Millennials Actually Have It Pretty Easy Saving For Retirement Compared To Previous Generations

Technically, I belong to the millennial generation (defined as those born after 1980), but I really identify more with Generation X than my fellow millennials. Let’s face it, somebody born in 1982 had a completely different cultural experience growing up than those born in 1992. I remember the days before the internet, and even when we did get full-time internet access sometime around the 8th grade (I think…I don’t really remember exactly), it was still so slow it was more a novelty than a serious tool.

Still, I do share some of the more negative experiences with most millennials. While I didn’t have the misfortune of graduating in the middle of the 2nd worse recession of the last century, the last decade wasn’t exactly one of prosperity and rainbows. I had my share of troubles: I suffered through a lay-off (which was actually pretty awesome, but that’s another story), I blew through a large (at the time) chunk of my savings to cope with said lay-off, and my income increased perhaps slower than it otherwise would have.

But Us Millennials Really Have It Pretty Good

It’s fashionable to bash the greedy baby boomer generation for pretty much ruining the economy for those of us coming of age recently, but how much of that bashing is just whining? Sure, things aren’t great for us now but as it turns out, things weren’t all that great for previous generations when they were our age, either. They figured out how to solve or at least deal with their huge problems, and I’m confident we will, too.

Things Sucked For Our Parents’ Generation

Our parents, who started their careers in the early-to-mid 70′s, had to deal with plenty of economic hardship in their first decade on their own. But, like every American generation before them, they found a way to succeed.

The Problem: Double digit inflation coupled with wage stagnation

So-called stagflation rapidly eroded the purchasing power of our parents’ paychecks and, coupled with mortgage rates well into the double digits, the prospect of ever owning a home must have seemed slim.

How They Resolved It

The wild successes of the first- and second-wave feminism movements saw women entering the workforce in huge numbers, which rapidly boosted overall household income even as men’s incomes stagnated (which is still happening today, by the way). While women still weren’t earning anything close to what men were earning, on average, it was more than enough to give that generation the financial means to afford them a piece of the American dream. Crisis averted.

The Problem: Investing Was Difficult And Expensive

Mutual funds were woefully expensive in those days and even if you were able to find a decent one, investing in it required a lot of stamps and that was after paying the high sales load to whomever sold the fund to you.  Likewise, investing in individual stocks required paying commissions into the triple digits ($100+ stock trades weren’t uncommon) and if you wanted to buy a number of shares not exactly divisible by 100, things got hairy. In short, it was difficult and expensive to do any investing at all.

How They Resolved It

John Bogle’s invention of the retail index fund in 1975 paved the way to make investing affordable for the middle class. Investing was still a pain (no internet yet), but at least reasonably-priced and diversified mutual funds started to become mainstream throughout the 1980s.

 The Problem: Pensions weren’t paying off

Don’t get me wrong, I would love to have a pension, but they never really were all-that to begin with. For starters, they are rarely inflation adjusted, which is a problem when inflation is running in the high single digits. What might be a decent monthly income at the start of retirement will be woefully inadequate 20 years later for all but the rosiest of inflation projections. Additionally, pensions often took several decades to vest and because of the turmoil in the job market, few had any illusions they would be able to remain at a job long enough to accrue significant pension benefits. The days of the lifelong employee were dead.

How They Resolved It

The 401k plan came into existence in 1978. Though it has serious problems, the 401k’s generous tax deferral coupled with the ease of setting up paycheck deductions allowed an entire generation of middle class families to build a moderate nest egg. For the first time in American history, people of moderate means weren’t dependent of the largesse of others (be it family, the government,  or an employer) to fund their lifestyle when they were no longer able to work. That said, 401k’s suck and I wish they would go away.

The Problem: Mortgage rates approached double digits

My 30 year fixed mortgage rate sits at about 4.25%. New graduates may not realize just how low that is. By comparison, in the early 1980s mortgage rates rarely dipped below 10%. You think affording a home is difficult now??? Try buying one at 10.5% interest with a 20% down payment. Affording to own a home is actually significantly easier now than its even been because credit is much looser (even accounting for the tightening up that happened after the financial bust).

How They Resolved It

This one just kinda fixed itself, fortunately. Never let it be said luck doesn’t play a major role in the fortunes of an entire generation.

Things Sucked Even Worse For Our Grandparents’ Generation

The era starting immediately after World War II is generally regarded to be a Golden Age where everybody had a generous pension, a lifelong, high-paying union job, and unicorn burgers for dinner every night. Unfortunately, the reality is a bit less rosy: the standard of living was simply much lower back then.

The Problem: Pensions were never that generous

While its true slightly more than half of workers coming up in the post-war period received some amount of pension income, the number of people with pension benefits actually rivaling their former pay was quite small. Pension benefits tend to be back-loaded, meaning the largest benefits only accrue in the last decade or so in retirement. Work at the same company for 30 years? You probably did well. Work only 20 years for the same company? Your benefits were substantially less, and at that point you don’t have the time to accrue significant benefits with another employer. So yeah, pensions are great, but their prevalence and actual benefit has been dramatically oversold.

How They Resolved It

They didn’t. Our grandparents just had a much lower standard of living than we do today. Although their real incomes increased faster than millennials can probably hope for, they started from a much lower base in terms of purchasing power.

The Problem: Pensions were not guaranteed for life and most didn’t include inflation adjustments

The Pension Benefit Guaranty Corporation (PBGC) is today tasked with insuring the value of private company pensions up to a certain cut-off: if your former employee goes out of business, you’ll still get your monthly check. The PBGC wasn’t created until 1974, however. Before that, if your former employer went out of business, you were screwed. And since the post-war period up until around 1970 was an era or rapid technological progress, bankruptcies did happen somewhat regularly.

How They Resolved It

The Employment Income Retirement Security Act of 1974 provided a public guarantee for private pensions.

The Problem: Only the rich could afford to invest in stocks

Our parents at least had access to expensive, tax-inefficient mutual funds. Most people in the post-war era were not so fortunate. While mutual funds existed (Vanguard’s venerable Wellington Fund has existed since the late 20′s) they were not well-understood by the layman and hardly anybody in the middle class could afford to invest in them. Savings accounts and certificates of deposit were the only viable alternatives for most Americans.

How They Resolved It

Investing gradually became less expensive and more accessible to small investors over the decades, though it wasn’t until the 90′s that they became mainstream. In other words, our grandparents had to make due without decent investment options.

How Do Things Compare For Millennials?

Now that we know our parents and grandparents weren’t living in a trouble-free golden age so often portrayed by the media, where go today’s 20-somethings stand?

We Don’t Have Pensions

The pension isn’t coming back, unfortunately. For better or worse, we’re going to have to find a way to pay for our own retirements.

…But we have more access to vastly superior investing options

Even the wealthiest of the wealthy in the 1950s would have killed to have access to the investing products available to the average middle-class American today.

Our Incomes Aren’t Growing Faster Than Inflation

Since the mid-70s, the average male’s salary hasn’t grown at all when adjusted for inflation. For a while, the rapidly-growing incomes of the huge influx of women entering the workforce masked the problem, but we’ve more or less fully exploited that. It’s unlikely average household income are going to grow that much faster than inflation in the foreseeable future.

…But we already have a much higher standard of living than our parents

Modern technology has had staggering consequences for modern living, most of them positive. While our income isn’t growing that much in real terms, advances in technology are still able to improve our standard of living. Example: how much has your quality of life improved now that you have what in the 1970s would have amounted to a super computer in your pocket? I never get lost, I never miss an important email/call, and I can keep interact with the world in ways nobody even dreamed were possible just 20 years ago.

Nope, things really aren’t all that bad for us millennials from where I’m sitting. We have major problems, but we’ll find a way to solve them just like previous generations did. Do you agree? Disagree? Let me us know in the comments!

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