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IS A STORM COMING? Long before I discovered HumbleDollar, I regularly read articles by Scott Burns. Now in his 80s, Burns was a popular financial columnist who wrote for the Boston Herald and later The Dallas Morning News. He’s a graduate of Massachusetts Institute of Technology, so he’s comfortable presenting quantitative arguments. Burns is an advocate of low-cost index funds, and he helped popularize couch potato investing, using a low-maintenance 50-50 mix of stock and bond index funds.
One of the books in my financial library is his work The Coming Generational Storm, coauthored with Laurence Kotlikoff. It came out in 2004, so its 20th anniversary is approaching. It was on Forbes’s 2004 list of the top 10 business books.
Here’s a sample from the back cover: “In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we’ll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability.”
As you might imagine, the book was an uncomfortable read. The twin threats of unfavorable demographic shifts and unsustainable government debt are laid out in stark terms. The generational storm thesis can be summed up by these two sentences from the epilogue: “The American dream is becoming prohibitively expensive. And unless we act soon, the Greatest Generation will be the last to leave its children and grandchildren a better country.”
The biggest reason we’re facing this generational storm, according to the authors, is an implicit asset problem. “The three most important implicit assets are Social Security, Medicare, and employer-provided pensions…. Raw demography is creating promises of implicit assets faster than the underlying economy is growing.”
Given that two decades have passed since the book came out, it might be time for a progress report. I’ll leave it to HumbleDollar readers to determine for themselves the extent to which we’re experiencing the ills listed on the book’s back cover. What about the authors’ personal-finance prescriptions? Here’s a summary of five key take-aways, along with my assessment of how each has worked out for me.
Avoid excessive fees. The authors include a chart showing the potential financial drain from advisor fees over an investing lifetime. I heeded that message, and have favored low-cost index funds for many years. The weighted average annual cost of my 401(k) holdings is currently 0.11% of the assets I have invested.
Buy a house. The book emphasizes the importance of “imputed income” in an inflationary, rising tax environment. Owning a home free and clear provides “tax-free invisible income in shelter services.” The non-cash income from your own home—the fact that you’re effectively renting to yourself—doesn’t show up on your tax return and yet its value will rise with inflation. Our home is paid for, so we have this box checked.
Build an alternative portfolio. To mitigate the effects of what they saw as major inflationary pressures and a weakening dollar, the authors recommended putting together an alternative portfolio. This portfolio is meant to supplement, not supersede, a traditional portfolio of low-cost stock and bond funds.
Some of the items they recommend including in an alternative portfolio are Series I savings bonds, inflation-indexed Treasury bonds, precious metals funds, energy funds and international stock funds, with an emphasis on China. I didn’t get carried away with this recommendation—which is probably just as well.
For most of the 20 years after the book was published, inflation remained quite low. I’ve held a decent amount of Series I bonds over that period. They’ve returned, in the aggregate, less than 5% a year. I’ve never bought any precious metals funds, though I do have a small clutch of physical gold. I have about 15% of my retirement portfolio in international stocks. I would never prioritize investment in China, out of both political and economic convictions.
Pay Caesar upfront. The authors’ contention: “The more successful you are as an earner and saver, the greater the odds are that you will pay taxes at higher and higher rates when you take money from qualified plans.” One of the key ways to address this concern is to fund Roth accounts, which don’t offer an upfront tax deduction, but where all withdrawals are potentially tax-free.
I have dutifully funded Roth IRAs for myself and my wife for the past dozen years. I do, however, have significant tax exposure through my traditional 401(k), where every dollar withdrawn will be taxed as ordinary income. I haven’t yet taken anything out of my 401(k). Since I have income from both a pension and part-time work, I don’t need spending money from my 401(k) right now, plus withdrawals would be taxed at a steep rate, given my other income.
By the time I’m forced to take out money from my 401(k), I expect the tax bite to be painful. I may have a few years to make small tax-advantaged withdrawals after I completely stop working and before I begin taking Social Security. The math, however, is not in my favor.
Eat broccoli. “Like it or not, the health care problem will be topic number one for the rest of our lives.” While as an individual, there’s not much I can do to influence the fiscal realities we face as a society, I can heed the authors’ advice to take responsibility for my personal health.
The authors have a section about DALE, or disability-adjusted life expectancy. DALE, a World Health Organization metric, starts with life expectancy, and then subtracts years lost to ill-health, disability and early death. At the time the book was written, the average DALE in the U.S. was 70 years, lower than many other countries.
After a scare with my heart a couple of years ago that—fortunately—turned out to be just that, I’ve been consciously reducing consumption of red meat for the first time in my life. I’ve gotten more disciplined about going to the gym. Next on my list: lose some weight. None of this guarantees that I won’t suffer a major health setback down the road. But I hope these actions will extend my healthy retirement years. Working in my favor is that I’ve never smoked or abused alcohol.
Although the two decades since this book was published haven’t unfolded exactly as predicted—for example, inflation stayed low for most of the period—I think the underlying arguments and analyses are still worth considering. So far, we may have successfully kicked the can down the road. But how much longer will it be until that can hits a brick wall?
Ken Cutler lives in Lancaster, Pennsylvania, and has worked as an electrical engineer in the nuclear power industry for more than 38 years. There, he has become an informal financial advisor for many of his coworkers. Ken is involved in his church, enjoys traveling and hiking with his wife Lisa, is a shortwave radio hobbyist, and has a soft spot for cats and dogs. Check out Ken’s earlier articles.
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I’m about half way through a book called “The Fourth Turning is Here” by Neil Howe. It addresses cycles that our civilization has and continues to experience. It’s not written from an economics or personal finance perspective; it’s a take on history and how frequently cycles repeat themselves and in what ways. There’s a good deal of overlap between the book and the bullet points that Ken has listed with regard to seeing how things are and may play out.
I have been reading doom and gloom opinions for decades and keep dismissing them.
I can post many “experts” who published bad predictions in the past. I have been documenting these for decades.
Although I’ve been a homeowner since 1977, I think that the financial advantages are frequently overstated. Many of the ongoing costs of ownership like mortgage interest, insurance, property taxes, repairs, and routine maintenance are included in rent but often not in homeowner costs when the two are compared. Many people also overestimate the benefits of mortgage interest tax deductions.
Also extrapolating recent gains in home values into the future is risky. For every seller there must be a buyer and prices can’t indefinitely increase faster than buyers are able to pay.
Thank you Ken, very good wisdom for the age we are in. Also, I recently viewed this documentary which certainly did get me thinking about what is happening now and in the future.
https://topdocumentaryfilms.com/changing-world-order/
I also fear that “anti-rich rhetoric” in the days ahead. And that Roths may not always be free of taxation.
And regarding health I agree totally. If your health is terrible the size of your portfolio becomes fairly irrelevant. The finest medical care on earth can only do so much. And for so many maladies, our personal health habits are key factors in determining our physical well being, or lack thereof.
There is always a storm coming, and the pundits predicting it are always right. Sooner or later.
The fact is that almost nothing Burns predicted on the back cover in 2004 has come true, and isn’t likely to come true by 2030. And those following that investment advice may have fared better than the average investor through the Great Recession, but they also failed to take full advantage of the most durable bull market in history.
As to a paid-for house, I understand the viewpoint. But I consider my 3% fixed rate mortgage a gift that keeps on giving when inflation means I’m making payments with steadily cheapening dollars as time goes on — AND taking a tax writeoff for it. Plus the money that would otherwise be stuck in the walls of my house is currently making 14% in the market and 5% in a money market account. So I’ll pass on paying off my house, thank you.
Mike. A big factor in deciding whether to pay off the house is the phase of life that you’re in. As a retiree I’m happy without a mortgage regardless of the interest rate. Before I retired I had no incentive to pay my mortgage down or off.
Scott Burns was a guest on The Long View podcast with Christine Benz and Jeff Ptak a couple of months ago … definitely worth a listen:
https://the-long-view.simplecast.com/episodes/scott-burns
I hadn’t been aware that he was still publishing columns … I remember reading him in the Dallas Morning News back in the ’90s.
The five take-aways discussed above are solid. I’m not sure how to prepare for a possible “generational storm” other than to follow the principles and practices that most of us are already familiar with. I would certainly underscore number five above … exercise and movement are critical for healthspan … https://www.wsj.com/articles/fight-aging-science-research-146aa2cd
Pay Caesar upfront. The contribution limits forced many of us to invest more in pre-tax accounts than a Roth account. I’ve been doing Roth conversions from my conventional IRA.
I expect the 1st dramatic tax increase when the Trump tax cuts expire. I’m sure that more tax increases will follow as the years march on.
I have a fear that rhetoric regarding “the rich” will ultimately mean prohibitive taxes on those of us who worked hard, read Humble dollar, and invested.
I wouldn’t be stunned if they eventually find a way to tax our Roths.
I wouldn’t count on younger workers tolerating (as voters) hefty taxes to maintain social security for boomers. This would be especially an issue with newer immigrants who do not have Grandparents collecting SS.
Ken,
One thing I’ve noticed is that I – subjectively – feel ‘better’ after exercise. I suppose it’s kind of like the “runners high” some write about.
YES! I’ve bought this book and do follow it. We can have knowledge, but also need action on that knowledge to enjoy success.
https://www.youtube.com/watch?v=Ie_Ia5UUbJ0
I’ve gotten very devoted to workouts since 2020 or so. I have definitely found that exercise reduces stress and makes me feel better. There have been mornings when I dragged myself onto our spin bike or elliptical or out for a walk even though I had a poor night’s sleep and/or have a lot on my mind. I always, always feel better physically and mentally after a workout.
Recently I’ve been dealing with a foot injury that’s forced me to shorten or even skip workouts. I absolutely noticed the mental effect it had on me. Thankfully, I seem to be turning a corner on that.
Winston, just returned from the gym after a lapse of almost two weeks due to a case of holiday Covid. I don’t go at it hard enough for a runner’s high, but the gym routine is helpful. I’m also getting curious as to whether lowering my sugar intake would help lower my blood pressure…have some recent data that might be promising.
Sorry to hear about your COVID; take it easy at the gym while you’re getting back on your feet.
I was on blood pressure meds from 2018 to early 2023. I started exercising and lost over 50 lbs, and now I’m off the meds and my BP is great. I know there are a lot of causes for high blood pressure, and they’re not always related to weight or exercise, but I was encouraged that I was able to retake control over that aspect of my health. Good luck!
Thanks for the advice and for sharing your BP experience. Fortunately my BP is only slightly elevated most of the time and I’m not on meds for it. I’d like to get it consistently into the ideal range, though.
I contend that people agree more than they disagree about the topics you speak of so long as politics are kept out of the conversation. When us versus them is introduced the can is likely to crash hard into that wall.
I, too, have long been a fan of Scott Burns. He is still writing a couple of columns a month at scottburns.com.
Yup, Scott still has some interesting things to contribute. I’ve gotten browser warnings when trying to access his website so was reluctant to link to it.
Likewise, I look forward to Scott Burns’ postings. His analysis always presents as an insightful and well written perspective into topics I don’t think about on a daily basis. Perhaps I should re-read the Coming Generational Storm, through my older (and wiser?) set of eyes.
Excellent article. Burns was a great read. I like what Benjamin Franklin said including: “Beware of little expenses, a small leak will sink a great ship.”
Thanks Rick.