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Given the inflation rate, this boomer is having hard time seeing the point too. So I'm spending more on capital infrastructure (tools for my shop) that I know w

Given the inflation rate, this boomer is having hard time seeing the point too. So I'm spending more on capital infrastructure (tools for my shop) that I know will be even more expensive soon. It's hardly a sin of a particular generation to see that saving is less smart when inflation is multiples of the savings rate.

WalterGR 4y ago
> saving is less smart when inflation is multiples of the savings rate. How? That's only the case when investments would lose money. Otherwise your rate of return offsets your inflationary losses. (Right? Disclaimer: I have a 401k but otherwise don't know a ton about investing.)
- matthewmcg 4y ago
  I think the point the parent is making is that when the rate of inflation is higher than the nominal rate of return from your investment, your investment has a negative real rate of return. To put it another way, if you're socking cash in a savings account paying 0.6%, while inflation is 9%, you're losing money.
  - WalterGR 4y ago
    > To put it another way, if you're socking cash in a savings account paying 0.6%, while inflation is 9%, you're losing money. Right, but you're losing 8.4% instead of 9%. (And hopefully you're investing the cash more wisely than a savings account!)
    - sidewndr46 4y ago
      Except you're still bleeding money. For perspective, "only losing 8.4%" of your wealth annually is like being on the Titanic right after the iceberg impact and plugging a small 1 inch hole in the hull of the ship. It's still sinking, and fast. Compound interest works in reverse as well. Losing "only" 8.4% of your wealth each year means in 8 years more than 1/2 your wealth is gone. Thus, saving is basically irrelevant. By the time you'd have saved enough money to be meaningful, it is not worth anything.
      - WalterGR 4y ago
        Well, that does seem to be the investment strategy the article is about. I'm saying it's not rational. The average rate of return for a 401k is around 5% - 8% yearly. So in this scenario, you'd be losing 1% - 4% yearly. $10,000 initial investment after 10 years: -1% -> $9,048.00 -4 -> $6,698.72 -8.4 -> $4,304.37 That sucks for sure, but it's better than - to continue with the Titanic metaphor - saying "Screw it" and just dying like DiCaprio rather than climbing onto the door. From the article: In fact, a Fidelity retirement planning survey of about 2,600 adults found that 45% of "next gen" — defined as 18 to 35-year-olds — "don't see a point in saving until things return to normal." Assume net $40,000 income per year and an investment of $500 per month at a 5% rate of return. Assume the person is 22 (just out of college) and retires at 65. Their retirement account would be worth around $900,000 at retirement. I understand the fatalistic attitude, but it would be smart to hedge one's bets.
        halo37253 4y ago
        that is not how a 401k works.. You are not at a loss if you don't sell.... Any buying in a down market is ALWAYS better for a younger generation. S&P500 still has a 10y avg of 11-12%, that means every year that is the avg return. Even if there was 2-3 bad years, the 7-8 good years make up for it... So in 30 years time, it doesn't mater if we had a few bad years of -20% declines. You are still up massively. Young people have such a lack of understanding when it comes to the stock market and it shows. If your 401k only avg %5 return per year over a 30y span, you picked the wrong investment methods. Too much in bonds.. Still you should be taking advantage of employer match. Pretty much every employer has a 401k program, use it. SS will be there, but you don't want that to be your life line. Sadly Gen X didn't really understand 401ks, they got them later in life and many didn't fund them correctly. It isn't uncommon to see genXers take money from the 401k later in life with a hit, and it will be on their family to take care of them when SS isn't enough.
        WalterGR 4y ago
        > that is not how a 401k works.. Sure it is. Yep, I agree with your investment advice.
- culopatin 4y ago
  Also keep in mind that if inflation is 9% and your gains are 10, you’re not paying taxes on the difference (1%) you’re still paying taxes on 10%, so your net gains might still be negative
  - WalterGR 4y ago
    I must not understand your comment. 401k's are a pre-tax investment vehicle. Withdrawals are taxed as ordinary income. If inflation is 9% and gains are 10%, all you're left with is 1%, which is what you'd pay taxes on when you withdraw. (I'm using hand-wavy math here.)
    - saltcured 4y ago
      To be even more pedantic, you pay taxes on the 109% later when you withdraw during retirement...
    - culopatin 4y ago
      You pay taxes on the gains and what you put in when you take it out. Say you get 10% return with 9% inflation, You pay taxes on 10% gains even though your gains were truly 1%. Also gains could be from any investments. If you have a Roth that you manage or is managed, your tax payment vs gains is worse as well.

WalterGR 4y ago

> saving is less smart when inflation is multiples of the savings rate. How? That's only the case when investments would lose money. Otherwise your rate of return offsets your inflationary losses. (Right? Disclaimer: I have a 401k but otherwise don't know a ton about investing.)

matthewmcg 4y ago
I think the point the parent is making is that when the rate of inflation is higher than the nominal rate of return from your investment, your investment has a negative real rate of return. To put it another way, if you're socking cash in a savings account paying 0.6%, while inflation is 9%, you're losing money.
- WalterGR 4y ago
  > To put it another way, if you're socking cash in a savings account paying 0.6%, while inflation is 9%, you're losing money. Right, but you're losing 8.4% instead of 9%. (And hopefully you're investing the cash more wisely than a savings account!)
  - sidewndr46 4y ago
    Except you're still bleeding money. For perspective, "only losing 8.4%" of your wealth annually is like being on the Titanic right after the iceberg impact and plugging a small 1 inch hole in the hull of the ship. It's still sinking, and fast. Compound interest works in reverse as well. Losing "only" 8.4% of your wealth each year means in 8 years more than 1/2 your wealth is gone. Thus, saving is basically irrelevant. By the time you'd have saved enough money to be meaningful, it is not worth anything.
    - WalterGR 4y ago
      Well, that does seem to be the investment strategy the article is about. I'm saying it's not rational. The average rate of return for a 401k is around 5% - 8% yearly. So in this scenario, you'd be losing 1% - 4% yearly. $10,000 initial investment after 10 years: -1% -> $9,048.00 -4 -> $6,698.72 -8.4 -> $4,304.37 That sucks for sure, but it's better than - to continue with the Titanic metaphor - saying "Screw it" and just dying like DiCaprio rather than climbing onto the door. From the article: In fact, a Fidelity retirement planning survey of about 2,600 adults found that 45% of "next gen" — defined as 18 to 35-year-olds — "don't see a point in saving until things return to normal." Assume net $40,000 income per year and an investment of $500 per month at a 5% rate of return. Assume the person is 22 (just out of college) and retires at 65. Their retirement account would be worth around $900,000 at retirement. I understand the fatalistic attitude, but it would be smart to hedge one's bets.
      - halo37253 4y ago
        that is not how a 401k works.. You are not at a loss if you don't sell.... Any buying in a down market is ALWAYS better for a younger generation. S&P500 still has a 10y avg of 11-12%, that means every year that is the avg return. Even if there was 2-3 bad years, the 7-8 good years make up for it... So in 30 years time, it doesn't mater if we had a few bad years of -20% declines. You are still up massively. Young people have such a lack of understanding when it comes to the stock market and it shows. If your 401k only avg %5 return per year over a 30y span, you picked the wrong investment methods. Too much in bonds.. Still you should be taking advantage of employer match. Pretty much every employer has a 401k program, use it. SS will be there, but you don't want that to be your life line. Sadly Gen X didn't really understand 401ks, they got them later in life and many didn't fund them correctly. It isn't uncommon to see genXers take money from the 401k later in life with a hit, and it will be on their family to take care of them when SS isn't enough.
        WalterGR 4y ago
        > that is not how a 401k works.. Sure it is. Yep, I agree with your investment advice.
culopatin 4y ago
Also keep in mind that if inflation is 9% and your gains are 10, you’re not paying taxes on the difference (1%) you’re still paying taxes on 10%, so your net gains might still be negative
- WalterGR 4y ago
  I must not understand your comment. 401k's are a pre-tax investment vehicle. Withdrawals are taxed as ordinary income. If inflation is 9% and gains are 10%, all you're left with is 1%, which is what you'd pay taxes on when you withdraw. (I'm using hand-wavy math here.)
  - saltcured 4y ago
    To be even more pedantic, you pay taxes on the 109% later when you withdraw during retirement...
  - culopatin 4y ago
    You pay taxes on the gains and what you put in when you take it out. Say you get 10% return with 9% inflation, You pay taxes on 10% gains even though your gains were truly 1%. Also gains could be from any investments. If you have a Roth that you manage or is managed, your tax payment vs gains is worse as well.