The last year of lockdown life has left many Americans longing for change. What many really want is to chuck the pandemic, and they are starting to get their chance.
But today’s reopening world is colliding with a demographic reality that was crystal clear a decade ago. Even then, it was apparent that the 2020s would begin just as the big bulge of the baby boom generation was turning 65 years old, placing new stresses on America’s entitlement systems at the same time that all the 10-year Treasury bonds sold to finance trillion-dollar deficits from the Great Recession would need to be refinanced.
Labor economists were also predicting a looming shortage of workers back in 2010. What no one anticipated was that a pandemic would render previous deficits almost trivial in size, or that a 12-year bull market for financial assets would leave many clients of financial advisors far wealthier than they ever expected.
There’s now a tenuous connection between labor markets and financial markets, but however that plays out in the next few years, it is likely to define the post-pandemic world. For some who can afford it and others who can’t, a take-that-job-and-shove-it mentality has suddenly prevailed. And financial advisors are finding themselves in a prime spot to watch this behavioral and economic change unfold.
In Fort Worth, Texas, Michelle Connell, president of Portia Capital Management, has seen surging home prices in the Dallas/Fort Worth metroplex influence clients’ retirement decisions. “For the last year, home prices increased on average 9% for the metroplex,” she says. “However, where it’s interesting is that local home prices have increased on average 58% over the past five years.”
An influx of businesses from both coasts has led to a higher population in Texas, and these people are now competing for the state’s finite housing supply. “I have had local clients that were pushed towards an earlier retirement due to the significant increase in their homes’ value,” she reports. “They decided to sell their homes and relocate to smaller homes in quieter and less populated areas of the country.”
She’s also seen an M&A boom of sorts among her clients who own businesses, a trend driven by the rich valuations for the underlying businesses and the inability of the families to pass those companies on to heirs. This year, there’s a third reason they might be pushed to sell their businesses—the potential for much higher taxes.
That prospect for affluent Americans is prompting Connell to advise many early retirees to double-check their living expense estimates during retirement. The threat of inflation also now has them asking whether their estimated IRA distributions are going to be enough for their golden years. “We are also looking at the possibility of much higher taxes for all income levels. Retirees that will probably be most affected are those that are middle to upper middle class,” Connell notes.
Affluent retirees simply don’t spend most of their after-tax income. “It’s obvious who can bend more as taxes, inflation and interest rates rise,” she says.
A recent survey by the Chicago-based Spectrem Group found that just under a quarter of Americans with assets above $25 million have purchased a new home or some other type of real estate since the pandemic began. Some may be looking to move, possibly to a lower-tax state, while others are looking to profit off dislocations caused by Covid-19, Spectrem suggested. Mass-affluent citizens face a more limited array of options, but they are also weighing changes in residency.
Tom Connelly, president and chief investment officer of Versant Capital Management in Phoenix, has witnessed clients and employees deciding to move more frequently than usual. “It’s more than a coincidence. They may have been thinking about it,” he says. But people “are getting antsy.”
Some people considering retirement have accelerated their plans, Connelly reports. Most of his business-owner clients looking to grow are either finding it difficult to find the right employees or people who want to work at all.
Richard Florida and Joel Kotkin, two professors of urban studies, recently speculated in the Manhattan Institute’s City Journal that America may be witnessing the biggest geographic shift since the flight to the suburbs after World War II. Big cities were already being squeezed by affordability problems before the pandemic permitted people to work from home more efficiently. Yet Florida and Kotkin add that major population movements can be self-correcting. As prices in the suburbs and exurbs soar, bargains become available in the cities.
Some see echoes of the housing boom that followed the September 11 terrorist attacks. It all began innocently enough, as Americans realized “life is short” and asked themselves what was really important. Often, the answer turned out to be family and friends. What better way to enjoy loved ones than by buying a bigger house or adding a new wing to one’s existing home?