If there is a silver lining to the bursting of the real estate bubble, the weak economy and the attendant
bear market, it may be that the great mass of baby boomers still 10 or more years from retirement might be scared into saving more for retirement while they still have time.
The real estate collapse and
bear market might introduce some rationality to their financial thinking. For too long, many baby boomers believed that they can have it all — big houses, fancy cars, boats, second homes and comfortable retirements — without saving up beforehand.
They have been spending as if there were no tomorrow, while assuming they were going to retire on the proceeds of selling their homes and on the market gains of their 401(k) plans.
At the same time, many of them have been borrowing much of the equity from their homes to buy the cars, boats and expensive vacations, figuring that the continued appreciation of home prices ultimately would bail them out when retirement arrives.
Some have gone so far as to borrow from their 401(k) plans, expecting the continued appreciation of the stock market to replace what they borrowed.
What's more, some have even speculated in real estate — for example, condos in Florida or Las Vegas, that they believed to be "sure things."
Now many of them know better because those gains from their houses and the stock market have evaporated and the real estate investments have soured.
And this applies not only to the working and middle classes. Many high-income earners overextended themselves, buying bigger, and often second, homes, yachts, etc., counting on their investments, their options and their restricted stock to provide them with retirement cushions.
Now many of those top earners are in trouble too. Their options are worthless, their home values are below the value of the mortgages, and their jobs are less secure.
The bursting of the Internet bubble should have encouraged more of the baby boom generation to save, but the economy and the stock market recovered too quickly, pumped up by the easy money from the
Federal Reserve which also pumped up home prices.
Since the beginning of 2000, according to the Department of Commerce's Bureau of Economic Analysis in Washington, the U.S. annual personal-savings rate has been greater than 3% in only one quarter — the third quarter of 2001, immediately after the collapse of the Internet bubble and the Sept. 11 attacks.
In the third quarter of 2007, the last period for which data are available, the personal-savings rate was only 0.3% per annum, up fractionally from 0.2% in the second quarter.
Given that the baby boomers seem to need a scare to encourage them to save, the chances are good that the second market slump in less than a decade, combined with the house price declines, will get the message through. It could be the two-by-four to the forehead that gets their attention.
Perhaps they will begin to adopt more of the frugal, prudent ways of the generations that went through the Great Depression and World War II, which often saved close to 10% of their income each year.
That would be good for them and good for the country.
