The Truth Behind the Numbers That Could Impact Your Retirement
“50% of small businesses close.”
How many times have you read some variation of this headline, or heard that number thrown around in casual conversation? You might have even used this “conventional wisdom” to talk yourself out of starting your own company. Fifty percent makes it sounds like your odds of success are on par with flipping a coin and guessing heads or tails. But that’s the tricky thing about numbers: taken out of context, they can be deceiving. Let’s dig into that 50% a little deeper and ask, “Why do half of small businesses close?” According to the Small Business Administration, the number one reason, yes, is a lack of revenue. Number two? The owner retires. Number three? The owner sells the company. So, two of the top three reasons that most small businesses close aren’t necessarily negative! They might even represent a lifetime of fulfilling work leading to a profitable exit for the business owner! Recently, you might have come across some big numbers related to our economy that have you nervous about your nest egg. On today’s show, we dig into those numbers as well to separate the facts from the hype.
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1. $4 trillion in debt!
Back in February, CNBC published an article headlined “Consumer debt hits $4 trillion.” Inside the article was a graph that charted our debt going back to the late 1950s: a diagonal line trending up, up, up, like a mountain. In fact, the graph was titled, “Mountain of debt.”
Scary, right? Not really.
Whether we’re talking about your household finances, your business’ books, or consumer spending, debt is only one half of the balance sheet. The other half is assets. So, while $4 trillion in debt sounds like a lot, it’s a lot less worrisome when you see what’s on the other side of the ledger: $124 trillion in total consumer assets, according to data from Q4 2018. Debt has never been higher because our nation’s wealth has never been higher either.
2. National debt is higher than GDP!
Currently, our debt to GDP ratio (GDP is Gross Domestic Product, and it measures the value of all the finished goods and services produced within a country's borders) is around 105%, meaning our national debt is higher than our GDP. But this level isn’t out of line with what’s happened in the past. After World War II, we were at 120%. The ratio declined to around 40% in the 1970s and has been rising gradually since the 1980s.
While having more debt than GDP sounds bad, the reality is that the cost of carrying that debt – the debt service ratio -- is at some of the lowest levels we’ve seen in the last 40 years. Despite recent moves from the Federal Reserve, interest rates are still historically low. That means, generally speaking, people are able to pay off the credit they’re using.
And, crucially to the economy, so are corporations. In fact, debt service ability is one of the key data points my team uses at Keen Wealth to determine whether or not a particular company is investable. An even better indicator, in our opinion, is earnings yield, which is a corporation’s earnings over its total enterprise value, including assets and debt. This ratio gives us a broader indication not just of a company’s balance sheet, but of how well the company manages its business to generate earnings.
That concept might be a bit too complex for a snappy cable news headline, but it’s an example of how we go deeper into the numbers to find better data for our clients.
3. Workforce participation is lower than it was during the Financial Crisis!
Before the financial crisis in 2008, workforce participation (folks who are either working or looking for a job) was at 70%. Currently, we have 63% workforce participation.
What’s changed in the last ten years?
As we discussed on a recent podcast, quite a bit.
On the one hand, economists who are more pessimistic would argue that workforce participation has dropped because the jobs available aren’t very good. And it’s true that advances in technology and globalization have made it tough for some folks to find good full-time work, especially unskilled laborers.
But there’s another big group that’s started to drop out of the workforce too: retiring baby boomers! Unfortunately, “Many Americans at retirement age are starting to retire” is another headline that probably wouldn’t get many clicks.
We’re not in the “clickbait” business here at Keen Wealth. So please don’t hesitate to call us if you need help sorting through the numbers that will be most important to your retirement planning.
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About Bill
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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