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Skip the Avocado Toast to Save for Retirement

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I’ll confess that I once ate a very expensive piece of avocado toast, at a hip coffee shop in Brooklyn, New York. It wasn’t very good, either. So I hear what Australian mega-millionaire Tim Gurner is saying when he accuses members of the millennial generation of wasting money on overpriced avocado toast instead of saving up to buy houses.

To a large extent, Gurner — a millennial himself — is just hawking his own product here. As a property tycoon, Gurner makes money when demand for real estate goes up. So unless he plans to diversify into the avocado-toast business, he has an incentive to urge young people to buy more houses. Although money spent on a house may look like savings,  a big chunk of it is actually consumption. Economists have a term for the consumption you get from your domicile — it’s called housing services. When gross domestic product is calculated, economists add the value of imputed rent, which treats a homeowner as a landlord renting to him/herself. This form of consumption has become a lot more important in economies where home values have risen. For example, here’s imputed rent as a percentage of GDP in the U.S.:

Source: Bloomberg

If millennials really want to save a lot of money, they shouldn’t be buying McMansions with big green lawns and nice picket fences. They should be living in modest accommodations with roommates or with their parents, scrimping each month and putting their savings into things like bank accounts, stocks and real estate investment trusts.

In fact, millennials are doing this. More of them are living at home. But most aren’t doing this because they’re parasites, burnouts or lazy video game addicts. A recent Census Bureau report found that 74 percent of young people living in their parents’ homes were either working or in school.

Meanwhile, millennial savings rates are looking healthier than their Generation X forebears. A 2016 survey by Fidelity Investments found that Americans aged 29 through 34 saved 7.5 percent of their earnings in that year, up from 5.7 percent in 2013. Another 2016 survey, this one by, found Americans aged 18-29 saving more of their money than those aged 30-49. Meanwhile, Generation X is still saddled with enormous debts from the great borrowing binge of the 1990s and early 2000s.

The thriftiness of millennials is hardly surprising. Our early economic experiences shape us profoundly, and today’s young adults came of age during the devastation of the Great Recession. Like the generation that went through the Depression 80 years ago, millennials emerged with pessimistic views about asset markets and a cautious approach to work and personal finance.

According to classic economic theory, millennials might even be saving too much. According to the life-cycle theory of saving, consumption and investment, people should try to maintain a constant living standard throughout their lifetimes. When they’re young and earn less, the theory says, people should borrow in order to boost their consumption, buying things like houses and avocado toast. Only when they reach middle age and their incomes rise should they start saving large amounts. Millennials, by saving as early as age 18, are defying this conventional wisdom.

So Gurner’s characterization is wrong. The young generation isn’t avoiding houses because they’re splurging on overpriced toast; they’re simply cautious about making big bets on housing.

However, although they’re already cautious, millennials might find it worthwhile to heed Gurner’s words. Young people are saving more than they used to, and more than their predecessors did, but that still might not be enough. The reason is that asset market returns could be a lot lower during the next few decades than in the past.

It’s impossible to predict asset markets with accuracy, but there are some clues to future expected returns. By metrics like the Shiller price-to-earnings ratio, markets look historically overvalued:

Price-to-rent ratios, a measure of housing market valuation, also look a little higher than their historical average. Meanwhile, it’s unlikely that interest rates are going to go any lower. And population growth is slowing, both in rich countries and in the world as a whole. So it’s reasonable to expect that stocks, houses, and other assets won’t yield stellar returns during millennials’ working lives.

That’s a reason to save even more. Unlike their boomer parents, millennials can’t count on asset markets to do their savings for them. If they want a comfortable retirement, young people should consider doubling down on their frugal ways.


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