I WAS Officially Depressed, but Feeling Better Now

July 15, 2011

Last Friday, I talked about how each generation’s retirement income is increasingly at risk and the factors (longer life spans, shrinking pensions, uncertainty with Social Security, rising health care costs and declining investment returns) behind that trend.  While all of these factors exist and are real reasons for concern, I also see hopeful signs out there as well.  Today, and next Friday, I’ll talk about why I am hopeful and some of the things you can do, small things that may seem inconsequential, to take control of your financial life and buck the negative trends that I showed you last week.

I’ll start with a few trends that I am seeing in the larger economy, that give me reason to believe that there is hope for people who are preparing for retirement.

1.  We are in the midst of a very long recession (at least from a real consumer perspective–what economists call a recovery is not how it feels to the average American).  No, I am not on drugs (unless caffeine and sleep deprivation count).  How is this a good thing?  Because…recessions end.  I have to believe that we are closer to the end of a lousy economic cycle than the beginning.  Heck, from a technical perspective, economists have proclaimed that the recession is over and we’re already in a state of recovery.  In sports, teams are never as bad as they look when they are on a losing streak and never as good as they look when they’re on a winning streak.  Similarly, in a down economy, it is easy to see negative signs everywhere.  To the best of my knowledge, no recession / bad economy has lasted forever.  This one won’t either.  The best part of this economic cycle is that millions of people in the U.S. have been forced to rethink their financial priorities and learn to live more frugally.  If that behavior holds up post-recovery (and there is data to suggest that we are in a recovery phase), those people can control their financial futures.

2.  Housing prices are still declining.  Again, how is this good?  We are right in the middle of a great “buyers’ market.”  People who were priced out of purchasing their own home are closer to, or at a point, where they can now afford to buy, rather than rent.  Price dips are allowing new buyers into the market.  I talk to a lot of people who formerly viewed a house as something to buy, paint and sell at an enormous profit.  The “reset button” has been pushed for millions of us who now view a house as a long term place to live, and eventually outright own, with no mortgage payment.  Life without large housing costs can be more easily funded and managed.

3.  Companies are investing in financial education and additional benefits.  Financial stress creates enormous hardship not only for you but for your employer.  Stressed out employees are not nearly as productive as they could be.  So, many leading employers are implementing financial education programs, helping employees better manage their financial lives.  Along with that, there is a trend toward “auto-enrollment” with corporate 401(k) plans, where new hires are automatically enrolled in the 401(k) plan rather than needing to affirmatively enroll.  This can significantly increase participation rates which will increase retirement savings, long term.  Another awesome feature, “auto-escalate,” is often used in conjunction with auto-enroll.  This increases your contribution automatically, usually annually, until you reach your desired contribution percentage.  I’ve seen programs that auto-enroll at 3% and then auto-escalate at 1% per year (to coincide with salary increases) until the contribution is at 10%.  This trend toward automating an ever-increasing savings rate can be very helpful over a long time horizon.  The combination of financial education and enhanced 401(k) features gives me enormous hope.

If we look at the current economy, and pay too much attention to the news, it can be a bit depressing.  But, those who are willing to look for positives, can find them.  There are larger trends at play that can be real signs of optimism.  Those, in concert with some personal financial behaviors (which I’ll talk about next week), can help anyone who is willing to put in the effort to make long term financial security a priority.