Today's debt bubble may derail many Baby Boomers' retirement plans -- and it's already hurting the generation that follows.
Take the recent real-estate boom. This windfall could have salved the financial wounds left by the 2000-02 stock market crash. But instead, many homeowners have turned around and immediately spent their real-estate gains.
Federal Reserve data show that the value of household real estate climbed 71 percent over the past five years. But mortgage debt grew even faster, up 75 percent, as folks cashed out part of their home's value when they refinanced or took second mortgages.
At the same time, car loans and credit card balances are also rising. Outstanding consumer debt is up 27 percent over the past five years, well ahead of the 13 percent cumulative inflation rate.
"It looks like we're doing as well as we've always done," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "But in fact, the world has changed. And it's for four big, real obvious reasons."
First, life expectancy is rising, which means seniors are facing longer, and hence more expensive, retirements. Second, health care costs continue to escalate, including for retirees covered by Medicare. Third, real interest rates are much lower than they were two decades ago, and that means we are looking at lower investment returns.
Finally, and maybe most important, traditional company pensions are disappearing. Among workers with an employer's retirement plan, 38 percent were covered by a traditional company pension in 2003, down from 81 percent in 1981.
"The implication is really clear," professor Munnell says. "People need to have more saved than they did in the past."
Source: Jonathan Clements, www.DetNews.com, The Wall Street Journal