The Coming American Retirement Crisis

by Dr. Boyce Watkins, Department of Finance, Syracuse University

I have some good news and some bad news. The good news is that Americans are really stinking rich. Compared to the rest of the world, our financial problems are essentially non-existent. We don’t worry about having food on the table. We worry about keeping up the payments on our two cars, expensive mortgage and maybe even the rent for our 28 year old son. Relatively speaking, we are doing OK.

The bad news is that there is going to be less good news in the future. America is on its way to one of the greatest retirement crises of our time. There, I said it. I am a Finance Professor, so I think about this kind of thing all day. The baby boomers have hit the boom and they are on their way to the bust. Americans might be loaded compared to the rest of the world, but to have something and lose it can be worse than never having it at all. So, relatively speaking, we are not OK.

The baby boomers are on their way out the door of the work world, and headed for that blissful place called retirement. They had a big financial party in the 1980s and 1990s, and it’s always after the party lights go out that you find out who drank too much beer, who broke the lamp and who is waking up in jail. Let me explain the recipe for the pending retirement crisis. The ingredients should be cooked up and ready to go over the next 10 – 15 years, and you can probably smell the aroma right now, with the subprime lending crisis yanking on the purse strings of many seemingly well-off families:

1) Social security is getting very insecure: Statistics show that the average American family owes about $500,000 per household necessary to pay the government's future retirement obligations. The population is aging and the young workforce is declining in size. In most societies, young people take care of the old with their productivity. The problem is that there are going to be far more old people than before, and the dwindling youth population is going to be carrying them (and their old deficits) on their backs.

2) Pension plans are disappearing: Globalization has reduced the need for companies to have great pension plans. Why pay a huge American pension when you can buy out the American worker and hire someone in China for $2/day? Since Americans don’t save, you can easily give $100k to buy out a worker who would have earned a million dollars more over time by keeping his/her job. Many great American companies are no longer following the rules of your parents when it comes to providing long-term security.

3) Americans are pathetic savers: The net US savings rate is negative. That means that we save less than we spend. Debt is the boat keeping us afloat, and as the lending crisis taught us, the raft eventually runs out of air. We send our kids to expensive universities, mortgage our homes as many times as we can and pamper ourselves into the ground. After a while, it’s time to pay the piper for the pampers, and that time is coming soon.

4) The fountain of youth has been sprinkling on us: We are living longer, which means that there has been a dramatic shift in the retirement planning paradigm. You once expected to kick the bucket just a few years after you retire, but now you get to extend your financial challenges by another decade or so. The idea of not getting a solid paycheck for 20 years can be a frightening thing.

5) The cost of healthcare is rising like a rocket: If I were a healthcare company, I would find the nearest politician and give her a big kiss. The truth is that political “leaders” have been getting hooked up by politicians for years, and are now allowed to financially pillage American citizens. Our privatized healthcare system is unlike any other in the world and the pharmaceutical companies are working overtime to convince you that you have illnesses you’ve never thought about. Regular drug dealers are scary, but corporate, government sanctioned drug dealers are the absolute worst. Perhaps you might be turning toward some of those drugs to get through the rest of this article. I’m sure the pharmaceutical companies would be glad to recommend something.

America is not going to get it together anytime soon. We’ve overdosed on Vh-1, MTV Cribs and Lifestyles of the Blingingly Fabulous. But the fact that America has fallen asleep at the wheel doesn’t imply that you’ve got to crash along with it. Be smart, have fun and have some degree of moderation. Go see your retirement advisor right now to find out what you can do to prepare for the future.

Plan ahead and your golden years can be shiny…..and that’s without all the drugs.

Finding Quick Ways to Save Cash

Saving Money can be tough, but it's not impossible. So, I figured that, in order to help us get our January started off right, I would give you some quick tips to save cash. The motto for today is "You have to have your mind right to keep your money tight", so think of this as every bit of a psychological exercise as much as it is a financial one:

1) Keep a budget - if you don't know where your money went, it's hard to know where it's going. Plan your spending and make sure that you are aware of just how much is coming in, going out and expected to be made in the future. This can help you plan cut backs or extra spending.

2) Take your lunch - did you know that by spending $7 per day for lunch, 5 days per week, you are spending $1,820 per year? If someone were to take that money and invest it in a portfolio earning 8% per year for 30 years, they would have $206,175.44. Now go snack on THAT.

3) Cut 10% out of your spending right now. Find that bill that you don't need or whatever else, and force yourself to make it happen. Pretend that your boss just gave you a 10% paycut and you have to take things out of your budget. Come on, you can do it!

4) Slice up a credit card or two - credit cards are America's financial poison and we are all addicted on some level. Get off the credit card crack pipe and start making healthy financial decisions.

5) Use a grocery list - don't shop without a list, so that your spending can be focused. Overspending at the grocery store gets me in trouble, which is why I have been getting fat. But not anymore, I am going to keep that list in my pocket. So, you see? We all have our vices, but it is up to each of us to work through our personal demons.

Keeping Debt in Perspective

I thought this story was a reminder of the psychological toll of debt. A man who was over $200,000 in debt killed his ex-wife and their two children. Friends of the man claim that he was not capable of such violence, or didn't appear to be. The event ended with the man killing himself.

He was a school teacher and PhD candidate. On his Myspace page, he described his children as "two amazing little human beings".

Obviously, the man had some mental problems to work through. Additionally, I am sure that the stress of debt is part of what pulled those mental problems to the surface.

But my advice to you is to keep your debt and financial challenges in perspective. Not that anyone would do something as terrible as what this man did, but the stress of debt can be very real for all of us. I recommend that you understand one important principle of money management: Your most valuable assets are not financial. Your love, life, health and family mean a great deal more. So, it was this man's focus on his financial assets that led him to destroy his most precious assets. That's very sad to me.

Click Here to read the story.

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MyFinanceProfessor - What we're all about

MyFinanceProfessor was a blog I created to help those who really want to improve their understanding of money. One thing I can tell you right now is that I am not a person who worships money. I respect it and I see the power of money, but I do not consider it to be the end-all and be-all of our existence. I consider money to be a tool for the enhancement of life, and not the reason you live it.

I have studied finance for 18 years now, and taught it for 13. I have taught Finance at 5 major universities, and done Visiting Fellowships in China and Europe. I have published 9 scholarly articles on various topics and written several books. Thousands of my students have gone on to Wall Street and some have become financial experts in their own right. I am very proud of them.

Now that we have gotten credentials out of the way, let's get it started!


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