My father wasn’t a drill sergeant. But when I was a kid, and things didn’t go my way, he would tell me to “toughen up.” When I complained about high school, he reminded me of his own teenaged years in England: “When I was 16 years old, I worked full-time as a mechanic’s apprentice. At night, I studied at a vocational college to become a full-fledged mechanic. And nearly all the money I earned went to my parents.”
I’m part of the so-called Generation X. But my father and I shared a certain trait. I also believed the next generation–in my case, millennials or Generation Y– needed to toughen up. Plenty of people say millennials aren’t resilient. Too many people in their 20s were told they were special when they were kids. They often earned sports medals and trophies just for showing up.
Simon Sinek wrote the bestselling book, Leaders Eat Last. In an interview with Inside IQ Quest, he shared his thoughts on millennials. He says they were raised to be entitled, self-absorbed and emotionally vulnerable to failure. Maybe he’s right. Perhaps they were coddled more than previous generations. But my view has come full-circle. Today, I have a soft spot for millennials.
I credit Scott Burns and Laurence J. Kotlikoff. They wrote The Clash of Generations: Saving Ourselves, Our Kids and Our Economy. They explained how today’s retirees have advantages that the next generations won’t.
Today’s retirees, for example, earn strong Social Security benefits. But are the payout schemes too high? It’s well-known that Social Security’s coffers might be running low. Burns and Kotlikoff say Generations X and Y will be stuck with the bill. They describe Social Security as a giant ponzi scheme where one generation’s contributions fund the previous generation. But my generation had fewer children than the boomers did. As a result, Social Security will have a lower taxable base. That’s why Social Security might shortchange the next two generations.
If that weren’t bad enough, defined benefit pensions are becoming a thing of the past. The Boston College Center for Retirement Research estimated that 62 percent of workers in 1983 were enrolled in such plans. By 2007, that number had dropped to just 17 percent. That number has dropped even further for today’s young workers.
College costs are also higher than they have ever been before. Even after accounting for inflation, The College Board says tuition, fees, room and board at a four-year private college cost twice as much as they did 30 years ago. The cost of public four-year colleges have risen even faster. As a result, an entire generation of college graduates are burdened by massive debts. CNBC reporter Abigail Hess says 44 million Americans collectively owe $1.5 trillion in student loan debt. That means roughly one in four American adults are paying off student loans. The vast majority are from Generations X and Y.
Home prices, in many U.S. cities, have also soared out of reach for many young workers. Today’s retirees, when they were young, had an easier time affording homes. But in cities like Manhattan, San Diego, Seattle, Washington D.C., Oakland, Boston, Los Angeles and San Franscisco, affordability is a dream of a bygone era.
The typical 65-year old today had other wealth-building tailwinds. They would have been 30 years-old in 1983. U.S. stocks were cheap. The cyclically-adjusted price-to-earnings ratio was about 8 times earnings. That’s almost 50 percent cheaper than the historical long-term average. Today, U.S. stocks trade at a nosebleed CAPE level of 35 times earnings. That’s more than twice as high as the historical long-term average.
In 1983, the 10-year yield on U.S. Treasury Bonds was 10.46 percent. The average dividend yield on U.S. stocks exceeded 4 percent. Low stock price levels (relative to business earnings) meant investors paid far less for their shares of corporate profits. That’s why Baby Boomer investors had strong winds at their backs.
Of course, they had some setbacks along the way. There were market crashes in 2001/2002 and in 2008. But from January 1983 to October 31, 2018, U.S. stocks averaged a compound annual return of 10.79 percent. It might be history’s most profitable 35-year stretch. If somebody invested $280 a month into the S&P 500, starting in 1983, they would have more than $1 million today.
Millennials invest in much less fertile ground. Today, U.S. stocks trade at nosebleed levels. The S&P 500 has a dividend yield of about 1.88 percent. That compares to a dividend yield of more than 4 percent in 1983. Today’s interest yield on a 10-year Treasury bond is about 3.2 percent. That compares to a 10.46 percent yield back in 1983.
Millenials should hope that stocks stagnate for years… or that stocks fall hard. It would allow them to pay lower prices for stock market shares. As a result of lower prices, dividend yields would rise. This would increase their odds of building stock market wealth.
Some of my friends, however, are already retired. They don’t want stocks to fall. And that makes sense. Retirees are selling their stock market assets. They want to see those assets rise. But they also came from a wealth-building golden-time. They earn solid Social Security payments. They paid lower college costs. Home prices were more affordable when they were young. Plenty of them earn defined benefit pensions. And they invested during a fabulous stock market run.
Some retirees say millennials are far too entitled. But millennials have a right to loudly call them out. After all, the boomer generation earned the biggest breaks.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas