Thursday, June 30, 2011

Baby Boomers vs Generation X

Sometimes it seems like saving for retirement is an impossible mission. We are constantly being hit with bad economic/investment news such as " social security to run out by 2037" or "stocks take a nosedive as unemployment rises" or "still no recovery in housing". This got me wondering, how different (if at all) saving for retirement has been for generation X than it has been for the baby boomers?

Though dates seem to differ from website to website, generally baby boomers were born from 1946 to 1965 and generation Xers from 1966 to 1982.

Since the stock market is typically a large part of a retirement portfolio, I first looked at the performance of the S&P 500 from 1965 to the present.

If we make the assumption that most people do not really start saving for retirement until they are at least 25 then the youngest boomer doesn't start saving till 1971 and the oldest until 1990. During this time period stocks were mostly flat from 1971 to 1981 then more than doubled from 1981 to 1990. Also, this is a period of little volatility. Of course there are small rises and dips but for the most part things are fairly calm.

Using the same assumption above, the first gen-Xer doesn't start saving until 1991 and the last one until 2007. In contrast to the period where the boomers were entering the market, here we see great volatility, as the S&P sharply increases and sharply decreases. It really does look like a roller coaster ride.

So far, the boomers have really made out a lot better than the Xers, especially the older ones. The older boomers who started investing in the 1970's had over two decades to buy stocks at consistently lower prices between 100 to 450. In contrast, the first Xers began saving for retirement in 1991. From 1991 to 2000 the S&P moved from about 340 to just over 1500. This sounds good but remember that Xers are just starting to save for retirement during this period so each time they make a contribution to their retirement accounts, they are buying at higher prices. In 2000 the tech bubble burst and the S&P drops like a lead balloon for two years down to almost 800. This two year period was of course a good time to buy but the psychological effect of the sharp prolonged drop caused many people to temporarily stop contributing to their retirement accounts (Dalbar QAIB 2004). In 2003 the S&P again began a steep five year climb reaching over 1500 only to have it nosedive down to below 800 over the next two years due to the housing crisis. We are once again making another climb back up with the index currently at 1330.

To sum it up many boomers were able to build up their portfolios in their early years due to a long period of market stability with stocks at relatively low prices. Xers started contributing during a long period of volatility, often buying at highs and pulling back on retirement contributions during declines (loss aversion).

For better or worse, another major part of many retirement portfolios is our homes. To analyze this I used the Case-Shiller index.

I got the graph here

According to this article, first time home buyers are on average 33 years old. Perhaps boomers bought their first house at a younger age so lets just use 30 years old to keep it simple. Using the same analysis as above we find that the first boomers start buying houses around 1976 when the case-shiller was at about 108. For the next twenty years the index moves up and down moderately somewhere between 108 to 125 before it starts a very steep climb around 1996.

1996 is also the year that the youngest members of generation X begin buying homes.

Again, it looks to me as if the boomers have made out much better that the Xers. Most boomers bought their first homes some time during a twenty year period when prices where relatively low and they have had a great deal of time to pay down or off their mortgages. In contrast, over half the genXers bought their first homes during the housing boom between 1996 and 2006. This means that many of them were entering the market when prices were incredibly high. Since during the early years of a 30 year mortgage most of your payment is going toward interest, these genXers had very little equity in their homes when the housing bubble burst in 2006. This left many of them in a situation where they owed more on their homes than they were worth. Of course the oldest genXers that are just now entering the market should fair much better as many believe we are at or near the bottom.

In summary, most boomers were able to buy low and then enjoyed good economic times where they were able to build up equity while a majority of Xers bought high and now have little to no home equity.

On top of the difficulties discussed above is the fact that social security doesn't look so secure for us, but that is a topic I have already delved into with my federal debt entries. So the future isn't looking too bright for genX. What do you think, is it time to panic yet?

1 comment:

  1. And yet studies suggest that most boomers are ill prepared for retirement...

    Is pouring money into the stock market a form of savings? If all those boomers who 'saved' via the stock market wanted to cash out over similar periods, then what would happen to the avg account value of this form of 'savings?'