10 ms·

Our Ridiculous Approach to Retirement

68 points by LVB 14y ago

losethos 14y ago
If losethos is bad, why not let it circulate? God says... C:\Text\WEALTH.TXT om thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours, by his labour, to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries. But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it, reserving only so m
anovikov 14y ago
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.
- epoxyhockey 14y ago
  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. edited for typos..
  - anovikov 14y ago
    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).
    - anovikov 14y ago
      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.
    - oijaf888 14y ago
      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?
      - anovikov 14y ago
        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.
nevinera 14y ago
>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.
- uncr3ative 14y ago
  I think at an older age, when you are more likely to have health problems, 31k is probably not enough.
  - JoshTriplett 14y ago
    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.
    - corbet 14y ago
      ...but anybody who thinks that health insurance provides any such guarantee (in the US) has never dealt with serious medical problems.
kablamo 14y ago
To find out how long you have until retirement try this: http://networthify.com/earlyretirement http://networthify.com/earlyretirement 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.
- anovikov 14y ago
  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.
  - JoshTriplett 14y ago
    > 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.
    - anovikov 14y ago
ry0ohki 14y ago
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.
stcredzero 14y ago
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.
- bilbo0s 14y ago
  There is something useful in the pragmatist view. 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.
  - orangecat 14y ago
    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.
    - moe 14y ago
      shuffling deck chairs on the Titanic. What's with the desperation? 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.
  - stcredzero 14y ago
    > 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.
rubashov 14y ago
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.
- majormajor 14y ago
  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.
  - nazgulnarsil 14y ago
    hysteria over edge cases due to scope insensitivity.
  - liber8 14y ago
    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.
carsongross 14y ago
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. What if that is no longer the case?
- otterley 14y ago
  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.
larrys 14y ago
"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.
dgreensp 14y ago
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.
- polyfractal 14y ago
  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...
  - ceejayoz 14y ago
    > 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.
olegious 14y ago
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.
- beagle3 14y ago
  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.
  - olegious 14y ago
    Good point, I forgot about my California taxes :(.
protomyth 14y ago
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.
- RandallBrown 14y ago
  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.
  - protomyth 14y ago
    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.
- tlrobinson 14y ago
  I, for one, would like to have enough money to enjoy my retirement, traveling and such, rather than simply waiting to die...
tptacek 14y ago
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%.
- jowiar 14y ago
  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.
  - drumdance 14y ago
    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.
  - marvin 14y ago
    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].
uptown 14y ago
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.
pge 14y ago
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.
- justincormack 14y ago
  Insurance-linked savings are popular ways of saving in many countries, and annuities are also common.
asdkl234890 14y ago
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.
rayiner 14y ago
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.
tzs 14y ago
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.
- gizmo686 14y ago
  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.

68 points by LVB 14y ago

If losethos is bad, why not let it circulate? God says... C:\Text\WEALTH.TXT om thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours, by his labour, to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries. But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it, reserving only so m

anovikov 14y ago

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.

epoxyhockey 14y ago
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. edited for typos..
- anovikov 14y ago
  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).
  - anovikov 14y ago
    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.
  - oijaf888 14y ago
    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?
    - anovikov 14y ago
      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.

nevinera 14y ago

>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.

uncr3ative 14y ago
I think at an older age, when you are more likely to have health problems, 31k is probably not enough.
- JoshTriplett 14y ago
  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.
  - corbet 14y ago
    ...but anybody who thinks that health insurance provides any such guarantee (in the US) has never dealt with serious medical problems.

kablamo 14y ago

To find out how long you have until retirement try this: http://networthify.com/earlyretirement http://networthify.com/earlyretirement 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.

anovikov 14y ago
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.
- JoshTriplett 14y ago
  > 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.
  - anovikov 14y ago

ry0ohki 14y ago

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.

stcredzero 14y ago

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.

bilbo0s 14y ago
There is something useful in the pragmatist view. 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.
- orangecat 14y ago
  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.
  - moe 14y ago
    shuffling deck chairs on the Titanic. What's with the desperation? 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.
- stcredzero 14y ago
  > 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.

rubashov 14y ago

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.

majormajor 14y ago
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.
- nazgulnarsil 14y ago
  hysteria over edge cases due to scope insensitivity.
- liber8 14y ago
  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.

carsongross 14y ago

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. What if that is no longer the case?

otterley 14y ago
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.

larrys 14y ago

"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.

dgreensp 14y ago

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.

polyfractal 14y ago
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...
- ceejayoz 14y ago
  > 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.

olegious 14y ago

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.

beagle3 14y ago
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.
- olegious 14y ago
  Good point, I forgot about my California taxes :(.

protomyth 14y ago

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.

RandallBrown 14y ago
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.
- protomyth 14y ago
  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.
tlrobinson 14y ago
I, for one, would like to have enough money to enjoy my retirement, traveling and such, rather than simply waiting to die...

tptacek 14y ago

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%.

jowiar 14y ago
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.
- drumdance 14y ago
  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.
- marvin 14y ago
  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].

uptown 14y ago

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.

pge 14y ago

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.

justincormack 14y ago
Insurance-linked savings are popular ways of saving in many countries, and annuities are also common.

asdkl234890 14y ago

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.

rayiner 14y ago

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.

tzs 14y ago

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.

gizmo686 14y ago
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.