Investment Insights Podcast – July 18, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 16, 2014) the subject matter pertains to the Congressional Budget Office’s release of their long-term outlook. It’s important to note that this forecast is a 75-year time horizon; so focus should be on the near-term debate in Washington:

What we like: Raised the long-term growth rate of the economy; lowered healthcare costs and interest rate costs which is a positive in the near term

What we don’t like: Healthcare and interest rate costs in the long term; interest rates likely to rise eventually; Social Security likely to rise in the near future; defense spending cutbacks

What we are doing about it: As citizens, being thoughtful when exercising the right to vote; keeping an eye on higher interest rates and impact on fixed income

Click the play icon below to launch the audio recording or click here.

Source: CNBC

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Demographic Changes Looming (Part One)

10.17.13_BlogRyan Dressel, Investment Analyst, Brinker Capital

This is part one in a two-part blog series.

In 2013, it seems the financial headlines have been dominated lately by policy changes of the Federal Reserve, dysfunction in Washington, China’s threat of a hard economic landing, or Europe’s ongoing sovereign debt crisis.  Lost in these headlines are some major demographic trends that are already under way, or are looming on the horizon over the next decade.  Many of these changes will have a profound impact on investors, governments and societies in the United States and abroad.

Aging Population

The world’s developed countries are aging quite quickly.  As of the most recent 2010 census, the median age in the U.S. is 37.1, compared to 28.2 in 1970.  This is actually fairly low in comparison to some of the world’s other developed nations.

10.17.13_Demographics_Part1

This is not a huge surprise as the baby boomer generation is reaching middle age.  It does, however, have some large implications that need to be watched closely by investors, companies and governments over the next decade.

What implications does this trend have for the U.S. and abroad?  For starters, an aging population will put a large strain on healthcare costs as the number of people who need access Medicare increases.  A study by Health Affairs cites aging population as a main driver of rising health care cost forecasts.  It projects national health care spending to grow at an average annual rate of 5.8% over the 2012 – 2022 period (currently near 4% in 2013).  By 2022 health care spending financed by federal, state, and local governments is projected to account for 49% of total national health expenditures and to reach a total of $2.4 trillion.[1]

Second, smaller subsequent generations (Gen X, Gen Y) will have to increase productivity to maintain the current low, single-digit GDP growth in the United States.  The responsibilities of the baby boomer generation upon retirement will naturally have to be absorbed by younger generations.  A 2013 study released by the Georgetown Center on Education and the Workforce (CEW) indicates that this trend is already occurring. It cites that there are more job openings created as a result of retirements today than in the 1990s.[2] The U.S. can fuel this productivity by increasing competitiveness in manufacturing, and using competitive advantages such as low energy costs and technological advancements.

Third, an increased focus will be put on fixed income and absolute return investment strategies, especially if the U.S is entering a rising interest-rate environment as many economists believe.  As populations age, their risk tolerance will naturally decrease as people need to plan for their years in retirement.  In 2012, only 7% of households aged 65 or older were willing to take above-average or substantial investment risk, compared to 25% of households in which the household head was between 35-49 years old.  Despite a growing life expectancy, the retirement age is still 65. This has major causes for concern for social security, capital gains tax policies, and corporate pension plans.  Subsequent generations will need to place an increased importance on individual retirement saving should the program terms change, or disappear altogether.

Part two of this blog will look at two additional trends of urbanization and wealth inequality.


[1] Health Affairs.  National Health Expenditure Projections, 2012 – 22: Slow Growth Until Coverage Expands and Economy Improves. September 18, 2013.

[2] Georgetown Center on Education and the Workforce.
http://cew.georgetown.edu/failuretolaunch/. September 30, 2013.

Is America’s Retirement System Broken?

SimonBill Simon, Managing Director, Retirement Plan Services

In an article earlier this week, Mr. John Bogle, founder of the Vanguard Group, decreed that America’s current retirement system is broken. As far as a fix, he offers only two suggestions. The first is to increase the current level of taxable income subject to Social Security taxes to $140,000-$150,000. The second is a reduction in the automatic cost of living adjustments that are used to calculate benefits.

While both would generate significant increases and savings to Social Security, they do not address the larger issues with our retirement system. As Bogle notes, the three pillars of retirement are Social Security, Defined Benefit plans and Defined Contribution plans—and they are in bad shape. In order for defined contributions plans to work better, we need to continue to automate as much of the functionality as possible, incentivize larger contributions, and make sure that an appropriate investment option is selected based on the participants age and realistic expectations about goals and markets.

5.15.13_Simon_BogleArticleHere is some food for thought. What if you could earn an additional tax credit by deferring at least 10% of salary or not having a loan against your 401(k)? What if an employer gave one additional vacation day per year if a company-wide goal of participation and contribution was reached? Ultimately, the system can work, but we need to continue to innovate and provide fresh ideas.

Click here to read more on John Bogle’s comments.

How 401(k)s are failing millions of Americans

Recently, some startling facts have surfaced that hint at a looming widespread retirement crisis.

Consider these statistics:

  • According to the Employee Benefit Research Institute (EBRI), there are 50 million 401(k) participants in the U.S.
  • The average 401(k) balance of those is slightly over $60,000
  • The average 401(k) balance of those within 10 years of retirement is $78,000—a third of them actually have less than $25,000 saved.
  • 43% of workers ages 45-54 are not currently saving for retirement at all.
  • In 1980, 60% of private sector workers had access to a lifetime income in the form of a corporate pension. As of 2006, only 10% still have access to a pension.
  • It is estimated that a middle-class lifestyle will require a nest egg of $900,000 at retirement.
  • Social Security only pays $14,780 per year for individuals and $22,000 per year to couples.

To read the entire article on How 401(k)s are failing millions of Americans, click here.

[1] “How 401(k)s are failing millions of Americans. The Week. April 20, 2012. <http://theweek.com/article/index/226886/how-401ks-are-failing-millions-of-americans&gt;