Today’s post comes out of a conversation I had with a Commonwealth advisor at a recent conference in Monaco. Part of my presentation there was on the mismatch between the high consumer confidence levels and modest spending growth we have seen recently. This advisor had some color to add based on his experience with clients. Below is part of a follow-up email he sent to me:
As a follow-up to my conversation about middle America retiring broke I ran some numbers to fuel your thoughts. The last ten clients I retired had just under $9 million in savings and assets. The bulk of that is in retirement accounts. Being Boomers, they missed the great Pension Era. That leaves Social Security. Three of the people were self-employed so they listened to their accountants over the years and minimized their tax burden—which also meant they didn’t max out their Social Security. The savings was spent of course. 80% of the retirees would like to find work but are running up against the age wall.
The income before retirement averaged $175,000 per family. After retirement it averages $72,000. While the textbooks say plan on living on 70% of your income, they don’t tell you where that 70% is going to come from. They certainly don’t prepare you for a 57% drop in income.
This is a real-world take on the actual income effect of boomer retirements. As this group composes a major share of the population, these retirements will certainly affect spending growth. There has been a great deal of discussion about the ongoing boomer retirement wave, but I had not seen the issue put in such stark terms before.
How would you cope with a $100,000 drop in income? Would it reduce your spending? Since the boomers are a major part of the economy, this problem will only get worse. To quote the advisor again:
I am concerned about the macro issues coming down the road. This small group lowered their contributions to the government via taxes and Social Security contributions by almost 100%. They are liquidating their investments at a pace that is not sustainable. The biggest thing is the cut in consumer spending, which I believe is a large part of our economy. Isn’t this going to have an impact on our longer-term outlook as the rest of the boomers move into retirement?
It certainly will. And this data suggests that the existing shortfall in spending growth will worsen over time as retired boomers spend down their savings and drop their resources—and spending—even further.
One of the base assumptions in any projection is that the future will be something like the past. The recent spending growth data, as well as the experience of many clients, raises a real question as to whether that will be the case with consumer spending. At more than two-thirds of the economy, this could be a headwind that knocks our models of the economy as a whole off course. This is a threat at which I will be taking a much closer look.