A lot of ground to cover today. A week ago, the WSJ wrote about which generational cohort had more challenges; boomers or millennials. Apparently the comments included a lot of what about us from Gen-X readers so the WSJ followed up with How Gen-X Stacks Up Financially. I am older Gen-X, born in 1966.
If this topic interests you to the point that you've done some reading then I doubt you got too much that was new from the article. The financial crisis was hard on Gen-Xers in terms of home purchases, our average net worth dipped below the boomers because of that, now we appear to be ahead of the boomers but are quite a ways behind millennials when adjusting for age. Oh and you read that correctly, they used average not median to study net worth.
Student loans are still an obstacle for Gen-X which isn't shocking to me in terms of younger Gen-X being in their mid-40's and although not quantified in the article, often when people in their 50s and 60s have student debt it is because they borrowed money to put their kids through school.
The comments covered a wide range of we had it easy, we had it hard, stop whining and whatever with that last one being a stereotypical reaction that Gen-X has to everything.
Let's quickly circle back to the average net worth numbers. The median net worth for 50-65 year olds ranges from $325,000 to $350,000 according Copilot with about half of that being home equity.
I'm not too interested in comparisons, you can look for yourself, it would be an easy query into AI but the numbers aren't great for 50-65 years (obviously a lot of overlap with Gen-X). Keep those numbers in mind as we look at a Bloomberg article that paints a grim picture for the economy. The TLDR is "after years of repeated economic shocks, the world has been left woefully unprepared to deal with the next one." The article primarily blames the war in Iran for the conclusions drawn.
As usual, I am not concerned about whether the article is correct or not but would be more concerned with trying to understand if the argument is plausible and if it is plausible, does it pose any kind of threat to anyone or anything that I care about?
On the list of things I care about are client retirement outcomes and how think I about what my later years might look like financially which gets us to a fascinating interview with Bill Bengen who devised the 4% rule for retirement withdrawals.
Bengen's original study goes back to 1925 and Barron's asked him what was the worst year to retire. It was not 1929 on the eve of the Great Depression it was actually 1968 because of the very high inflation rates of the 1970's. I don't recall ever reading anything from Bengen that went down this road.
The 4% rule says to start at a 4% withdrawal rate (a little higher actually) and then adjust the withdrawal rate up by the rate of inflation each year.
| Year | Inflation Rate (%) |
|---|---|
| 1970 | 5.84% |
| 1971 | 4.29% |
| 1972 | 3.27% |
| 1973 | 6.18% |
| 1974 | 11.05% |
| 1975 | 9.14% |
| 1976 | 5.74% |
| 1977 | 6.50% |
| 1978 | 7.63% |
| 1979 | 11.25% |
You can see then how adjusting upward in that fashion could have a relatively bad outcome. The outcome wasn't across the board catastrophic, but it ran out of money after 30 years. My take on the 4% rule has been to forget about adjusting the withdrawal percentage by the rate of inflation because the growth of the portfolio will handle that. It requires some flexibility for the years in which markets decline. My idea is much simpler. Each quarter, look at your balance and take no more than 1%.
This quarter, you have $950,000, cool, take $9500. Next quarter, $971,000? Take $9710. If the market does something hideous, that might require some belt tightening or this threat can be mitigated by raising expected cash needs ahead of time, maybe get 18-30 months ahead to avoid the likelihood of having to sell low and/or really cut back on something.
So what happens if Gen-X cannot collectively retire on (reduced?) Social Security and their savings? What if there are long lasting economic impacts from the war that hurt the economy and capital markets? The point is not predict what will happen or rationalize why it will or won't happen but to plan in case things turn out to be that negative. It's your life and no one will care more about it than you.
This is why we talk all the time about building resiliency and creating optionality. Yesterday at fire training, one of the firefighters drew my conclusion about doing incident management team (IMT) work (I've talked about this many times as an outlet from my FD involvement) as a Plan B. "Yes!" The firefighter in question is 38 so I added or if you get to some age you think is old and realize you either want to do something different or feel you have to do something different, you can start to build that optionality now. She helped at the Basin Ops Drill (the live fire exercise I write about every year) in the planning section checking people in. That little bit is barely an introduction but where I've talked about this to the group before she now has a first hand sense of the opportunity which I feel good about.
The IMT example is just one possible income stream from my stuff, everyone hopefully has one or two things from their life that could play out as an income stream if ever needed and if not, get started trying to solve that right now. The longer the runway the better the odds of success.
No one will care more about your retirement than you ~ Joe Moglia.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
No comments:
Post a Comment