Saturday, April 22, 2017

Financial security versus independence

The changing face of the United States should be viewed as an opportunity
James E. Smith and Alex Hatch
In 2015, the Bureau of Labor (BLS) Statistics released the results of a study dubbed the “National Longitudinal Survey of Youth 1979.”  This survey observed the employment habits of nearly ten thousand men and women of various groups over a 30-year period. Of all the data presented by the study, two numbers most characterize the evolution of the American job market: 11.7 and 93.7. 
The former represents the average number of jobs a person will work between the ages of 18 and 48; the latter the percent of people age 30 to 34 who will spend less than 15 years with any single employer. 
These numbers reflect the downward trend, if not the death, of the one-time American ideal of being a “company man.”  The average American no longer aspires to grind through a nine-to-five job in his or her perfect first employment scenario. If they did initially, the volatility of the current job market seems to force a more thorough review of reality. 
At the very least, they certainly don’t expect to be rewarded with a mantle clock or gold watch after thirty-plus years of faithful service. Even in their early to mid-thirties, an age when most people begin to settle down and raise a family, the average American is still willing to change careers and locations repeatedly to further their long-term economic viability.
In most cases a planned career change provides an improvement in living and working conditions, as well as a boost in income. For most, these improvements are reflected in the standard of living enjoyed, and also with measureable improvements in future financial security, improved net value, greater liquidity, and larger retirement benefits.
For some, the correct choices may also provide the ability to cross the threshold where financial security becomes financial independence: defined as the ability to continue the same, or better, lifestyle without a job; the much-heralded early retirement. 
The frequency for this likelihood increases for the case where workers take greater personal and financial risks early in their career by investing in additional retirement plans, stocks and bonds or, more significantly, by contributing their time and future income to innovative technologies and start-ups.
Accordingly, spurred on by the age of the internet, numerous opportunities have sprung up in the last 30 years, resulting in a more than eight-fold increase in millionaires. That demographic can be used here to illustrate the number of people who have become financially independent.
More specifically, in 1988 there were only about 1.5 million millionaires in the United States. By 2017, this number had increased to 10.8 million, showing that, as investment savvy workers and the innovations they support have grown, so too have the number of financially independent Americans.
By and large though, employer mobility, as enjoyed by American workers, has often come at the cost of their financial security.  According to the BLS study, during the 30-year period the bureau analyzed, the subjects spent a total of 22% of their time from age 18 to 48 either unemployed or out of the workforce.  This means that they were out of the working world for nearly seven years during what should be the most productive portion of their lives.
While a good portion of this time was likely related to the pursuit of higher education and training, the result is still the same: the average American now spends more than half a decade out of the workforce during their working careers. This results in years of lost wages and promotions for the individual, lowering their future earnings potential and seniority in a position, in many cases affecting their job security. 
In a broader sense, this also means that there are fewer citizens who can make positive contributions to the local economy, as well as to the government in the form of taxes. Today’s employee knows that stability in a career is not a given, and there is very little chance that the government will provide any kind of substantial fallback for them should their employment situation change. Thus, their historically strong employer loyalty has given way to increased financial depth.
The days when Social Security and even company pension plans would provide for future living conditions and survival security are long gone.  Even with all the optional retirement vehicles, the reality is that the American workers must again secure their own future financial security, independent of government-mandated programs that may work initially but can never keep pace with changing economic, demographic, longevity and life-style realities. 
Workers must invest in their own future, first through education and training and then by investing in public and private markets, as well as in innovation and entrepreneurial opportunities, not to mention second jobs or the equivalent from their spouses and other family members.
According to the 2016-17 Global Entrepreneurship Monitor report, there has been a significant uptick in entrepreneurial activity in the last decade. Most notably, in 2016, 13.6% of all American adults ages 18 to 64 were involved in either the creation or the operation of businesses that are less than 42 months old.  Thus, millions of Americans have decided to dedicate at least part of their time and financial security to the pursuit of innovation and wealth creation, instead of working exclusively in the corporate world. 
While entrepreneurship entices Americans with the promise of great wealth, it is important to note than 90% of all startups fail. For the sake of financial stability, Americans must understand that the social safety nets currently in place simply cannot support entrepreneurs who fail in their endeavors. They must have their own savings and safety nets to help them survive any failures they may encounter.
We are ultimately responsible for our current situation, and more so for the future, since we have time to make the plans necessary for that future lifestyle we have set as our goal. It also means we can bet the house on one throw of the dice. Proper planning is essential and even risk taking must have a safety net.
For these and numerous other reasons, it is important for the stability of our citizens and the social welfare system we enjoy that we take charge of our own financial security and not expect to find the solution to our lack of personal planning during the eleventh hour of our working careers. Programs are in place to provide the fundamental mechanisms for wealth accumulation. We just need the discipline to take advantage of them. 
More importantly, with that same discipline and a proper outlook to the future, there appears to be a plethora of ideas that will allow the transition from hand to mouth to financial security and possibly to financial independence. The data show that the United States is primed to make innovation another way to create security and independence. It is our responsibility to make it happen.
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James E. Smith, PhD is a professor of Mechanical and Aerospace Engineering at West Virginia University. Alex Hatch has a BS in Mechanical Engineering from WVU and is studying for his Master’s Degree in engineering at WVU.
 

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