7 ms·

> Assumptions: > - You can earn 5% investment returns after inflation during your saving years

by r4vik 14y ago

praptak 14y ago
Covered here: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/ http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-i... Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk82uEJ:www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/+&cd=4&hl=en&ct=clnk&gl=pl&client=firefox-a http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...
- jerf 14y ago
  One of my favorite infographics ever: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110... As I say every time I link it, read it carefully; it does not say what most people initially think it is saying when they first see it. In this particular case I bring this up to show that the "standard" 7% over a long term can be optimistic. As it happens that corresponds to the first light green color, and that is not as pervasive as you may have been led to believe. Sub 3% over 20 years is a very realistic possibility. Individual snapshots of that graph can be highly deceptive. The whole is quite interesting and difficult to summarize.
  - praptak 14y ago
    Yeah, it's not that simple and on top of that "historical performance is no guarantee of the future one".
  - jcdavis 14y ago
    That chart takes away inflation. When people say the expect 7%/year they are not including inflation. 7% a year pre inflation and taxes is likely roughtly 3.5-4%, which is grey on that chart.
    - dro77 14y ago
      Yes. This chart goes along perfectly with MMM's math.
  - T-hawk 14y ago
    Yes, great graph. It illustrates the fundamental truth overlooked by most retirement planning schemes: the stock market doesn't just automatically grow in value over time. It grows in emphatically punctuated booms driven by technological advances. The boom of the 1920s owed a lot to the telephone and automobile, linking businesses together in new ways. The boom of the 1960s was mainframe computerization, and the boom of the 1990s was personal computers and Internet connectivity. All these permitted entrepreneurs and established businesses to gain ever larger leveraged multipliers of turning effort into impact and value and wealth. No breakthrough technology means no boom. We won't have another until another such technology arises. The Internet has largely plateaued in terms of business value. We don't have anything obvious on the horizon that will create a 10x productivity multiplier over email or Excel or StackOverflow, in the way that computers replaced adding machines and email replaced snail mail. Judging by the history of industrialized society, something will arise eventually to spark another boom (my best bet is neural-computer integration), but we can't say what or when. The next 20-year quadrupling of the stock market may begin in 2015 or in 2060.
  - sethist 14y ago
    The problem with that graph is that almost no one invests that way. People just don't dump their entire life savings into the market, wait x number of years, and then withdraw it all at once. Dollar cost averaging and changes in investment aggressiveness will likely smooth out those numbers.
- bryanlarsen 14y ago
  He's using US stock market data for his argument. The US stock market over the last 100 years has been an obvious outlier. In that time the US grew from a small fraction of the world economy to dominating it. If you want to make this argument, you have to use global stock market data. Personally, I use 2% after inflation for my calculations, and consider that to be optimistic. There are lots of examples of stock markets returning less than inflation over long term periods.
LVB 14y ago
Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.
- Ntrails 14y ago
  This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year. The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55? This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg
  - RyanZAG 14y ago
    Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee. If the stock market performs on average or better than average, you lose by using a guaranteed annuity. If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits. If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything. So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
    - Ntrails 14y ago
      First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money. The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital. This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets. The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically). I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.
pragmatic 14y ago
Yes, this is quite the assumption. While the US Gov't is doubling down on Keynesian spending (borrowing money, printing it, keeping interest rates near 0), there is no safe/guaranteed investment (CD) that comes close to 5%. I've hedged myself by investing in "foreign" equities. But this is no where near a steady guaranteed 5%. It's super volatile. Life is a risk. You pay your money and you take your chances.
- martinced 14y ago
  Exactly. I was going to post exactly that, but your post resonates with me... And of course your nickname is "pragmatic". : )

> Assumptions: > - You can earn 5% investment returns after inflation during your saving years

by r4vik 14y ago

> Assumptions: > - You can earn 5% investment returns after inflation during your saving years

Covered here: http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/ http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-i... Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk82uEJ:www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/+&cd=4&hl=en&ct=clnk&gl=pl&client=firefox-a http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...

jerf 14y ago
One of my favorite infographics ever: http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html http://www.nytimes.com/interactive/2011/01/02/business/20110... As I say every time I link it, read it carefully; it does not say what most people initially think it is saying when they first see it. In this particular case I bring this up to show that the "standard" 7% over a long term can be optimistic. As it happens that corresponds to the first light green color, and that is not as pervasive as you may have been led to believe. Sub 3% over 20 years is a very realistic possibility. Individual snapshots of that graph can be highly deceptive. The whole is quite interesting and difficult to summarize.
- praptak 14y ago
  Yeah, it's not that simple and on top of that "historical performance is no guarantee of the future one".
- jcdavis 14y ago
  That chart takes away inflation. When people say the expect 7%/year they are not including inflation. 7% a year pre inflation and taxes is likely roughtly 3.5-4%, which is grey on that chart.
  - dro77 14y ago
    Yes. This chart goes along perfectly with MMM's math.
- T-hawk 14y ago
  Yes, great graph. It illustrates the fundamental truth overlooked by most retirement planning schemes: the stock market doesn't just automatically grow in value over time. It grows in emphatically punctuated booms driven by technological advances. The boom of the 1920s owed a lot to the telephone and automobile, linking businesses together in new ways. The boom of the 1960s was mainframe computerization, and the boom of the 1990s was personal computers and Internet connectivity. All these permitted entrepreneurs and established businesses to gain ever larger leveraged multipliers of turning effort into impact and value and wealth. No breakthrough technology means no boom. We won't have another until another such technology arises. The Internet has largely plateaued in terms of business value. We don't have anything obvious on the horizon that will create a 10x productivity multiplier over email or Excel or StackOverflow, in the way that computers replaced adding machines and email replaced snail mail. Judging by the history of industrialized society, something will arise eventually to spark another boom (my best bet is neural-computer integration), but we can't say what or when. The next 20-year quadrupling of the stock market may begin in 2015 or in 2060.
- sethist 14y ago
  The problem with that graph is that almost no one invests that way. People just don't dump their entire life savings into the market, wait x number of years, and then withdraw it all at once. Dollar cost averaging and changes in investment aggressiveness will likely smooth out those numbers.
bryanlarsen 14y ago
He's using US stock market data for his argument. The US stock market over the last 100 years has been an obvious outlier. In that time the US grew from a small fraction of the world economy to dominating it. If you want to make this argument, you have to use global stock market data. Personally, I use 2% after inflation for my calculations, and consider that to be optimistic. There are lots of examples of stock markets returning less than inflation over long term periods.

LVB 14y ago

Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.

Ntrails 14y ago
This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year. The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55? This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg
- RyanZAG 14y ago
  Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee. If the stock market performs on average or better than average, you lose by using a guaranteed annuity. If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits. If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything. So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
  - Ntrails 14y ago
    First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money. The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital. This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets. The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically). I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.

pragmatic 14y ago

Yes, this is quite the assumption. While the US Gov't is doubling down on Keynesian spending (borrowing money, printing it, keeping interest rates near 0), there is no safe/guaranteed investment (CD) that comes close to 5%. I've hedged myself by investing in "foreign" equities. But this is no where near a steady guaranteed 5%. It's super volatile. Life is a risk. You pay your money and you take your chances.

martinced 14y ago
Exactly. I was going to post exactly that, but your post resonates with me... And of course your nickname is "pragmatic". : )