Basing a system on people’s voluntarily saving for 40 years and evaluating the relevant information for sound investment choices is like asking the family pet to dance on two legs.
What other skills along with "saving for retirement" are we all apparently hapless victims of our own incompetence for lacking?
I'm not going to argue that "people" haven't been shafted by changing times and a variety of cultural and economic forces, but I take offense at the comparison to a dancing pet, as I think any self-respecting reader should. Or are we supposed to chuckle with recognition at the absurdity of being trusted with our own finances? A similar discussion of the unemployment problem would run along the lines of: "Who really knows how to apply for a job, right? Or calculate what your salary needs to be to afford rent after taxes... we're not freaking accountants!"
We are all going to get old one day, stop working, and still need a private source of money (personal savings, inheritance, pension, etc.). I don't think most people stop and truly reflect on this responsibility. They should drill it into us in school, really, along with the multiplication tables and long division. I don't remember a single lesson on what a stock is or how to balance a checkbook. Or, for that matter, how to make a friend, find a mate, or display leadership. As an adult you eventually realize what's really important in life. Financial solvency is not the pinnacle but it's a big one.
In the paragraph immediately after that, she notes that retirement planning requires not merely competence, but prescience: You need to know when you'll retire, and when you'll die. You need to know when you'll get fired, get sick, have a child. You need to make investments that will consistently beat inflation over the course of decades.
Now, we could debate to what extent it's possible to guesstimate these things, and to what extent it's reasonable to expect people to do that themselves, but I think that may be missing the main point, which is: Why? Why should we want to require every individual to perform these calculations for themselves, knowing that many will get it wrong and become a tragic drain on our last-resort emergency support system?
Why, when it would be so easy (and so much cheaper) for us to assume some collective responsibility as a massively productive society to take care of our individuals who are no longer productive, and let no one have to die in poverty?
Saying that "you'd have to know the future" is just an overly dramatic way of talking about risk, and her points are overblown for effect. I could see your argument in a thread about healthcare, say, but we are talking about personal money, on top of any (current) insurance or social programs. There is no universal personal risk elimination system that smooths out risks due to the stock market, personal circumstances, etc. and makes sure we are never forced to live a less comfortable life than we anticipated.
Even if we decided to compensate all retirees for lack of savings or income, to say it's obvious or easy to do so is obtuse.
The current model for retirement savings, which forces individuals to figure out a plan for their retirement years, whether through a “guy” or by individual decision making, will always fall short.
Surely "a plan" is the very least we should be expected to have regarding our finances, not some unjust burden thrust on us by outside forces?
I think it's fair to say a solid financial plan could be the difference between comfort and affluence. For it to be the difference between comfort and poverty is inhumane.
That's where I'm coming from: No one who spends their life contributing value to our society should have to live out their final years and die in poverty. It's just not right, and there's no good reason to extend that right only to those individuals who have the ability to manage their own retirement.
Talking about risk and education and so on is misdirection. This is just something a civilized culture should do.
Are you suggesting the U.S. government which is currently over 15 trillion dollars in debt and climbing would be better at planing for people's retirement? Because all evidence points to the contrary (for example if there is a surplus in social security taxes they spend the money on other stuff instead of saving or investing it). In fact one of the reasons it's so hard to save for retirement these days is because interest rates are being kept insanely low by government policy in order to support the ballooning debt.
What ever happened to spending less and saving more, and since when did having to move into a smaller house and spend less extravagantly in retirement become some horrible hardship that required collective intervention?
The trouble comes when Social Security stops bringing in a surplus and has to start redeeming the trust fund. Then the Treasury has to start paying back the ~$3 trillion it will have borrowed. We'll see how that goes.
Great idea! I have some surplussavings. What I'll do is lend it to myself so I can spend it on stuff now, then demand it back from myself in 10 years time. Genius! Except what actually happens is we demand it back from our children after we've retired. Sucks to be them.
"... to assume some collective responsibility as a massively productive society to take care of our individuals who are no longer productive".
It's called "social security" and "welfare". It's the safety net for those without "competence" and "prescience" (or unlucky ... whatever). 401Ks, Roths, IRA, pensions are for those who do have "competence" and "prescience".
The silly part is that finance courses used to be common. My parents took a basic finance course in grade school, where they learned how to balance a checkbook. Those all got cut for whatever reason (budget, not applicable to college entrance exams, etc).
I have no idea why the first time people encounter personal finance is either a college course or when they realize they have bills to pay as an adult
And, for what it's worth, I taught my dog "close the door" last night. I've seen plenty of dogs do "stand up" on two legs as a trick. Honestly, the OP didn't even use a good analogy. If it's as "hard" as teaching a dog to stand on two legs...well, that isn't really very hard...
I took a civics class in high school that touched on a lot of this - how to budget, the magic of compound interest, the real costs of having children etc. We even had to carry around a raw egg for two weeks as a proxy for a child, the idea being to give you a sense of how much attention children demand.
Didn't stop me from getting in serious credit card debt, though.
> I have no idea why the first time people encounter personal finance is either a college course or when they realize they have bills to pay as an adult
Oh, it's not a college course. It's the rep from the credit card company with a booth at college orientation giving out free t-shirts if you sign up for a card, one that has a $90 annual fee, a 25% interest rate, and a couple dozen other gotchas.
Well, until the Credit Card Act of 2009. Now you have to be 21 to get a credit card unless you can demonstrate significant means to pay it off or have a cosigner. I managed to sneak through the last year before this went into effect, but considering all the issues my friends have just with their student loans, I'm sure it's saved people a lot of misery, even if the nanny-state aspect of it still rankles me a little...
It's pushed the limit out 3 years, but I wonder if it's really changed anything? They're 3 years older, but are they 3 years wiser? Wisdom tends to come from experience, and since they don't have any experience with credit cards... Well, I doubt they're wiser about them.
At least they're closer to having the means to pay it off. At 21 (as a college senior) you might have a part-time job, you might have an internship, or you might be full-time somewhere. As a college freshman or incoming freshman, chances are you won't have that income. As a senior, theoretically you should be done burying yourself in debt, and beginning to have the means to pay it off.
>This do-it-yourself pension system has failed. It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers.
It has failed because it relies on people to make rational choices and to save money. To be fair, those were considered reasonable expectations until the last few decades.
You don't need 'investment expertise'. You put your money in a Vanguard index fund, and you don't pull it out until you're done working. With a savings rate of even 10%, you're golden by traditional retirement age.
The main problem I have with .. pretty much every article on retirement ever is this line:
>To maintain living standards into old age we need roughly 20 times our annual income in financial wealth.
Really? Your living standard is entirely dictated by how much money you spend?
I had a conversation with my mother recently about their retirement plans - she's "done the math", and they won't be able to retire until a few years after they planned to. I was somewhat surprised, and asked for details - she apparently can't picture living comfortably on less than $130,000 per year. My wife and I have a comparable lifestyle, and are living on $31,000 without even working hard at it.
My advice to everyone: spend less.
You're chucking great gobs of money at things that don't make you happy; just STOP DOING THAT and you will have enough to retire on by the time you're 50.
Here's a great rule-of-thumb that I've gotten by with: Never ever compare the cost of your standard of living to someone else's. You just don't have enough information to do an accurate comparison.
My in-laws buy a lot of stupid stuff (IMHO) that saps their spending money. Do you think they're going to stop buying stupid little knick-knacks when they're retired? Probably not. Should they? Probably. But humans have a hard time changing their behavior.
So what this woman is proposing is to work with and solve the problems we have, not try to magically wish them away or pretend that we can easily change the behavior of the 400mil Americans overnight, and I tend to agree with her that it's a good idea.
> You don't need 'investment expertise'. You put your money in a Vanguard index fund, and you don't pull it out until you're done working. With a savings rate of even 10%, you're golden by traditional retirement age.
It actually does take much more investment expertise than the average American has to know what a Vanguard Fund is, to know that it's a safe bet etc.
I would argue that is a basic failure of parenting and education, not a financial failure.
Why aren't basic finance classes taught in grade schools anymore? How hard is it for parents to teach their kids to save 10% of their income, and to put it into an IRA?
Edit: Before anyone points it out, I know the IRA is a relatively young investment vehicle (the 70's). Swap IRA for any sane long-term savings and retirement plan.
Agreed. However, betting that over the course of your lifetime, the entire market (as represented by an index fund) will trend upwards seems like one of the safest bets around. And conversely, sticking your money in a savings account entails risk as well: you risk having your money decrease in value as inflation occurs, since you get paid much less interest than the rate of inflation. The question then becomes "which investment has the best combination of risk and reward?".
30 year US Treasurys are currently ~2.7%. Assuming someone saves 10% of their pre-tax income each month between the ages of 25 and 55, at that interest rate, they can look forward to 5 times their average annual income to sustain them through their last 20+ years of life. That's a 75% cut in income. Stocks are theoretically higher yield, but as others have argued, normal people shouldn't have to worry about stocks, and more importantly, there's a justified fear of market crash, which could be... appreciably lower return than Treasurys.
The idea that people should have to speculate in stocks to tread water, index fund or not, is absurd and historically abnormal. I also happen think that dumping money into a stock index fund will be a good way to lose over the next 10 years. It's been a really bad idea for many long historical periods.
It should be possible to buy CDs at a few points above inflation. This was the historical norm. People shouldn't have to "invest" at all to preserve and modestly grow the value of their earnings. The vast majority of people have no business owning stocks or bonds. The only reason you can't get a decent interest rate is the crazy monetary policy of the last 40 years.
Crazy? Seems like a smart move for shareholders to ask for a government policy that increases stock prices at the expense of other investment vehicles.
It's funny how most (all?) government policies result in a wealth transfer. If it's not directly buying goods and services from a corporation on behalf of the people, it's a policy to encourage the people to spend on one thing instead of another. There's nothing inherently wrong with that, but it's good to notice who stands to gain.
>It's been a really bad idea for many long historical periods.
Name a historical period of longer than 15 years in which the market as a whole has lost money relative to inflation. That didn't even happen across the Great Depression.
Furthermore, market history did not begin in 1910 in the United States. Stock markets go back hundreds of years in many countries. A global long-view perspective is worth a lot more than 90 years of US data. And from that perspective "stocks for the long haul" have very often been a bad idea.
Your chart shows a flat spot of 16 years across the 80s, and another one of about 25 years measured from the very peak of the market in 29.. So you're right, though that figure isn't impressively different.
The figure I was remembering was actually about a 60/40 balanced stock+bonds fund like VBINX, which is what I'd recommend to anyone anyway.
Fantasizing, man? Now listen the real story. I survived 2 currency crashes, when savings of the whole 2 generations of the family were effectively nullified overnight. The euro is now damn close to such crash, and the US dollar as well. From my exp and from the good advice of my granny, I can only tell you to invest into good tools, safety matches, soap and food stash. Everything else is just fiction.
Well, the retirement savings are somehow (directly or indirectly) invested into a stock market, so they are safe from inflation, or even complete currency crash. When inflation is high, you even benefit, because people's consuming activity increases as there is little they could do to save money which is being burnt with inflation, so they spend, improving the bottom line of the companies they buy stuff from - and stocks of which you have. Or they buy stock directly, increasing real price of stock directly by increasing demand.
That is valid even in the case of extreme inflation - like 1923 Germany. People suffered, but stocks didn't.
Only exception from that rule was the 70s oil shock, but that wasn't a real crisis (economy itself was doing just fine, only the oil became expensive for purely external political reasons).
Any pension was lost? Yes stock market collapsed and so the savings on some funds which invested into stocks. But now they have nearly completely recovered, and 3 years which have passed is too low for a planning horizon for pensions. Last 10 years have been turbulent for stocks, with market (and overall economy) performing well below long-term average, and yet, dividends included, index funds post a modest profit over 10-year period, inflation-adjusted (in part that was because the inflation was low).
Out of curiosity, which currency crashes were these? I would not have my money in the bank if I was in Greece today, but I have most of my savings in stocks anyway, globally distributed...so it doesn't really matter.
The Soviet rouble, and the Latvian rouble before the LVL currency established.
Just curious, will you still have access to your stocks if the Internet collapses?
I'll still technically own them, but I'll have to access my broker (which is located in my own country) by some other means, i.e. telephone, mail or physically showing up at their office. About 50% of my stocks are owned through a very large fund, which mainly operates by mail anyway. I guess the stock exchanges themselves will at least attempt to stay open in such a scenario; it will probably be chaos but the stock market is at the basic level just a list of orders, which could in principle be sorted manually. Or at least without an internet connection. But you'll still own your stocks as long as there is a paper trail _somewhere_, worst-case you might not be able to sell them for a while.
If the internet became unavailable for a long time, it would be a very interesting situation regardless...during a calamity like that, you might be better off having all your money in real estate or other physical goods.
We used to have real pensions from companies, too. It used to be that, by working for a company, part of your benefit was that they'd pay four your retirement. Of course, this is bad for the bottom line, so they cut that.
This was definitely a bad thing for the economy. A lot of people will stay on the job they hate, having a lot of idea what else to do, just not to lose the pension.
> To be fair, those were considered reasonable expectations until the last few decades
Ahistorical nonsense. "People USED to save! That's why people used to generally end up desperately poor when they were elderly, and also is why the US implemented Social Security."
>My advice to everyone: spend less. You're chucking great gobs of money at things that don't make you happy; just STOP DOING THAT and you will have enough to retire on by the time you're 50.
I'm glad to see a comment on Hacker News in which the author describes how amazingly thrifty he is and how irresponsible and shortsighted and stupid everyone else in the world is. It's been ages since anyone has posted anything along those lines and really helps our discussion of large-scale social issues.
Sum up the premiums on your insurance, as well as the maximum out-of-pocket expenses on that insurance, and you have a good estimate for your maximum medical expenses in a year; you should get a number that comfortably fits in a 31k budget. Insurance exists to make medical costs predictable and budgetable.
Hence why I said "good estimate" rather than "absolute maximum". However, the kinds of problems that health insurance won't buffer for you will generally screw you whether you have 31k/year or 131k/year.
Here's my problem with the American system- we laugh at European tax rates as being "too high." But let's take a look at what the European gets for his hypothetical 50% tax rate and what I get for my 30%: he gets healthcare, pension, low cost education, good public transport. Me? Um... all of a sudden my "low tax rate" (vs Europe) doesn't seem that low.
Living in NYC, I pay 48%: 35% federal, 13% city. So I pay European tax rates. People in California and many other "nice to live in" states have similar rates.
So it is not even nominally lower, even if you don't count education, pension, healthcare and public transport.
An even darker thought: even "the good case" is built on the idea that you can effectively hit 8%+ risk free returns with a reasonably diversified portfolio.
This is absolutely a valid concern. The stock markets have been effectively stagnant for the past 10 years. Sure, we had a good run between 1930-2000, but long-term patterns are as unpredictable as short-term ones.
This do-it-yourself pension system has failed. It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers
To what extent is the gap between the returns of normal people and of professional investors the product of a gap between those returns? How much do professional investors profit off the ignorance of normal people?
It seems likely that this is a number somewhere between 0% and 100%.
The bigger issue is that when something becomes "conventional wisdom", it ceases to be effective. The stock market in our current post-dividend era is largely a sham, in this regard. "Put your money in an index fund and forget about it" is sound investment advice as long as increasing numbers of people are doing the same. Once the population growth tapers off, as it has, this is no longer a surefire way to save for retirement.
This is very close to viewing the stock market as a zero-sum game, or the "baseball card" analogy which was spread around a few years ago. This is a fallacy; stocks do not derive their value from how popular investors find them. Rather, the correlation is in the opposite direction.
When you're buying a stock, you are actually buying part of a company...and assuming a reasonable stock structure and corporate governance, being on equal footing with all the other owners of the company.
These business owners, dividend or not, want to maximize the return they get from the business. Whether the company pays a dividend or not doesn't factor into the equation - part of the company's balance belongs to you, regardless of whether the board decides pay it out in a given year or not. If the board does not follow the interests of the shareholders, a shareholder lawsuits or board changes will result.
Pre-dividend/stock buyback Apple is an excellent example of this, although examples this dramatic and obvious aren't common. The stock price was increasing steadily in lockstep with the company's balance sheet until the board decided they couldn't use the money for anything useful and decided to pay it out to the shareholders.
[Edit: Actually, share prices in the funds I own are historically low relative to common measures of company valuation, price/earnings or price/book value. Earnings to market cap for these companies are something around 8% on average. So either stocks are historically cheap, or earnings are about to drop by more than a factor of 50%. Seems like a better bet than a negative-real return bank account to me].
I wouldn't got that far. A huge chunk of US corporate profits comes from overseas, which wasn't the case 30 years ago. Population growth in emerging markets is part of that, but rising incomes in those markets plays a huge role too.
Sometimes I think that we have an even bigger problem with retirement: it comes at the wrong end of our careers!
Make a list of all the things you'd like to do if you didn't have to work. For most of us, that list would probably include a mix of intellectual pursuits and physical pursuits.
With the current system, I'm supposed to work 45 years, then I can retire and get to work on that list of my interests. Hopefully I'll still be mentally able to pursue my intellectual interests, but my body will be old and may not be up to the physical interests. Broken bones and other serious injuries are usually much more dangerous at 70 than at 25.
It would be so much more sane to flip this around. Give people their retirement benefits right after they get out of school. Then they can spend 10-20 years pursuing their interests while their bodies are still resilient. Eventually, most people will get tired of that, or their bodies will be sufficiently battered, that they'll want to settle down to a more quite life. Then it is time to get a job and work until they die.
I actually know a fair number of people who do essentially that. They get a low paying research job a a university, where they are given a fair amount of autonomy in what they research. Then, they might decide to settle down and get a better paying job so they have something for their actual retirement.
Unfourtuantly, this approach is not open to all interests.
The ridiculousness underlying the ridiculousness is that it's possible for retirees to not retire without a major downgrade in their standard of living. Such a phenomenon would be literally unprecedented in human history.
The fact of the matter is that "saving" in the stock market is completely artificial. "Saving" money doesn't create resources for you to use in retirement, it gives you an earmark on the resources produced by people who will be working when you retire.
With current technology and the foreseeable resource limits we'll be encountering over the next 30-50 years, it's just not physically possible for a small working generation to produce enough to support both itself and a large retired generation at the same standard of living the retired generation was accustomed to when it was working.
"To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. "
Just because you are used to spending a certain amount of money while working (you probably pay for transportation and maybe lunch, work clothes etc which all go into chipping away at the $100k not to mention the taxes you pay on being in a certain income bracket and things you buy that you don't need because of how secure you feel that are totally discretionary and you would be happy w/o like a newer digital camera) does not mean that that should be the base number to multiply anything by.
There are also many things you spend money on that you can cut out as well. You don't have to buy as many gifts you don't have to attend as many entertainment things you don't have to dine out as often as you do when the money is flowing freely. If you raised children and by the time you retired they moved out you don't spend money on them like you used to. Or at least, given the proper set of circumstances, hopefully you don't have to.
Added: People's spending, like companies, tends to rise to the level that they have available to spend. Not all of this is fixed spending that you can't get rid of.
Ridiculous should be determined by how well something works.
To predictably let a huge segment of the voting population to become destitute is arguably ridiculous. Human nature hasn't changed. Whether or not a mob deserves their state makes little positive impact on the mob. The fact that such a mob exists is a sign of policy failure.
How, then, do we change policy? If public funded retirement doesn't work, and private funded doesn't work, and individual funded doesn't work... what are we left with?
Should we go back to the 19th century sort of, "family funded" model?
Should we simply let all of the little old ladies sink or swim?
I don't know... I'm left with more questions than answers here.
If public funded retirement doesn't work, and private funded doesn't work, and individual funded doesn't work... what are we left with?
Cure aging. Seriously. The fundamental problem is that we have a rapidly increasing number of people who can't be economically productive due to physical and often mental decline, and who are very expensive to keep alive. Arguing about who should pay for all of this is just shuffling deck chairs on the Titanic.
We're about to enter the robot-age, during which most manual workers are going to lose their jobs. That's a lot of people who won't have much else to do other than look after old people like your children and mine.
> There is something useful in the pragmatist view.
More specifically, there's just some things one should pragmatically avoid. Running out of toilet paper: don't let it happen. Doing the same during a part: even more so. Angry mobs of the destitute: If one can see this one coming for decades, one simply has no excuse. It just shouldn't happen.
I've always thought there was one critical flaw in the every man for himself retirement model (where each person is responsible for saving for their own retirement, as we have in the US) vs a pooled plan like social security or a pension. In the every man for himself, everyone has to plan for the worst case (we live to be 90+). In reality, many of us will die well before that, some before we even retire at all. A pooled plan like a traditional pension can plan actuarially for the average, so the total amount per person by which the plan needs to be funded is far less than what each individual has to save when he is on his own. The current US model makes us all save much more than we (on average) need.
I don't believe 7% is enough. When i did my own math it got me to some like 15% figure. Which is easy to stick with in my opinion.
Also, since retirement is a 70-year plan (you start after college, and you finish when you die - and insurers now put in their calculation than the average person aged 30 now will die at 93) - you don't need 'funds'. Just put money in the stock market. This is scary when you have a 5-15 year planning horizon, stock market performance over such an interval varies widely. But over 70 years, you get nearly same return whatever 70-year interval you take, so simply buying stocks is okay for a retirement plan.
Past performance is not a guarantee of future results.
We used to think that all you had to do was work for a company for 40 years in the same job and you would be taken care of with your pension + social security. Pensions are just about nonexistent these days. Social security is going to be gone after the baby boomers suck it dry. And, personally, I don't have much confidence that blindly throwing my money into the stock market for 70 years is going to help me more than smartly saving my money. The current climate on wall street seems to be to rip off retail investors and take advantage of pension funds.
And that's why you should invest in low-fee index funds. You can't beat the market, so don't try. Just dump your money into a few good funds and ignore it for 60 years.
You have to do something with your money. If you just stash it into a savings account you will literally lose money to inflation. A good mix of index funds (or target retirement-type funds) are probably the "safest" long-term savings you can do with your money.
You probably won't become a millionaire, but you probably won't be destitute either.
Yep! In fact, the various Vanguard "Target Retirement" funds are simply different allocations of these three different funds. As the "retirement date" get's closer, it shifts more of the allocation over to Total Bond Market fund and out of Total Stock and Total International
Anyway, there is nothing better than stock market. I don't want to tell obvious things, but buying stocks are buying what the economy is made of. Everything else, like real estate for example, is just a direct or indirect derivative of stock. Investing in anything else (of course as long as we stay in a legal field, and mean only passive investment) just trades profits for risks. Best way of doing so is a balanced portfolio of stocks, bonds and cash, due to inverse correlation between stocks and bonds most of the time, but anyway, this isn't required on a 70-year timeline. If stock market won't give you the return, nothing else will - even bank deposit can be 'diluted' with inflation.
Social security, pensions etc. - agree, these are on the way out due to demographic changes. But that's a point for individual retirement savings, not against them.
And yes, there is no such thing as stock performance prediction, this has been proven many times since the 1930s. So funds are useless in the long run - just a way to trade performance for risks, and pay a fee (while i agree that in the case of Vanguard, you lose almost nothing because the fund is really cheap).
You have to be pretty good to pick individual stocks which will perform well on a 70 year timeline. Are there even more then 20 companies that have been publicly traded in the US for that long?
okay, okay, i got your point. Yes as long as the fund is a really low fee one, like Vanguard's ones with around $10 per $10000 a year invested, that's nearly an equivalent to a stock market minus the pain of balancing the portfolio yourself.
But again, that really means nothing compared to the fact that people don't really save at all. I know a lot of people of my age (early 30s) for who the phrase 'got no money' means 'maxed out all of my credit cards and can't get a new one'. Some of them are MBAs so it's not about financial literacy.
Technically we already came up with a solution to "force" people to save for retirement. It's Social Security. Unfortunately the economics of the 1930s don't work quite as well these days (people living decades longer and the base of workers shrinking instead of growing, families no longer caring for their parents, etc...).
It is really sad to hear my friends in there 30's saying they haven't started saving for retirement yet, it's so hard to convince people to do this because it's "someday" money, and people like to see instant results.
First, there is no way you should have the same level of spending after retirement as before. It does cost a fair amount of money to work. To name one item, traveling to and from work is not normally cheap.
I do believe we need a safety net, but company pensions are no longer a reality and the "company man" is long gone. I wonder about some public / private partnership for a "public pension plan". I think with us all living longer, the prediction problem is going to be more acute.
Really, it is much like the health care uncertainty of that "major event". I really think if there is a role for government, traumatic event insurance and an actual pension would probably be it.
I would expect to spend much more after retirement because of all the extra free time I'll have. Even if I just decide to stay home and work in a garden all day I'll have to spend money on plants, tools, dirt, etc.
You might be the exception, life is certainly not one size fits all. But take a look at how much you spend to work each week. For a lot of people it actually adds up to a pretty hefty total. A lot of people eat at a unsubsidized cafeteria, have travel expense such as gas / parking, which leads to more frequent repairs / maintenance, and work clothing costs.
Also, the author's example was a household that makes $100,000 annually and saves 10%. They must work 52 years to save the $2.3 million needed to retire.
If they increased their savings rate to 50% they could retire after 17 years and would only need $1.3 million.
If they increased their savings rate to 80% they could retire after 5.6 years of work and would only need to save $544,000.
The chart on the link is misleading. There is no need for 'withdrawal rate' parameter, because it really depends on how long you expect to live after you retire. The later is retirement age, the higher the withdrawal rate should be, so the chart should calculate it rather than make me enter it.
Also, with the defaults it has (5% above-inflation profit and 4% withdrawal rate), it results in the savings that never end but continue growing at about 1% per year, which is an overshoot for someone who just wants to retire, not leave a huge legacy.
> There is no need for 'withdrawal rate' parameter, because it really depends on how long you expect to live after you retire.
That calculator intentionally assumes "forever", which gives you a safe margin for error; that doesn't actually change the amount you need to save by very much. Also, as the URL suggests, that calculator aims particularly at people trying to save heavily and retire early, and given that, the difference between "save enough for 50-60 years of retirement" and "save enough for an indefinite retirement" doesn't add up to very much.
> Also, with the defaults it has (5% above-inflation profit and 4% withdrawal rate), it results in the savings that never end but continue growing at about 1% per year
Again, margin for error. If you count on withdrawing exactly what you can get from your investments, then whenever those investments don't do so well in a particular year, you'd get significantly less income than you planned on.
OK. I did my own estimates in an Excel spreadsheet with some VBA in it, using S&P 500 data (growth, dividends) in a monte carlo-like pattern. That got me to about 15% savings rate guaranteeing 95%+ chance that my money will outlive me. Something i am quite happy with.
And yes, i didn't use 'inflation' at all. Prosperity and 'good living standards' is relative. If an old guy started saving in 1960 when he was 25 and he's now 77, what was good living standard then is now poverty. I used nominal GDP per capita to 'deflate' my net worth over years, data from www.measuringworth.com.
Another reason why i don't recommend using 'inflation' is that everyone has different consumer bundle so his inflation is different from the CPI. And the measurement of inflation is overally broken, i don't trust it, and believe it is meaningless. As long as you don't face risk of starvation, there is little importance on how much stuff you can buy, how you do vs others is important.
If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security.
Sounds about right. And also why I have no plans to retire.
If I can find a job at some point because I'm too old, then I will start a business. And maybe that's why most startups are actually created by people in their 40s, 50s and older.
One huge problem with the evolution of the retirement system has to do with how retirement savings are vulnerable to outside influences. The stock market is no longer just investors deciding that a company sells a good product, and stands to increase in value so is a safe investment. The market has evolved into a massive casino of automated algorithmic trading ... with transactional activity coming from automated systems far outpacing the buy-and-hold activity that most individual investors are participating in.
Separately, you've got municipal or a private college's retirement plan that's broken off into pieces and handed off to hedge fund managers with the hope that they'll see a good-return on the retirement savings of their employees. Sometimes this works out ... and sometimes the hedge fund goes under, taking with it whatever investments the retirement plans had entrusted it to invest.
Then you've got too-big-to-fail financial firms that have ensured their own existence (because if they fail, they'll take the entire economy with them), pre-written their individual executive exist-strategies (golden parachutes / LEH, etc.), but have branches of their firms tasked with growing the money under their control. Maybe they'll succeed. Or maybe they'll make some bad bets and lose $5.8 billion dollars for the firm (JPM) ... and the multitude of mutual funds, hedge funds, and individuals whose financial security is in-some-way connected to their financial well-being. But hey ... they took a chance, and it just didn't work out this time.
Maybe on some other trading floor somebody makes a fat-fingered trade and blows $1.24 billion (Gold, 4/30/2012) ... subsequently throwing the market into disarray for a period of time while everyone tries to figure out if the economy is melting, or if it was just a mistake by somebody.
Meanwhile ... whether you're investing with the help of some "guy", or buying index funds, or going the individual stock route ... pretty much every choice you have is subject to the fuck-ups of people you don't even know exist. They control whether you'll be able to afford to eat when you've stopped working. Whether you'll be able to afford rent when you're no longer able to work. And if you opt-out and just choose to sit on cash, or invest in CDs (whose rates are currently comically-low) you won't approach anything near staying on-par with cost-of-living projections given inflationary trends.
But hey ... we can't subject trading to regulation 'cause it'll stifle innovation! We can't institute a per-trade transaction fee 'cause it'll decrease volumes and penalize those providing liquidity to the market. In-fact, the market appears to be going the opposite direction ... towards even less regulation. For everyone that supported the concept of Kickstarter for startup-equity, just wait till the elderly start gambling their retirement nest eggs into what's billed as the next Facebook. It's a nice thought that startups can get access to an untapped market of small-time investors, but it's got the potential to amplify the already-bleak retirement outlook for unsophisticated investors.
He claims it's "ridiculous" to expect people to save responsibly. Yet it happens in east asia, and it happened historically in the west.
The story is another demo of this curiously common mentality where nobody can be held to account for their choices. You can't say that people are fat because they're slobs with no self control, no, it's fructose, fast food ads, or whatever. The education test results aren't lousy because the kids are dumb and lazy, it's the teachers.
People aren't saving enough or taking enough responsibility in general because we're seeing the end-game result of four generations with a generous public social safety net. I could fix the retirement savings problem right quick: Bring back the poor house. If you want any sort of public assistance you have to live in a big concrete dorm with rows of bunk beds and do menial labor. Make some TV shows about living in one.
If removing the safety net would fix things, why were they ever broken enough for the safety net to be put in place in the first place?
I don't see many people thinking that social security enough will be enough to keep them from being poor. Yet many of them still don't save much on their own. You think it's simply a question of the magnitude of the negative incentive, vs the far-future nature of it?
And what if I don't want the poor house to be brought back? What if I think today's situation (if you don't save, you're slightly better off than the poor house) is better? Likewise, it used to be more common for employers to offer long-term employment with pensions. It used to be more common for families to live together across generations. I don't particularly want any of that back -- it would limit my mobility and flexibility, and I don't want to stay in one place forever -- but people are not adjusting well to the new, more independent present.
If removing the safety net would fix things, why were they ever broken enough for the safety net to be put in place in the first place?
You're assuming that's the reason it was put there in the first place. I don't think that's the case. Before modern politics, it was as effective to solicit voters with promises of free goodies as it is now to solicit corporations.
I don't particularly want any of that back -- it would limit my mobility and flexibility, and I don't want to stay in one place forever
(Not sure I know what you're arguing here, so forgive me if I've misinterpreted your point) You should be allowed to make that choice. Forcing people to "come together and find common solutions that protect us all from risk" (read: implement more taxes, have gov't take care of us) eliminates much of that choice. Not only long term choice, but the sort of short term choice you seem to be talking about (mobility and flexibility). Head over to Europe to see. High taxes, incredible benefits, and a system that makes it nearly impossible to fire workers (even private workers), makes finding work very, very difficult. Unemployment for those under 24 is over 50% in Spain and Greece, and not much better in most other EU countries.
You're assuming that's the reason it was put there in the first place. I don't think that's the case.
I'm not sure how one could read much about what conditions were like in industrialized countries in the late 19th and early 20th centuries and not think that's the case. Conditions were really shitty for workers and the poor for some decades. People literally used to die in the street due to lack of health care; die on the job due to nothing even approximating a concern for workplace safety; die of cold due to no heating; die of hunger due to not being able to buy or steal enough bread; etc. Much of Manhattan was full of tenement slums with high mortality rates.
Head over to Europe to see. High taxes, incredible benefits, and a system that makes it nearly impossible to fire workers (even private workers), makes finding work very, very difficult.
"Europe" does not really have one system. The best examples of social-democratic European countries are probably the Scandinavian countries, which do not generally make it hard to fire workers. In Denmark, at least, it is exceptionally easy to fire workers. But there is also a strong safety net, which is the tradeoff: it's easy to fire workers, but they won't be on the street if they get fired. A similar pro-market-but-pro-services mindset is seen in other sectors of the economy. For example, the transit system is paid for largely by taxes, but privately run by contractors who bid for the right to operate it, unlike the publicly-run U.S. transit systems.
The basic model is high tax but high flexibility. I think that actually increases freedom and individual choice considerably compared to the American model. For example, in Denmark, people who were born with congenital heart defects have the freedom to start a technology company. In the United States they do not, because employer-tied health insurance means they must work for a large employer with a group health plan (unless they're very wealthy).
This comment really nails it. Employers should have all the flexibility they need with regards to hiring/firing, but it should not mean you wind up in the street. This is part of the reasons (IIUC), that "unions" in many Scand. Countries are quite different than American ones, in that they are more guild-like cooperatives (working along with business and government) rather than largely adversarial. A model that has the right mix of policies to allow dynamism without impoverishment is what's needed (along with a periodic reassessments to make tweaks), and seems like something that's seriously worth looking at here in the US.
Good point regarding Scandinavian "unions". This distinction sometimes makes it hard to discuss work related situations with Americans unless I take a large detour around what a union up here usually does.
Of course, the social safety net isn't generous. I'm not sure why you think that. Social security pays out enough to keep _some_ old people from abject poverty. For some unfathomable reason, you think that reintroducing that kind of suffering is a solution?
Oh, wait, I caught it - "if you want any sort of public assistance, you have to ___". On rereading what you wrote, I don't think you're interested in proposing honest solutions to solvable social problems (i.e. you're trolling).
(And...your second-paragraph rant suggests that you think that people are, by default, totally immune from advertising and group pressure. Do you really think that this is so, or is this also trolling?)
"He claims it's "ridiculous" to expect people to save responsibly"
It's actually "she". And what she really claims is ridiculous:
* "First, figure out when you and your spouse will be laid off or be too sick to work"
* "Second, figure out when you will die"
* "Fourth, earn at least 3 percent above inflation on your investments, every year"
"If you want any sort of public assistance you have to live in a big concrete dorm with rows of bunk beds and do menial labor."
I like that thinking. I had a similar thought. People convicted of white collar crimes should be forced to clean public bathrooms (like on the NJ Turnpike - but you can pick your favorite wherever you live) not comfortable community service. The displaced janitor can do the community service while the felon is taking his place.
> He claims it's "ridiculous" to expect people to save responsibly. Yet it happens in east asia, and it happened historically in the west.
Social Security is the most effective anti-poverty program in the history of the US. Before SS, old people used to reliably end up destitute in far greater numbers than today. I don't believe your claim that responsible saving, to an extent to allow people to reliably retire in comfort, happened historically in the West.
I agree with you overall. However, Social Security has come to be seen by too many people as a retirement fund when it was originally designed as a type of insurance. I think it should be means-tested.
I agree, but I think that being structured as a mandatory retirement fund is a political necessity. A means-tested SS where what you put in is unrelated to what you get out would be outright welfare and unacceptable to a large portion of the American political spectrum.
Ironically, stuff like means-testing SS and removing the cap on the SS tax are just the sort of things that would keep SS solvent for decades to come, yet those who constantly criticize it on the basis that it's not sustainable would probably never accept such changes.
You can't say that people are fat because they're slobs with no self control, no, it's fructose, fast food ads, or whatever.
I'm going to accept your premise that people are fat because they are slobs with no self-control. So what now? They're doomed to have tough lives and die young? I think that if we can make healthy foods more attractive, tasty, and affordable, then we should do that.
My cousin is an Optometrist. I currently wear contacts but I do not sleep in them. I saw a commercial for contacts you could sleep in and thought that would be a nice feature to have. Turns out that's not the case. It is unhealthy to sleep in contacts, regardless the type. Those contacts were developed because some people will sleep in their contacts even when they know it is bad for their eyes. So Optometrists won't prescribe sleep-in contacts to people who wear their contacts according to the directions (it would be less healthy for the eye than what they currently do), they prescribe them to people routinely sleep in contacts which are explicitly not made for sleeping in. The sleep-in brand mitigates the damage.
In other words, if you can design around behavior it is often helpful to do so. It is difficult to get people to change, especially when it requires giving up a near-term convenience or pleasure for a long-term gain. Nagging doesn't work. If we can help people with bad habits by making it easier to make the right choices or by making the habits less bad, I think that is a good thing.
Also Optometrists will try to prescribe one-a-day contacts to overwearers people who sleep in their contacts before they try the sleep-in brand. That is another example of making the right choice (remove your contacts at night) easier (throw em in the trash, no upkeep) instead of making the wrong choice less harmful. One-a-days are relatively expensive, though, so the sleep-in contacts are another option.
Actually retirement is a modern result of societies that have gotten wealthy. No one saved at all until relatively recently. Longer lifespans and lower marginal profits from having children have made saving necessary to sustain a rich lifestyle.
How does keeping people in a poor house help them find jobs?
On a related point it doesn't seem that there is any relationship between the generosity of the safety net and savings rate. You are right about cultural attitudes being a factor but this really doesn't have anything to do with saving. Wealthy societies and classes in general are more thrifty because they can afford can be.
As is usually the case, both extremes are wrong, or rather half-right. People are fat because they lack self-control AND corporations are lining up to take advantage of said lack.
I see no abdication of individual responsibility in creating a joint retirement fund to balance risk, merely a recognition that humans are impulsive and fallible.
In east asia, and historically in the west, peoples' kids too care of them when they were too old to work. The idea of a bunch of retirees living independently at the same standard of living before they quit working, across the huge swatch of society, is completely without precedent.
That was when people were generally a lot poorer than they are now and having children had little cost beyond food. Now, that math simply doesn't work.
>He claims it's "ridiculous" to expect people to save responsibly. Yet it happens in east asia, and it happened historically in the west.
Ive worked in east asia. The retirement conditions are attrocious, and grand masses of old people get f... all, or have to work till they are 70+ to the worst McJobs.
Back to the west now:
It's not about "responsibillity" and saving and investing etc.
For one it's about inequality. A $100K a year programmer can think ahead and make "investent decisions" and "savings". A hand-to-mouth low wage worker cannot. This "be responsible" things, basically says "screw them". And no, its no less egotistical and silly when it comes from "I started poor but made it, others are just lazy etc" outliers.
Second, its about power. Again, the upper middle class can negotiate better wages, and better medical coverage or retirement / insurance packages. The poor, not so much. And even less have they the skills to evaluate invenstent options.
Third, a bad turn, a sudden costly illness, a fraud and there goes your retirement fund.
This general attitude reflects bad upon society. It basically amounts to "we're not a real society, we're a every-man-for-himself race, and screw those that couldn't make it". People that don't care if a 70 year old is working every day at a Walmart or begging for change, are not society material, in my European mind.
Excellent response. I would just like to add that I've heard it pointed out many times since the 2008 financial crisis that, e.g., China's extremely high savings rates have been a drag on its economic recovery. The level of consumption required for growth can't happen if the vast majority of your population is neurotically saving every penny for retirement because they know there's no safety net.
Another point that the article makes is that these savers are rarely making "investments" that would meaningfully help the economy down the road (a possible argument against nudging them towards consumption). They're "stuffing it under the mattress," parking it in the safest investments they can find (cf. lower-middle-class America watching Glenn Beck and then rushing off to buy gold from his advertisers). Or at best, they're entrusting it to a "guy" (as described in TFA) who does roughly the same thing for them, while providing a nice placebo effect that makes them believe they're "investing."
For what it's worth, before I was a programmer I was a biology technician, living in Boston (a very expensive place to live) making 32k a year.
I still managed to max out my personal IRA as well as hit the match on my employer's 401k. Sure, I was single and living cheaply...but that's the point. Live within your means and contribute to retirement. You don't need to make 100k.
>I still managed to max out my personal IRA as well as hit the match on my employer's 401k. Sure, I was single and living cheaply...but that's the point.
The point is if you're not making enough money don't have a family? Or choose between family/kids etc and retirement?
I'm not entirely certain of your statement (grammar), but I think it may also argue for not having a family before you are financially capable of having one.
Having a family is a privilege, not a right. You should only have one when you can afford to house, clothe and feed them as well as contribute to your own retirement. You wouldn't take a vacation to Tahiti if you can't afford to buy bread for yourself to eat...why do people think it's ok to raise a family on a salary that is not sufficient?
You got it, pal. You are not the real society. And once the USSR is gone, nothing can limit the corporate greed anymore, so more and more people will be delusioned, separated, fed to machines and thrown away for the sake of the immediate profit.
That would be valid if USSR ever given anything like tolerable life conditions for the vast majority of its population. It didn't. Something that was shit and got worse shouldn't much of a concern.
It did. You are nit even 40% close now to the living standard we had in the USSR. Top notch education for everyone, the best public transit almost for free, more than enough cheap energy, and tech even now beyond your imagination. We even had the better Internet, although not for civilians. And man, our robots had really been on the Moon :-)
Nonsense. I lived in USSR. Subsistence farming was the main source of food - i hardly remember eating anything except bread which would came from the shop, not the family plot. And yes, my parents were Ph.D.s and worked in space program - kind of people that would fly first class would they be in the USA.
We may argue a lot about capitalism vs socialism, but however dire things may end up in the U.S., no American would ever escape on a homemade raft into Cuba.
What other skills along with "saving for retirement" are we all apparently hapless victims of our own incompetence for lacking?
I'm not going to argue that "people" haven't been shafted by changing times and a variety of cultural and economic forces, but I take offense at the comparison to a dancing pet, as I think any self-respecting reader should. Or are we supposed to chuckle with recognition at the absurdity of being trusted with our own finances? A similar discussion of the unemployment problem would run along the lines of: "Who really knows how to apply for a job, right? Or calculate what your salary needs to be to afford rent after taxes... we're not freaking accountants!"
We are all going to get old one day, stop working, and still need a private source of money (personal savings, inheritance, pension, etc.). I don't think most people stop and truly reflect on this responsibility. They should drill it into us in school, really, along with the multiplication tables and long division. I don't remember a single lesson on what a stock is or how to balance a checkbook. Or, for that matter, how to make a friend, find a mate, or display leadership. As an adult you eventually realize what's really important in life. Financial solvency is not the pinnacle but it's a big one.