"Hope I Die Before I Get Old" Is Not a Life Plan

Attention in the business media is turning from the alarming drop in value of Baby Boomer retirement savings to a more fundamental problem: the generation's unprecedented indebtedness. As the Wall Street Journal notes today, Boomers have bigger problems than shriveled 401k plans. Over their lives, they've consumed most of their income rather than save it. Writes the Journal:

"What Baby Boomers of all persuasions have done, without dispute and to an unprecedented degree, is spend money instead of saving it. During the 1990s, Baby Boomers accounted for about half of all consumer spending in the U.S., according to a recent McKinsey Global Institute study. ... Their appetites buoyed sales of everything from Bavarian sedans to Sumatran coffee to Swedish furniture."

U.S. household savings plunged to 2 percent of income during the 2000-2005 period, down from 10 percent two decades earlier -- just as Boomers' earnings were peaking and they should have been saving. Citing the McKinsey study, the WSJ article notes that the average Boomer household (where the head of household was 50 years old) carried $122,000 in debt. That compared to $50,000 in inflation-adjusted level of debt for comparable households twenty years previously.

Writes WSJ reporter Joe White: "Millions of Boomers are realizing that 'hope I die before I get old' was just a sarcastic line in a rock and roll song, not a life plan."

It gets worse. White raises the terrifying prospect of a massive imbalance in supply and demand as the 78 million Boomers try to sell into a real estate market in which the much smaller GenX generation is buying. Think real estate prices have fallen a lot already? Just wait.

White touches upon the idea that Boomers will find it extremely difficult to dig their way out. They've built their lifestyles of McMansions and SUVs around cheap credit and cheap energy. The cheap credit has dried up. So has the cheap oil. The article closes with a quote from Wharton business school professor Olivia Mitchell: "The Baby Boomers are going to have to work longer and eat less. And go back to what my mother was doing -- saving string."

In reality, the situation is even worse than White describes. Even if Boomers were inclined to embrace thriftier lifestyles -- and there is evidence that they are -- they can't shed their old ways without some pain. Many are saddled with expensive-to-maintain assets that can't be sold without a loss.

Take houses, a major source of Boomer net worth that Boomers counted on tapping when the kids fly the coop. Many Boomers bought McMansions on the suburban frontier during the cheap-energy era when land and housing prices were cheaper. As traffic congestion, long commutes and higher energy prices nudge households back to the urban core, housing values on the metropolitan periphery have fallen steeper than the national averages.

How about those low-mileage SUVs? Richmond, Va.-based CarMax, the nation's largest retailer of used cars, learned what happens when everyone unload their gas guzzlers at the same time. The price of used SUVs and trucks plunged 25 percent over three months earlier this year, obliterating millions of dollars in the value of its inventory. The Boomers face a devil's dilemma: Take a big financial hit up front by selling the gas hogs now, or take it over several years each time they fill up their gas tanks.

Indebtedness... lack of savings... houses built in poor locations, with values that continue to decline... energy inefficient automobiles and long commutes... Boomers are boxed in by the choices they've made over their lives. Boomer angst will likely get worse before it gets better.

(Image credit: Spoleto Today.)