The Traditional Retirement Dream vs. Reality#

You know the story: pay attention in school, study hard, get a good job, work diligently your whole career, and then one day, you get to relax and enjoy a nice retirement. Sounds good, right?

Well, the reality doesn’t always match up. There are tons of stories about people who did all that – had good jobs and saved carefully – but still need to keep working pretty late in life. And that’s not even getting into folks who unfortunately didn’t have the chance for higher education or a steady career.

Recent reports are pretty stark:

• Less than 30% of American workers are actually on track to retire at all.
• Even fewer think they will have a comfortable retirement.

And they might be right. I know this isn’t what you wanted to hear, but there are a few BIG factors happening in the world right now that look like they’ll keep most younger generations working… well, pretty much indefinitely.

This was all before we even consider the major disruption that the COVID-19 pandemic caused. That global event actually made things worse by widening the gap between younger generations (who often have fewer assets and less stable jobs) and older generations (who tend to be more financially secure).

Now, you might be thinking, “Hey, I’m different!” Maybe you:

• Contribute to your 401k.
• Save diligently.
• Subscribe to How Money Works.
• Even invest regularly in the stock market.

That’s all great, seriously. But I might still have some less-than-great news for you. There are a lot of complex issues tangled up here, mainly related to Housing, the Stock Market, and a bunch of broader economic conditions that might actually threaten the idea that things will just keep growing forever.

So, let’s dive into how money works to figure out why we might all be on the grind until we hit 120!

Issue #1: The Housing Hurdle#

The most obvious problem is housing. Being able to afford a home has become a huge challenge for most workers in the USA.

Yeah, I know, you’ve heard this before, it’s not exactly new. BUT, there are still some really important factors people don’t think about:

• Even very high-income earners who graduated from top universities and work in fields like banking or big tech often end up moving to equally high-cost-of-living places like New York, Chicago, or San Francisco.
• Pew Research recently reported that a majority of young adults between the ages of 18 and 30 are now living at home with their parents.
• The median age of a first-time home buyer in 2019 was 34. Experts agree it’s almost certainly going to be pushed even higher because of the pandemic.
• Young buyers are also tending to buy smaller places like apartments and townhouses instead of traditional standalone family homes. Why? Not because they don’t want the bigger house, but because they simply can’t afford it.

This is a really big deal because, as most financially secure people will tell you, their house is their biggest asset. This doesn’t just mean it’s the most expensive thing they own. Owning a house means:

• You don’t have rental expenses.
• Even if you have a mortgage, those payments are at least partially building equity in the home itself.
• Once the mortgage is paid off, you have somewhere to live with very low ongoing costs.

Retiring when you own your home means even modest retirement savings or a pension can stretch a lot further compared to someone who has to use that money for rent. If a homeowner is short on cash in retirement, they might be able to simply downsize their family home – a luxury someone who hasn’t paid off their home, or doesn’t own one at all, doesn’t have.

Now, let’s be optimistic and take that median first-home-buyer age of 34. Stick a 30-year mortgage on top of that, and suddenly, even this “regular young worker” is in their mid-60s and still paying off their home loan. And this is assuming they never upgrade, renovate, or do anything else that would increase their mortgage amount from the original one they took out.

The more, shall we say, morbid among you might think, “Well, the boomers have to die and leave us their homes eventually, right?” And… well… yeah, I guess so. As unpleasant as that thought is, it is a reality. The problem is, this will likely only make the issue worse. We saw this in our video about why family fortunes disappear: inheritances that could actually fund a retirement often go to people who are already pretty old and wealthy themselves.

Again, the issue of unaffordable housing is a debate as old as modern capitalism. But maybe you’re still not worried because you plan to fund your retirement even without owning a home. Okay, let’s put those plans to the test…

Issue #2: The Stock Market & Asset Overinflation#

The stock market is the other main way people fund their retirement. Even fixed-income pension funds eventually rely on these markets growing to provide income to their members later on. But this idea of endless returns might be under threat.

To see why, let’s use a simple example. Imagine 10 lumberjacks working at a sawmill making frames for houses. Right now, they’re just using basic hand tools. If they all work hard, they meet their quotas.

One smart lumberjack saves some of his pay and uses it to fund research into motorized tools. His money is well spent because he invents the table saw. He then saves a bit more to buy materials and build 9 copies of his saw. He gives these 9 saws to his colleagues who were using hand tools. This boosts their productivity so much that they can still meet the quota even if the first lumberjack doesn’t show up for work at all.

This is what we call capital investment. And, at least in theory, it’s how we can sustainably fund people’s retirements. The same number of frames are made, the other 9 lumberjacks don’t have to work longer or harder, and the first lumberjack is rewarded for his invention with a nice retirement.

Of course, this is a really simple example, but in reality, most people do the same thing, just through the stock market. Companies raise money and use it to buy capital equipment that helps their workers produce goods and services more effectively and efficiently for the economy.

But let’s go back to our simplified example. Problems start when more lumberjacks get the same bright idea. One might invest in a forklift to make the work of nine men possible with just eight. Then another might invest in nail guns to make the work of the remaining 8 men possible with just seven, and so on.

But every time this happens, it gets harder to find that next big improvement. Eventually, you’ll need an almost fully automated production line, and even then, you’ll probably still want at least one worker there to oversee things. Every human worker you replace with a piece of capital equipment becomes more and more expensive, especially compared to some alternative investments.

Let’s say lumberjack number 5 would need to invest Millions of dollars into a robotic arm just to be able to retire while still ensuring the mill’s quota is met. He might just think, “You know what? I’ll just buy the factory instead and require the remaining four workers to work an extra 10 hours a week to pick up my slack while I go retire.”

Now, this guy sounds like an____, but just think: how many hours a week are you working at your job just to cover your rent? This investment into non-productive assets (meaning assets that don’t actually help add value) is a major hurdle.

Classic examples of non-productive assets include:

• Gold
• Bitcoins
• Pokemon cards
• And, of course, real estate.

Real estate is a bit weird because, unlike those other non-productive assets, it does produce income without needing to be sold. It does this through rent. Investing in real estate has been super attractive for a lot of people, which does two things:

1. It increases the price of real estate, making that housing issue we talked about even worse.
2. It takes away investment from the types of productive assets that can sustainably fund retirements.

There’s one other problem beyond this… the overinflation of ALL asset markets.

Let’s look back at our table saw example. Those saws were machines that cut up pieces of wood. Say each one can chop up 20 pieces a day. Now let’s replace those table saws with shares. Think of shares as effectively machines for making money in the form of dividends. Say each share makes $20 a day in dividends.

In both examples, the lumberjack would need to own 9 of each.

• 9 table saws = 180 pieces of wood a day (replaces their job at the mill).
• 9 shares = $180 a day (replaces their income).

Either works just fine for funding retirement.

Now, and this is where it gets counterintuitive, problems arise when these assets become more expensive. Most people think stocks getting more expensive is a good thing, and it is… for the people who already own them.

Imagine each share was trading for $10,000**. Saving up **$90,000 is a pretty tall order for a lumberjack making $180 a day, but it’s certainly possible over a working career.

Now imagine those same shares were trading for *$100,000**, *while still paying the same$20 daily dividend. If you already owned these shares, you’d feel great because your net worth (on paper) has grown a lot. But our lumberjack now has to buy $900,000 worth of shares to fund his retirement, which is just not realistically possible within his working career.

Now, this might sound like a crazy example, but it’s not! It’s exactly what is happening today.

To see this, let’s look at the Price-to-Earnings (PE) ratio of the S&P 500 (that’s a group of the 500 largest public companies in America).

• Historically, the PE ratio has hung around a multiple of 15. This means, on average, it would take the earnings from these shares 15 years to pay for the share itself.
• Today, that multiple is sitting just under 50 years. That’s the second highest it’s ever been in history, falling only behind late 2008 (which, as you all know, was a time of widespread economic prosperity… cough cough).

In plain English, this means people are either going to need to:

1. Invest 3 times as much money to fund their retirements. OR
2. Rely on the “next biggest idiot” to buy their shares off them in retirement for a 100 times multiple, 200 times multiple, 1,000 times multiple… (which, by the way, certain investors are already doing for some stocks).

You might say, “Oh well, shares aren’t like table saws with fixed outputs. Those dividends can and likely will increase in the future, right?” And sure, that’s almost guaranteed. BUT, it’s still unlikely we’ll ever see widespread PE ratios under 20 again for two reasons:

1. If a company does start paying out a consistently high dividend relative to its market price, investors will buy it. This will push up the price, meaning it won’t be such a great deal anymore. Market forces are a bitch.
2. The second reason is a bit more complex, but it’s one that has some leading economists genuinely concerned…

Issue #3: Broader Economic Headwinds (The Limits of Growth)#

This brings us to the broader economic conditions, specifically the idea that limitless growth in a finite world might not work out indefinitely.

Let’s talk about Robert J. Gordon. He’s an American economist who published a paper with the National Bureau of Economic Research titled: “Is US Economic Growth Over? Faltering Innovation Confronts The Six Headwinds”.

It’s a fantastic paper and surprisingly readable, even if you don’t have a strong economic background. But here’s the spoiler alert: Gordon basically argues that the past 200 years of innovation and economic growth were more of an exception rather than the rule that we should keep expecting forever.

Gordon’s argument is that this generation is like that “5th lumberjack” we talked about. All the easy innovations that drastically improve productivity have already been made. Even gradual improvements from here on out will either be very expensive, or just rent-seeking in nature. This means working harder to shift value around in new and creative ways, more so than actually creating any new value.

If that rather bleak outlook wasn’t enough, Gordon also argued that this slowdown in growth would coincide with what he described as the 6 economic headwinds. These are forces that will act to slow down growth in economies around the world for at least the next 100 years.

Here are Gordon’s Six Headwinds:

1. Loss of the Demographic Dividend: The economy got a huge boost when women started entering the workforce in large numbers between the 1960s and 1990s. Now, most women in developed countries work professionally similar to their male counterparts – that’s the status quo. We’re not going to be able to double the workforce like that again… unless, well, you know… we make people work later and later in their lives.
2. Loss in Educational Attainment (Particularly in the USA): Education is getting more expensive, less comprehensive, and increasingly irrelevant to the needs of the modern workforce. A 3-year degree simply doesn’t mean as much as it did 50 years ago, either for the individual or the economy as a whole.
3. Rising Inequality: This is a sensitive topic, but Gordon was quite practical about it. His paper noted that incomes were increasing by about 1.3% per year on average. But that growth was heavily concentrated in the top 1%. The remaining 99% only actually saw income growth of around 0.75% year over year. That’s not even enough to keep up with inflation. If this trend continues, it’s inevitable that larger and larger groups of workers simply won’t have the financial means to save for retirement. However, if you are in the top 1%, congratulations, you can go say “nananana your video title is wrong” in the comments section.
4. Impact of Globalization: In theory, globalization should make everyone wealthier, and on “average,” it does. But averages have outliers. And in this case, those outliers will be national workforces that have historically had high incomes relative to the rest of the world – like, say, probably you watching this. The other side of this is that globalization tends to equalize global wages. This is great for people in countries that have typically had low incomes compared to the global average, and for the business owners who can profit from pools of cheap labor along the way.
5. Energy and the Environment: The growth of the past century was powered by fossil fuels – a cheap, easily transportable, incredibly efficient energy source. But they’re a finite resource and they came at a cost. This cost will now be paid by younger generations, either through environmental regulations that slow down industrial output, or from complete environmental collapse that will also slow down production.
6. Debt: Household debt, government debt, corporate debt – it’s all been growing steadily. Eventually, this needs to be paid back. This will ultimately require more income or less spending. For the government, producing more income is easy: they just tax more. But for individuals and businesses, the only option might be spending less. If someone is already on a tight budget, those regular contributions to a retirement account might be what ends up getting sacrificed.

Gordon did suggest a likely way to ease that sixth issue (debt) for everyone, and you might be able to guess what it is. Yup, push back retirement ages.

Wrapping Up#

Now, if all of this has felt a bit bleak and you still think you’re going to make millions overnight, then good on you! I’ll just have to work harder at crushing your spirit next time.

But until then, you should learn what to do with your overnight fortune by watching our video on exactly what you should do if you suddenly make a lot of money.

Of course, step one will always be to like and subscribe to keep learning how money works!

Video URL: https://www.youtube.com/watch?v=Q5sF0MbfVn8