The Baby Boomer generation is most often defined as those individuals born between 1946 and 1964. The Vietnam War, recession, stagflation, oil crisis and double digit interest rates was the landscape as the double income households entered adulthood and the work force. Not knowing how these circumstances would shape our lives, this well educated group made decisions that resulted in this generation owning approximately 50% of America’s wealth. 

Around the 1980’s Baby Boomers decided to buy real estate by borrowing $100,000 to buy that first home. At the time of signing escrow documents and the 30 year mortgage at 14% to 16%, the documents disclosed interest payments to the Bank of four to five times the value of the home we were buying and we signed. An investment is the present value of the future value of an investments earnings.  Around the 1980’s, rental income of $1,000 per month times 12 divided by its value of say $100,000 is a 12% current yield not return before income taxes, insurance, property taxes, repairs and maintenance.  Bank CD’s and the mortgage rates were higher than 12%. And we bought real estate knowing this.  We must have known that interest rates were going to decline. Therefore, $1,000 per month in rent (adjusted for inflation) times 12 would equal a 2% current yield in 2020 before taxes, insurance, property taxes, repairs and maintenance; making this real estate worth $600,000. Hence, a rate of return of 4.5% ($100,000 to $600,000 in 40 years before income taxes, insurance, property taxes, repairs and maintenance). 

In 1980 the S&P 500 was approximately 400 points and is 3200 points today. Eight times the value before dividends and 11%+ compounded yearly with dividends reinvested.  Using the rule of 72: 72 divided by 11% = ~6.5 years it takes money to double. 40 years divided by 6.5 = 6+ times. So that $100,000 = $200,000 = $400,000 = $800,000 = $1,600,000 = $3,200,000 = $6,400,000 as its sixth double. Wow, $100,000 in the S&P 500 in 1980 would be $6.4 million today. 

Boomers were the luckiest generation because anything we put money into that had earnings went up in value because interest rates used to calculate its value went down.  As always, better to be lucky than smart.  Lower interest rates reduced our monthly payments too. Home equity, refinancing and cash take outs allowed our children go to college, buy cars and other goods that would never have been possible if we did not buy that home with a mortgage at 14 to 16%.  We were so lucky not to go broke.  So give the next generation credit for not buying real estate because we boomers used up all the financial luck that comes with declining interest rates.

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