You know the numbers that your 401(k) likes to use for expected annual growth based on compound interest? Probably not part of the future:
Washington and Wall Street are coming around to the idea that the economic future we’re stumbling towards will be far less generous from the normality we long for. The “New Normal” — a disarmingly benign term coined by Mohamed El-Erian, co-chief investment officer of the big California investment firm Pimco — envisions a future of sluggish growth, international discord, increased uncertainty and minuscule returns on capital. Government revenues shrink while spending remains high.
The 8 percent historic returns projected into the future by many corporate and state pension funds (and those retirement calculators offered by your 401(k) administrator) never materialize. The fiscal implication: Pension funds that are a trillion dollars underfunded at 8 percent returns actually face shortfalls two or three times as large. And the mind-boggling $6.6 trillion Retirement Income Gap — the difference between what the nation has saved and what it should have saved, as calculated by a coalition known as Retirement USA — may actually be understated.
So, is there hope? Perhaps there is a bit that one can do. As the author sees it:
- Americans have to deleverage (that is, we need to pay down our financial debts).
- Demographics could undo us (that is, people did not have have enough children)
- Globalization will reverse (that is, big international markets will shrink and fade away)
Regarding debt: there is much that we can do as individuals to address the debt we have and keep reverse the trend. Yes, I realize that saving money right now hurts. I recently looked at the percentage rate I was getting on my savings account. It was less than 1/4 of 1 percent. According to the rule of 72, that means it would take about 280 years to double my investment. That is disheartening. At the same time, there is a freedom that comes with knowing that one is not living so close to insolvency that one vehicle breakdown could trigger the collapse. Of course, for many, serious saving will come after paying off debt–so maybe you don’t need to be concerned with horrible interest rates right now.
Regarding children: there is little we can do to undo the lack of excess of our parents. In other words, we are going to get hit with this one and there is not much we can do outside of realizing that the best way to take care of our parents is to take care of our parents. If you are an adult with parents and children, you might look at whatever money you are setting aside for your children and consider whether you might (morally speaking) be better off setting it aside for your parents.
Regarding trade: while it would be difficult to have our world go back to the point where I can’t buy fresh shrimp from Thailand when it’s time to treat the family, there is something to be said for the learning how to put off gratification (and even learning how to do without). I am reminded of the shortages of nylons, chocolate, fuel and everything else during WWII. Our parents and grandparents survived–they just didn’t pass on the appreciation for what they had very well to us.