Peter Thiel over at Forbes has some commentary on the state of retirement savings for the boomers and beyond. We have been hearing the statistics for a few years now, about how Americans have a negative savings rate, we’re stacked with debt and living beyond our means while Social Security continues to be a major problem. What makes the situation even worse is that while people are saving less, we are expected to live even longer than ever. How’s that for a double whammy?
For the oldest Boomers, the race to save is ending. They can gamble on Social Security, postpone retirement or sacrifice quality of life. The rest of the nation has another option: Save more. Assuming Social Security goes bankrupt on time and that you can make about 9% on your money (the historical long-term return for stocks), a secure retirement requires the median household to save 10% of gross income–slightly more than the historical average.
This is good news for our generation, knowing that we can count on Social Security to go bankrupt, and that if we can save 10% of our income for retirement and invest it with a long-term average of about 9% returns that we will be in pretty good shape. Of course, this is a generalization using the median income, and some may need to save more or less, but it provides insight as to how a little bit can go a long way for the younger Americans.
I’m happy to say that personally, we are close to hitting that 10% retirement savings mark. We are sitting at closer to 8% right now simply because some of the extra money is going towards knocking out some high-interest debt. As soon as that is paid off, our goal is to move to saving 15% towards retirement which should provide a good base after a few years. I quickly plugged our numbers into a calculator, and assuming 10% of income saved and a 9% return, with no raises or any changes to contribution amounts, we’d have a significant retirement portfolio at our target age of 60, which is nice to know. Of course that is a minimum goal, I’d love to double that at least as we progress through our careers and eventually earn more money allowing us to save even more.
Near the end of this article Peter talks about some strategies to help, which I have to disagree with a bit. His second bullet point states:
Second, taking a massive flier on stocks is a risky way of closing the savings gap. There’s no guarantee stocks will produce a 9% return forever. In fact, as savings rise, the stimulus from consumption decreases, making recession more likely and stocks more risky. Trim exposure to stocks and focus on defensive issues like Exxon (nyse: XOM – news – people )and Procter and Gamble (nyse: PG – news – people ) that can profit in any economic environment.
While it is sound economic advice, I don’t think I would recommend people to focus on a specific sector or individual stocks to get the job done. I would address the issue of a balanced portfolio among different asset classes. Holding not only equities, but bonds and other fixed income assets. Sure you may want to reduce exposure to certain types of companies in a recession environment, but I feel you would fair better by focusing on the overall exposure percentage to stocks and bonds as a whole before looking at the individual sectors.
All-in-all, a good article that reiterates the issue we are soon to be facing. Baby Boomers are starting to retire and Social Security is in trouble. Combine that with the issue that many younger Americans are not saving much and have a higher proportion of debt than our parents, and it is clear to see we need to take action as soon as possible. Save more and invest smart, and let time do the work of generating returns. It will pay off in 30 years.
Courtesy of: Warning: Save, Save, Save
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.