Visiting the KC Fed Helped Put Retirement Planning Into Perspective
Last Friday, I had the opportunity to attend a speech by Alan Barkema at the Kansas City Federal Reserve. He’s the senior vice president of the Research Division and Director of Research for the KC Fed. It was a great experience to visit the new(ish) Fed building and hear from a very experienced and very knowledgeable economist.
A couple things stuck out to me:
- We are a consumer driven economy – It wasn’t a new revelation, but it continues to impress me (and not in a good way) that our GDP is approximately 70% consumer spending.
- The economic crisis took three decades to build up – During the last thirty years our individual debt levels have roughly doubled. Some of this is due to an increased availability of credit, but most is, in my opinion, due to people living well beyond their means.
- Consumer spending is coming back, but at lower than pre-crisis levels. – Many people are predicting a new level of “frugality.” I’m hoping it’s more a new level of sustainable rationality.
The current debate, now that we seem to have exited the recession, is what follows now. Most people seem to be in one of two camps. The first side believes that the recovery will be “U” shaped. Essentially, the belief is that the economy will continue to recover, but do so slowly. The second camp believes that once the government’s stimulus spending ends we are headed for a fall, because things like consumer spending hasn’t, and won’t recover anytime soon. My impression was that Mr. Barkema believes in the “U shaped” recovery theory based on his belief that government spending will get us through 2010 by which time the economy will be on solid enough footing to continue the recovery on its own.
- As for how this relates to your retirement planning: Right size your spending – There is a big difference between a want and a need. If a purchase is a “Want,” try asking yourself whether you really want it or if it’s just something that caught your eye. Many times it probably won’t even be a “want” and, as a result, it’ll be easy to eliminate.
- Save more – If it is a U-shaped recovery, we’ll likely need to save more to reach our goals. Try increasing your 401(k) contributions by 1% now (and each year after). I doubt you’ll even notice that it’s missing and it’ll have a big effect on the account’s future value.
- Focus on the simple things – For me, anyways, I get the most enjoyment out of the simple things, so I’ve made a renewed effort to doing those things more often, such as having friends over instead of an expensive night out.
It probably didn’t surprise you to hear that our economy is a consumer driven economy. So it’s a bit of a catch-22. If we don’t spend anything our economy struggles, but if we spend too much we set ourselves up for another fall. Rather than not spending, or living beyond our means, I suggest we instead live within our means while also making sure that we have goals to work towards and successes to enjoy.
So my challenge to you is this –eliminate a “want” each week for the next four weeks and leave your comments/thoughts/actions here, or if you’re a client feel free to leave them in the forum. I’ll do the same and look forward to hearing about your progress.
Scott H
