As the unusually weak economic recovery continues, you've at least got to wonder if future studies of what ails us will include our aging population as a material cause. Simply stated, older people tend to liquidate assets to fund their retirements. Younger people tend to acquire financial assets as their personal wealth rises and they build their own nest eggs.
The United States has enjoyed nearly 40 years where the number of people acquiring assets was greater than the number of people disposing of them. This condition is being turned on its head. We now face roughly 40 years where there will be more people in this country wanting to sell financial assets than buy them. This supply-demand shift could put a lid on asset values and depress overall economic growth.
Further, recent reports show U.S. fertility rates have declined under the so-called replacement levels needed to maintain population levels. The recession appears to have discouraged families from having children. This hurts the formation of households and the strong boost to consumer spending that usually occurs when couples begin or expand their families. It also removes a source of future consumer demand. With immigration inflows to the United States being similarly curbed by the perceived lack of economic opportunity, we've lost, at least temporarily, yet another traditional demographic driver of economic activity.
For people in retirement or getting ready to retire, the demographic message is clear. It would be unwise to assume a return to prior growth patterns for housing and investments. If you were counting on getting, say, $300,000 for your home, think conservatively about getting $275,000 or less. If you were forecasting your holdings would grow by 4 percent a year after factoring in the effects of inflation, see how your plans work if that number becomes 3 percent a year. And even these lower levels of gain won't be seen until the economy has limped its way back to whatever the new equilibrium looks like.
Elod Takats works for the Bank for International Settlements, a global rule-making and financial think tank. A couple of years ago, he looked closely at the relationship between demographic shifts and housing values in 22 industrialized countries. Events of the past two years have mostly ratified his findings.
Housing values, he argued, provide a relatively pure read on the financial effects of population shifts within a single country. That's because the groups of people who are home buyers and sellers in the United States mostly live in this country. Investors, by contrast, increasingly choose securities from a global market. So if stock values go down in the United States, for example, investors here can shift some of their holdings to countries where investment values are increasing. Housing is much closer to being a self-contained supply-demand process.
Looking at historical home values, Takats found that there was an annual demographic "bump" of about eight-tenths of 1 percent in home values in the United States during the past 40 years. But as the number of retirees swells to exceed the size of subsequent generations, this boost will be replaced with an equally large downward pressure on home values. Put another way, there could be a 1.6 percentage-point swing in the annual downward pressure on home values in this country, from plus 0.8 percent to minus 0.8 percent. Takats is careful to refer to these numbers as either tailwinds or headwinds, and notes that lots of factors can cause the actual value of homes and other financial assets to differ from a pure demographically driven shift.
In moving from housing values to the overall shift in asset prices, Takats concluded that population shifts may reduce the future rate of price appreciation for all global assets by about 1 percent a year. "The United States stock market has averaged an annual real return of 6.8 percent between 1802 and 2006," he notes. "Shaving off around one percentage point from this return would be substantial, but does not seem to have catastrophic implications."
This may be true for the overall economy, but individuals could still face unhappy retirements if it turned out their income fell short of expenses by one percentage point each and every year.
If there's a silver lining in this population tale, it's that the United States is not facing nearly the aging pressures of Japan and most European economies. Relatively speaking, it will be harder for these countries to achieve high economic growth rates than in the United States. America also can turn to a likely flow of immigrants should it decide that internal population trends won't be sufficient to fill the jobs provided by domestic employers.
Even China, which has fast become the biggest producer of seemingly everything, is aging rapidly. In roughly a dozen years, the average Chinese resident will be older than the average American. In many respects, the Chinese may be forced to use their huge current budget surpluses to fund social safety nets for their aging population. The horde of U.S. Treasury bills they now hold may become their version of Social Security.
1. Rent Your Retirement Toys
Where do you see most RVs? Parked in their owner's driveways for 11 months a year. So instead of rushing out to buy one for $100,000, check out renting it instead. We're told a pretty nice Airstream that sleeps six will set you back $2,000 per week. In general, the rule of thumb has always been to own what appreciates and lease what depreciates. Do you really want to walk past the behemoth in the driveway five times a day knowing it devalues a little more each month with age? And don't forget about the other costs of RV ownership: insurance, maintenance, storage off-site when you tire of it as a lawn decoration.
2. When You Do Buy, Buy Used
Our favorite places to shop are thrift stores near retirement communities. Golf clubs and golf carts show up frequently in these shops at a fraction of their original cost. We also comb the classifieds of the retirement community newsletters for gently used cars; you can find some gems with low mileage.
3. Boats Are Things Belonging To Friends
To state the obvious, you can always rent a boat for a day of sailing or a weekend at sea. You also let your boat-owning friends know that you're "thinking" of buying one and ask if they would mind taking you out for the day? Most boat owners love to show off their toys. And you can become the guests they always invite back by going a little overboard with the food and drink you bring. Boat owners we know say the guests they like the most are the ones who stick around long enough after the sail to help clean up and secure the vessel.
4. Swap And Trade Are Words To Live by
Offer your guest room to out-of-town visitors and you'll feel better asking to use theirs. Use a home-swapping service when you visit new places. Trade your plumbing skills with the house-painter's. You sew and your neighbor bakes like a pro; order up a birthday cake and offer to take up a few hems. The one commodity that retirement gives everyone is time. Barter it for the lifestyle you want.
5. Get What You Can For Free, And That's Plenty
Public libraries rent out not only books and movies, but they also run lots of free programs including lectures. Parks hold concerts in the summer for free. Colleges frequently allow those 55+ to audit classes for free; you won't earn credits toward a degree, but you will learn some new things.