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JAForlines Global: The Great Demographic Battle

Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market. Some products/services may not be offered at certain broker/dealer firms.


New York, October 16, 2012, Advisor Update®
As the US elections draw nearer, much of the focus has been on how the candidates plan to stimulate job growth.  One area that has been frequently expounded on is the need for better education and job training.  We agree entirely that the education system in this country is in dire need of improvement.  One of the most serious consequences of the inadequacy of our educational system is high youth unemployment and falling wages among young people.

Youth unemployment (16 to 24 years of age) currently stands at about 16%, while real household income for the same group has fallen by about 15% since its peak in 2000.  Additionally, the labor force participation rate for that group has fallen by more than 7% since 2000.  This is a result of both high school students who have given up looking for summer jobs, as well as young people who have gone to college or grad school because of poor job opportunities.  The latter is a group which we think deserves particular attention.

An increasing number of recent high school and college graduates who were not planning on continuing their education have instead chosen to do so in recent years as a result of poor job opportunities.  Government guarantees for student loans have made it easy to obtain a student loan, and this influx of students has led to rapidly rising tuition costs.  The combination of these two factors has led to an explosion in student debt in this country: total outstanding US student debt has risen from $250 billion in 2003 to over $900 billion at the start of this year.  At the same time, average earnings of young college graduates have fallen by 15% since 2005.  Additionally, student debt cannot be discharged in bankruptcy without demonstrating “undue hardship.”

This combination of falling incomes and a rising debt load has saddled with debt a large part of a generation that is expected to pay for unfunded Social Security and Medicare programs.

At the same time as young people in the US are seeing themselves carrying a greater burden than the generation before, retirees and those nearing retirement are less prepared than those before them.  The share of workers who describe themselves as “on track” or “ahead of schedule” in the retirement savings has declined from 44% in 2005 to 31% today.  This is due in part to the large decline that many retirees have seen in both their savings and home values, as well as the lowered expected future returns due to historically low interest rates and stagnating home prices.

One consequence is that workers are delaying retirement.  The share of workers who expect to retire after the age of 65 has increased from 30% in 2007 to 44% today.  The increased competition from experienced workers has no doubt contributed to high youth unemployment.

The most important lesson that can be learned from the difficulty experienced by retirees and those nearing retirement is the need for sound financial planning and a capable asset manager.  Our Global Tactical Allocation Collective Investment Trust, available for retirement plans, implements our philosophy that we have long argued: the key to strong long-term performance is the ability to avoid large drawdowns.  This maxim is exemplified most clearly by the recent experience of older Americans.

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