Using retirement money now
This is a guest post by Micah Warren.
A few weeks ago the Census Bureau reported that more than half of all births in the US are non-white. The social implications are more widely discussed and reported, but the more interesting and worrisome fact is that overall births are sharply declining, especially among whites, ever since the recession hit.
My best guess is that the declines are mostly among the middle class, who are feeling squeezed by student loans, mortgage debt or inability to buy a home, stagnant incomes and employment uncertainty.
Since middle class Americans typically prefer to buy a house before popping out children, it’s fairly simple math: Years ago when the median house price to median income was a little above 2, and nobody was drowning in student loans, and you didn’t have to obtain advanced degrees to make a reasonable wage, most families could comfortably start having children by their late twenties.
Nowadays, the median house is 3 times the median income, people are finishing college/grad school later, have students loans which take a large chunk of what would otherwise be discretionary income, setting the time-line back 5-15 years. To most people, this means less kids. I took a different path, and am learning the hard way that I might have made a choice between a home and children in my (relative) youth.
I wanted to buy a house in my thirties, but savings has been hard to come by with three kids (including twins), student loans, high rent, on one income. I had planned on using retirement funds, until my benefits office, said, “sorry, you can’t touch that money.”
In their own words, “paternalistic reasons.” They don’t want me to jeopardize my retirement. My retirement has been growing at a very healthy rate, with employer contributions much higher than our discretionary income.
I griped around a bit and the common response seems to be that I would never be so foolish as to mess with the magic money in my retirement funds, to spend today. After all, if had invested $10,000 in Berkshire Hathaway in 1965, my holdings would be worth more than $50 million today, right?
Now I have two points in response to this.
- Pulling money out of retirement to put on a house may actually be a good idea for an individual.
- Individuals collectively pulling money out of retirement plans to put on houses is a good idea for the economy as a whole.
- Retirement funds are in for a tough road. Firstly, the global economy has hit the skids and will take a while to rebuild. Secondly, the aging population: as these guys from the Fed pointed out, the P/E ratio appears to be linked to the ratio of retirees to people in their prime earnings years. This report seems widely ignored and/or downplayed. About $18 trillion is in retirement funds which will be coming out of the market as baby boomers retire and age. Note that those in the financial services industry have a vested interest in convincing people their retirement funds will grow at a 10.8%, which is bats. Most retirement funds are in managed funds, which means that they are being eaten away by the typical 1.5% fees that fund managers take. That takes an optimistic 6% underlying growth rate down to 4.5% which is in the range of most mortgages
- Private mortgage insurance is expensive.
- Rent money is not equity in your home: 5-10 years rent saving for a down payment is a lot of money.
- Tax is tax. Your money will be taxed. Yes, it may be at a lower marginal rate when you retire, but you don’t know that. Further, because compounding is nonlinear, a small change in returns makes a much bigger difference than a difference in tax rates.
On the other hand, if we do pull money from retirement and put in on homes,
- Home prices may find a bottom sooner. Clearly, if more people like myself have money to spend on houses, more houses will be sold at better prices.
- Finance will have less money and markets will be more stable. (OWS rant ommitted)
- More young middle class people will have more babies. Healthier, well-fed, well-educated children will support the economy in the future. This is the main point here. The greatest investment in our future economy is children today. Money in an account does nothing, unless you still believe in trickle-down theory. The middle class is being depleted, and this will be made much worse in the future due to the simple reason that there will be less middle class children to squeeze. Things could get much uglier years down the road if the population continues to age and retire and expect the money they dumped in the retirement funds to be there without the economy to support it.
Bottom line: A large chunk of younger American couples/families are not able to buy homes and participate in the real economy (rather than just as debtors) and we are in danger of losing out on a whole generation of economic output. This spells a much bigger disaster for our retirement funds than the loss of $20K to home equity.
Instead of choosing a better living standard when our children are young, we are expected to (somewhat selfishly) leave money in a fund that has no guarantee of growth rate, which we have no guarantee will be alive to use, and while optimistically may be spent on glorious retirement, it is also quite likely these funds will be depleted in a few short months by end-of-life care. In the meantime, Wall Street plays puff-puff-give with the money.
I personally would gladly accept financial comfort while my children are young in exchange for a smaller chunk of money later, which gives me little comfort at all, because there is no earthly way to discern what this money will mean to me when I am 70. On the other hand, I can tell you exactly how much a 20% down payment on a $300,000 house is, today.