Saturday, November 26, 2011

Death of Defined Pensions and Motorhome Sales

If you retire with a fat pension, the monthly payments on this beast might seem 'affordable'.  If you had to pay cash for it, on the other hand, it would look like a pretty scary purchase.

The RV industry has taken a big hit since 2007.  It is starting to recover, slowly.  But I wonder if the glory days of $250,000 to $500,000 Bus Motor-homes are behind us for good.  And I wonder if the death of defined-pension benefits is to blame.

Simply stated, back in the day, if you retired from a "good job" you might get a pension equal to 75% of your salary.  Some teachers get 90% of their last year's salary, which can be over $100,000!

That is a lot of money to have in retirement, to be sure.  But as our economy changes and as a younger generation moves toward retirement, those days may be gone, for good.  Bloated pensions are no longer affordable.  Rhode Island is the latest government entity to cut pension plans.  The government workers are threatening to oust the elected leaders, but as one put it, "there are still more taxpayers than government workers in Rhode Island" - the threat by the unions can only go so far.

And most of the younger generation has 401(k) plans, not defined benefit pensions.  What are we to do when we retire?  How much money is "enough" to retire on?  It is a much harder question to answer than "how much do you need per month to retire?"

When you look at retirement as a series of guaranteed monthly payments, from your pension and Social Security, well, a lot of things look affordable. Want to buy an expensive motor-home?  So long as the monthly payments are less than your monthly surplus, it is a practical proposition.  So, paying $2500 a month for a $250,000 motor-home seems rational, if you are taking in $8,000 a month in pension and Social Security.  You have more than enough left over to live on.

But, to us 401(k) people, the proposition is not based on monthly payment, but overall cost.  If we have saved up a million dollars (!!!) for our retirement, we might end up taking home about $75,000 a year, if we get $35,000 in Social Security (ha-ha) and withdraw $40,000 a year using the "4% Rule".  It is better to be a retired schoolteacher than a millionaire - in retirement!

But since us 401(k) people are not guaranteed a monthly income, the idea of taking on $2500 a month payments seems a lot scarier.  Values of stocks and investments can go up or down, and we can find ourselves broke in short order.  Our retirement will not be as relaxing as for the defined-pension generation!

And the idea of buying a rapidly-depreciating asset like a motor-home or boat, that is equivalent to one-quarter of our entire wealth just seems utterly idiotic.  Only a fool would spend such a huge percentage of his remaining wealth on a vehicle.  And yet, some will, of course.

But, I think our generation will be less inclined to do so - looking instead at the overall cost of the transaction and not just the monthly payments.

Since the recession of 2008, Motor-home and RV sales have tanked.  Many motor-home manufacturers have gone out of business and many of the remaining ones are hurting.  Sales are starting to edge up a few percentage points here and there.  But tellingly, the lower-end of the market - Class C motor-homes, less-expensive Class-A units, as well as towables and Class-B's are doing better overall.

The RV industry won't wither and die, of course.  But I suspect it will be a long, long time before we go back to the excesses of the late 1990's and early 2000's, where owning your own bus seemed like a rational proposition.

UPDATE:  March 2012.  A recent story on NPR discusses how RV sales on edging up again.  Sales are now topping 250,00, up 100,000 from the nadir in 2008-9.    This is not nearly as high as 300,000+ sold at the peak, prior to the recession.

However, a lot of these sales are in lower-priced units - towables and $100,000 and less Class A and Class-C units.  The days of the half-million dollar coach may be far behind us - at least for most folks.

The problem is, if you are an average middle-class American and retire with $250,000 to $500,000 in your 401(k) account, does it make sense to spend that much on an RV - and then live off Social Security?  Or to take on a loan at that age?  (one wonders whether LEASING will be offered for these monsters). 

For most sane, rational people, the answer is NO, although I've seen people spend their very last pennies on an expensive motor-home and then have to struggle to fill it with gas, on their Social Security alone.  People make bad choices.

But what about the very rich?  People with millions and millions of dollars?  Well, they likely aren't going to want to sleep in a campground or even a fancy "RV Resort" if they can just buy a condo on the water or stay in a 5-star hotel.  Granted, there are a few lottery winners out there who might think that owning a half-million dollar RV is the cat's ass.  But that is the exception, not the rule.

I think the 401(k) is going to make selling these beasts harder - people look more at overall cost, and the idea of getting loan payments in retirement is going to seem less and less appealing.

It is not that people will stop RVing, but perhaps look for less expensive ways to do it - and less expensive trailers and coaches are one answer.

And of course, there is a glut of used upper-end coaches on the market that can be had, all day long, for less than half their original purchase price, often far less.....