I have the fortune of working with people from all generations, helping individuals at different stages of their lives figure out the next financial move. In general, those nearing in on retirement have a strong grasp of saving and try in earnest to make good choices with their money. Nonetheless, it’s these same folks that often stare back at me with confused looks when I discuss the specifics of managing their finances.
While a lot of principals and properties of the American economy still look the same, we have seen massive changes in wealth management and financial practices in the last few decades. The steps we take to borrow, save, invest, earn and spend are different than when our parents started saving and investing for retirement. The tech boom naturally claims a lot of responsibility for these changes, and the housing bubble also caused a disproportionate amount of upheaval.
Along with those major disruptions, millions of other policies and market corrections have played a small role in creating a financial universe that looks vastly different than it did 40 years ago, when today’s retirees were settling into their careers. What does this mean for the modern investor? For the most part, you aren’t affected by changes that have already happened. However, knowing the catalysts for these changes can help with your own planning, as well as make you more knowledgeable about general economic policies.
Let’s look at four apparent and semi-recent changes in wealth management. This info might help you understand some of your father’s Thanksgiving rants, and it will hopefully inspire you to be proactive in how you approach your own retirement.
Explaining how retirement changed in the last 30 years is a monstrous task, so anyone really interested in this topic should plan on finding additional literature after reading this post. The most notable differences are where people place their savings and how much retirement money is needed. In addition to inflation and cost of living, there are numerous reasons why you need a lot more saved today than you would have a few decades back.
For starters, Social Security benefits once covered the majority of people’s retirement needs. As recently as the mid-80s, most people got around 65 percent of the money they needed from Social Security. That number has been cut by more than half, as those benefits cover less than 30 percent of what people need in retirement. Social Security does account for inflation, but lifestyles, life expectancy and expenses have changed at a faster pace than the program could handle.
Meanwhile, far fewer people have pensions in today’s economy. While nearly half of private-sector workers once had pension plans to pair with their Social Security funds, four out of five companies don’t offer this option. A majority of Baby Boomers were raised by parents who didn’t think to save for retirement because that saving was done for them. While plenty of people still use employee-sponsored 401(k)s, it’s definitely not a majority, and those types of contribution plans don’t offer the same safety as benefit plans.
Lastly, CDs don’t offer a realistic retirement solution anymore. Once upon a time, a certificate of deposit would yield nearly 20 percent each year. Now, you’re lucky to get 2.5 percent back. Dumping money into CDs works for saving, but not as a high-profit investment.
Retirement planning has been headed in this direction for quite some time, but it’s only in the last few decades the change became obvious. Unfortunately, that means a lot of you never learned about saving for retirement, because it wasn’t something your parents knew about or had the ability to teach. If you aren’t going to work for the same company and earn retirement benefits for 40 years, you have to educate yourself about saving and investing. Otherwise, you might find yourself working for 50 or 60 years.
Between stocks, bonds and other investment options, there’s no shortage of ways you can grow your money - just know you have to start earlier and strategize more than your parents did.
Few things are easier than borrowing money. Anyone who remembers 2007 knows why that’s not always a good thing.
This is not to say it used to be hard to borrow and lend; people have made money off loans since the earliest days of finance. The issue is how loan opportunities have exploded, making borrowing exceptionally easy and enabling people to lend money that doesn’t exist.
Perhaps the biggest enabler of this is our willingness to live with debt - US households owe trillions of dollars to various financiers. Between student loans, credit cards and giant mortgages, most people have just accepted living in the red. This is where many people from generations past raise an eyebrow and ask, “What are these crazy kids thinking?”
Household debt started rising quickly after WWII, and while the recession reversed the course slightly, most people still have a lot of borrowed money to pay back. Aside from the amount of debt, what’s the biggest difference in how we borrow now versus how we used to? There are two main areas:
● Loan classifications
You used to borrow money from either the bank or your uncle. Beyond a family loan or a contract signed at a brick and mortar financial institution, there weren’t a lot of people and places that were looking to hand out money. That meant almost every time a person had to borrow money, unless it was subsidized by the government, it was coming from a bank with which that borrower had an established relationship.
Today, you can do a quick Google search and instantly find dozens of options for various types of loans: private student loans, loans and leases for farm equipment, real estate loans, small business loans, etc. In some respects, this diversity and competition greatly improves the market; at the same time, so many individuals and businesses trying to make a buck by slinging debt causes a lot of problems.
To quickly address the pros, you can get a loan WAY faster than you used to. When the traditional bank loan monopolized the lending world, everyone would patiently wait a few months for funds to get processed. That made it very difficult for anyone with a modest income to make moves on real estate and business acquisitions. In addition to receiving money more quickly, you have the benefit of working with industry experts when you seek financing. Having a loan officer with lots of insight makes a big difference when figuring out what terms are best for your needs.
And then there are the cons. The housing crisis was largely caused by people who had no business lending money deciding it was their business to lend money. The surplus of lenders created a complex web of borrowing and buying, and only when people stopped paying their mortgages did everyone realize trillions of fake dollars had exchanged hands. I like to think that Americans learned a lesson with the housing bubble, but debt is still on the rise and lots of companies still lend aggressively.
This is a new business model. A few decades ago, lenders were much more averse to risk than they are today, and consumers didn’t yet have a full-blown love affair with debt. Risk and debt aren’t inherently bad, but both need to be approached with caution. Borrowing without a solid plan for repayment is a recipe for disaster, and you don’t have to search long for examples of what those disasters look like.
It’s funny when I hear people in their 30s laughing about how their parents still don’t use credit cards; younger people see that as a sort of flaw, while their parents don’t understand why kids casually spend money they don’t have. Maybe I’m a little old fashioned, but I tend to side with the older crowd on this one.
This closely relates to the retirement savings issue, though it’s a greater phenomenon than some people give it credit for. The baby boomers who didn’t worry much about retirement had pensions, and they paid into those pension plans decade after decade. A question for you, dear reader: how many jobs have you had since graduating college? If only one or two, you’re somewhat of an anomaly; the average person works nearly six jobs between the ages of 18 and 25.
This is one of the more pervasive changes in wealth management, and it goes well beyond the employer-sponsored retirement account. You can and should be investing for retirement without the help of your boss, so not having a 401(k) through your work isn’t a good excuse for not saving. A better excuse is not having enough money while you try to get your career on track. That’s the reality a lot of college graduates face, and it’s something that we should all be helping the next generation to prepare for.
When you graduate with a bachelor’s degree and $80,000 in debt, you have no choice but to find work ASAP. This immediate need to earn often leads to one of two subpar outcomes: A) a job that doesn’t pay enough, or B) a job that’s terrible. People in their early 20s who haven’t worked before aren’t going to step into management positions at awesome firms, and yet the debt they carry requires that type of salary to stay afloat.
This isn’t the case for everyone, of course. Teenagers make gobs of money in tech, and apparently children can become millionaires on YouTube. Virtually anyone can start any type of business, which is the solution for some… and the root of the problem for many others.
Many systems of higher education still follow the old path to a career, but with substantially more private student loan debt attached. This means it’s not always financially responsible to follow in your parents footsteps, and that can be a hard pill to swallow. Hardworking graduates with worthy ambitions have to rethink their futures on the fly, and it seems silly to worry about retirement while going through that type of reevaluation.
More people are getting wise to the changing job market and the subsequent changes in wealth management; there seems to be increasing importance placed on the emergency fund, and a growing number of millennials see the stock market as a long-term investment instead of a place to earn a quick buck. If this trend continues, we’ll see a decline in older couples who aren’t prepared for retirement.
For this hope to come to fruition, job expectations need to change, and people need to understand how those alterations relate to savings and investing goals. You have to factor career and employment changes into your financial planning, and you can’t just hope your next job will triple your salary and make up for lost wages. For those who want to join the growing freelance workforce, there’s extra accounting that needs to be done in order to save and cover taxes. People looking to climb the corporate ladder need to find a field where there’s actually a ladder to climb.
Your parents had a different path to employment, as did their parents and grandparents. Millennials are spending a lot more time finding their way, and that’s not necessarily a bad thing. It just means you have to put a little extra effort into planning for the future.
Credit has always mattered, and most standards within the financial marketplace factor in personal and business credit scores in some way. However, there’s a difference in the amount of work people put into building and rectifying credit scores. A generation back, people didn’t pay this issue much mind; in the 21st century, it’s practically a full-time job.
In modern-day America, your FICO score and your credit history matter in so many ways. From the terms on your next credit card, to your ability to get consumer financing, to whether or not you’ll get an apartment in an extremely competitive renters market - all of these financial battles can be won or lost on the back of your credit report.
In the days of yore, you needed credit to get a loan. While credit scores certainly had influence on other matters, it wasn’t a constant source of concern. Now, with the accessibility of credit cards and other forms of financing, a person can ruin his or her credit in the first year of adulthood. The process of restoring bad credit is tedious and tenuous; people sometimes spend a good deal of money to repair their credit score, all so they can get a loan, buy more stuff and start the process over again. It’s very counterproductive, and it’s why the evolution of credit scoring is one of the changes in wealth management people have the most trouble comprehending.
Like it or not, you have to pay attention to your credit as soon as you start spending, earning and borrowing. The goods news is all you have to do to keep your credit in line is spend sensibly and pay your bills. The bad news is that’s a lot to ask of a young adult who just signed up for a Visa or Mastercard. It’s easier to build credit now than it was 30 or 40 years ago, but it’s also much easier to make a few bad choices and put some ugly blemishes on your financial record.
There was a time when credit mostly took care of itself and had limited adverse effects, but those days are long gone. You don’t really have a choice but to keep your credit in good standing, you should keep that in mind whenever you make a financial move.
You can’t ignore lessons learned by your parents and grandparents. Every generation offers good financial insight that anyone can benefit from. At the same time, the last few decades’ worth of changes in wealth management have to inform your financial planning. The economy has a very long history of moving forward; it’s not realistic to expect employers and money managers to revert to business practices from the 1970s.
I want you to make the most of every penny you earn. If you’re going to do that, it takes some diligence and studying. You need to know what’s happening in the financial world, and how changes in wealth management could affect you now and in the future. Since it’s never too early to start planning, saving and investing, I encourage you to get educated now and make sure you aren’t relying on financial information that peaked in the early 80s.