we need to raise the alarm bells. I spend a lot of my time trying to help people get blood out of stones. And fixing the short term attitude that has been perpetuated by Boomers and taught to their kids is the only really impactful thing that we can do.

    So, feel free to vote however you want - but understand that you cannot, ever, get blood from a stone. At some point the debt has to be paid back. And it is likely time for the next generation to stop being victims of others choices and start driving the conversation.