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This article is bad on so many levels... 1) The lifehacker article doesn't list the 2 most important sanity check #s. What is the rate of return that they're

This article is bad on so many levels... 1) The lifehacker article doesn't list the 2 most important sanity check #s. What is the rate of return that they're assuming for the equity and fixed income? 2) If you dig into the actual research, with the hard to find link, it's actually not really 60% equity, 40% bonds. It's 60% large cap equity (which performs worse than all equity and low cap) and 40% short term bonds (which over long time periods underperform long term bonds, though are less volatile). 3) Despite digging into the linked article, I still can't find assumed rates of returns. 4) Why are we to believe the next 40 years will be like the last 139? The last 139 had a different set of wars, different stages of development, a different tax regime, and different government. All this talk about "Starting early" assumes a few things: 1) That you can afford to. How many retirees who today contribute 10k/year could have afforded that in 1973? 2) There are no massive events that wipe out returns. We've had two in the past 13 years. This doesn't mean don't save, but it does mean don't overestimate the value of saving early. (It's not worth eating out of tin cans to squeeze an extra $500 into a pension) Edited to clarify my comment on bonds and starting early, and fix a formatting issue on the second list.

phillmv 13y ago
Basically, we're all fucked and I don't understand how anyone retires.
- microcolonel 13y ago
  Things aren't that hopeless. The point is that you invest in something which has greater growth and dividends, as well as something secure. Right now I'm very young, so I just put a certain amount away into Canadian bank stocks and other stocks with a history of ever-improving dividends. I think there's one particular guy somewhere here in Canada which retired at 30-something on a fairly plain job by investing in solid stocks for the long term.
- mathattack 13y ago
  I think the real lesson is we don't know how long or how much we'll need to save. We do know that we'll live longer than the people for whom the original pension systems were defined. We also know that returns may not be as good as they have been in the past. What can we do? 1 - Invest reasonable amounts in aggressive enough well diversified tax friendly financial assets with low fees. (Low fee index funds in 401Ks, and 529s for folks with kids) 1.5 - Delink your financial investments from your human capital. If your salary (& options) are very tied to the success of silicon valley, don't invest in the NASDAQ. If you are working for a mining company, avoid commodities funds because you don't want your investments to lose value the same time you lose your job. 2 - Avoid high cost debt. (Credit cards, unsecured bank loans, etc) 3 - Invest time (and if needed, money too) in your professional education continuously. Assume your skills (and salary) will degrade on a trendline of 5-10% each year that you don't invest. 4 - Plan on working a long time. (75? Note - this isn't as hard as previous generations, because less of the work is manual) 5 - Invest in your health, since you'll be working and living longer. 6 - Invest your time in a happy and healthy home life. This sets you up for a pleasant surprise of retiring at 55 if the situation allows, or 75 if it doesn't.
wtvanhest 13y ago
I completely understand time value of money, and I'm going to propose an alternative way of thinking about retirement: You may want to assume no rate of return above the rate of inflation over the long term in your retirement calculation. Why? Because, if you assume you have a rate of return, you must assume you are taking risk in order to get returns above the risk-free rate. Rather than assuming you will earn interest in the market, people may want to consider the strategy of saving like they won't earn interest and scaling back as they get older. The OP suggests that the past 139 years may not look like the future 139 years. I'd say they almost definitely won't. The current generation entering retirement has very big problems ahead, and the younger 20-35 year old generation will have even larger problems with retirement. If you follow my strategy, retirement planning is easy: 1) Assume no inflation in either investments, salary, future needs (this makes sense since they match) 2) Figure out how much money you want to live on in retirement using today's dollars. 3) Divide the number by an assumed interest rate. I'm using 5% for my retirement. (that number is higher than you would get today in income and lower than what has occurred over a long period of time.) In order to have $100,000 a year salary in retirement, you would need to have $2M in the bank in today's dollars. +++This isn't a perfect calculation, but seems far more realistic than assuming you will earn a return above inflation. (An alternative would be to assume you earn a leveraged return above inflation. Its more risky, but could be argued.)
- ronaldx 13y ago
  This is exactly how I base my calculations. Pension calculators which assume e.g. a 7% annual rate of return (with apparently no inflationary concern) are just financial propaganda.
  - mathattack 13y ago
    Worse yet, they are push problems into the future. The pension holders can't count on the money, and the pension funders are allowed to kick the can down the road.
- extra88 13y ago
  So you're assuming you'll get <em>nothing</em> from Social Security?
rtkwe 13y ago
IIRC the average rate of return for the stock market has been pretty stable. There's the dramatic examples where it spiked above and below the average but those even out and that's about 9% iirc. >4) Why are we to believe the next 40 years will be like the last 139? The last 139 had a different set of wars, different stages of development, a different tax regime, and different government. Yes, past performance isn't a good thing to go on, but speculating on the future regulatory environment and business environment and the rabbit hole of poorly understood interactions is even less useful.
- mathattack 13y ago
  It is very stable only over the VERY long haul. Look at the SPY index, which is total returns (including dividends) of the S&P. Take it back to 1994, which is as far as Yahoo Finance allows. http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=spy;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=sp... In the almost 20 years since, there are many 5 year periods of rapid drops, and many flat 10 year periods. If you look as the NASDAQ it gets much worse. One can say, "It's been a rare 20 years" but who are we to say the business environment pre-1994 is more similar today than post-1994? I think you can't speculate on what the future will look like, you have to prepare yourself for the uncertainty. (Invest in yourself and your health, prepare for the possibility of retiring later, don't ignore your spouse so much that they divorce you, etc.)
  - rtkwe 13y ago
    The retirement timeline for most people falls into that 'very long term' time frame.
onebaddude 13y ago
>"40% short term bonds (which underperform long term bonds) This is not true. What if you are buying during an inverted yield curve? Do you think buying long bonds, today, with rising rates on the horizon, would do better than rolling short bonds? The real mistake in the article is assuming there's some "safe" allocation ratio(60/40 or 40/60!). There are periods (like now with bonds, or stocks in summer 2000) where buying certain assets are a recipe for disaster. But we do anyway. People are going to have to become far more financially literate about their financial futures. >There are no massive events that wipe out returns. We've had two in the past 13 years. There is no need to "assume" those things away when planning long term. For example, equities have recovered their value plus more since the 2008 plunge. The people who lose are the people who sell into the panic (or those who happened to be retiring right at that moment, bad luck). But volatility happens. If you held on, you're back on track.
- mathattack 13y ago
  On bonds, I'm not sure actually. I am generally short term bearish on the asset class, but I'm not a pro, and I tend to be bearish on most asset classes. Bill Gross wrote about it recently. (http://www.pimco.com/EN/Insights/Pages/Bond-Wars.aspx http://www.pimco.com/EN/Insights/Pages/Bond-Wars.aspx) Over most time horizons, when the yield curve isn't inverted, the longer bonds due perform better, but not necessarily enough to justify the volatility. In terms of equities - I agree, you should hold them. In general equity investments should be "Buy and hold for a long long time". That said, if you look at the past 20 years, there were many 5-10 year periods where you would be down or flat. If you are assuming a fixed retirement date, there are a lot of bad years to retire. http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=spy;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=sp... I believe that it's much safer to assume we may have to keep working while we keep saving and waiting for asset values to return.
  - onebaddude 13y ago
    >"but I'm not a pro" Me neither. I'm trying to put my money where my mouth is and learn as much as possible. Otherwise, I'll be a broke "retiree" like everyone else! >"Bill Gross wrote about it recently" Gross is an interesting dude, and you can't take away from his success. But his fund could be in trouble if we see a "too fast" rise in rates. He likes to talk his book. >"we may have to keep working" This, on many levels. To keep this in the spirit of HN, I think there are going to be some interesting opportunities in the financial education/boomer retirement help space.
jonstewart 13y ago
I knew Wade in undergrad. A mutual friend said of him, "Someday I'll get to say I knew Wade way back when." A LifeHacker post is a LifeHacker post is a LifeHacker post. For the details you want, Wade's blog is here: http://wpfau.blogspot.com/ http://wpfau.blogspot.com/ Jon

phillmv 13y ago

Basically, we're all fucked and I don't understand how anyone retires.

microcolonel 13y ago
Things aren't that hopeless. The point is that you invest in something which has greater growth and dividends, as well as something secure. Right now I'm very young, so I just put a certain amount away into Canadian bank stocks and other stocks with a history of ever-improving dividends. I think there's one particular guy somewhere here in Canada which retired at 30-something on a fairly plain job by investing in solid stocks for the long term.
mathattack 13y ago
I think the real lesson is we don't know how long or how much we'll need to save. We do know that we'll live longer than the people for whom the original pension systems were defined. We also know that returns may not be as good as they have been in the past. What can we do? 1 - Invest reasonable amounts in aggressive enough well diversified tax friendly financial assets with low fees. (Low fee index funds in 401Ks, and 529s for folks with kids) 1.5 - Delink your financial investments from your human capital. If your salary (& options) are very tied to the success of silicon valley, don't invest in the NASDAQ. If you are working for a mining company, avoid commodities funds because you don't want your investments to lose value the same time you lose your job. 2 - Avoid high cost debt. (Credit cards, unsecured bank loans, etc) 3 - Invest time (and if needed, money too) in your professional education continuously. Assume your skills (and salary) will degrade on a trendline of 5-10% each year that you don't invest. 4 - Plan on working a long time. (75? Note - this isn't as hard as previous generations, because less of the work is manual) 5 - Invest in your health, since you'll be working and living longer. 6 - Invest your time in a happy and healthy home life. This sets you up for a pleasant surprise of retiring at 55 if the situation allows, or 75 if it doesn't.

wtvanhest 13y ago

I completely understand time value of money, and I'm going to propose an alternative way of thinking about retirement: You may want to assume no rate of return above the rate of inflation over the long term in your retirement calculation. Why? Because, if you assume you have a rate of return, you must assume you are taking risk in order to get returns above the risk-free rate. Rather than assuming you will earn interest in the market, people may want to consider the strategy of saving like they won't earn interest and scaling back as they get older. The OP suggests that the past 139 years may not look like the future 139 years. I'd say they almost definitely won't. The current generation entering retirement has very big problems ahead, and the younger 20-35 year old generation will have even larger problems with retirement. If you follow my strategy, retirement planning is easy: 1) Assume no inflation in either investments, salary, future needs (this makes sense since they match) 2) Figure out how much money you want to live on in retirement using today's dollars. 3) Divide the number by an assumed interest rate. I'm using 5% for my retirement. (that number is higher than you would get today in income and lower than what has occurred over a long period of time.) In order to have $100,000 a year salary in retirement, you would need to have $2M in the bank in today's dollars. +++This isn't a perfect calculation, but seems far more realistic than assuming you will earn a return above inflation. (An alternative would be to assume you earn a leveraged return above inflation. Its more risky, but could be argued.)

ronaldx 13y ago
This is exactly how I base my calculations. Pension calculators which assume e.g. a 7% annual rate of return (with apparently no inflationary concern) are just financial propaganda.
- mathattack 13y ago
  Worse yet, they are push problems into the future. The pension holders can't count on the money, and the pension funders are allowed to kick the can down the road.
extra88 13y ago
So you're assuming you'll get <em>nothing</em> from Social Security?

rtkwe 13y ago

IIRC the average rate of return for the stock market has been pretty stable. There's the dramatic examples where it spiked above and below the average but those even out and that's about 9% iirc. >4) Why are we to believe the next 40 years will be like the last 139? The last 139 had a different set of wars, different stages of development, a different tax regime, and different government. Yes, past performance isn't a good thing to go on, but speculating on the future regulatory environment and business environment and the rabbit hole of poorly understood interactions is even less useful.

mathattack 13y ago
It is very stable only over the VERY long haul. Look at the SPY index, which is total returns (including dividends) of the S&P. Take it back to 1994, which is as far as Yahoo Finance allows. http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=spy;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=sp... In the almost 20 years since, there are many 5 year periods of rapid drops, and many flat 10 year periods. If you look as the NASDAQ it gets much worse. One can say, "It's been a rare 20 years" but who are we to say the business environment pre-1994 is more similar today than post-1994? I think you can't speculate on what the future will look like, you have to prepare yourself for the uncertainty. (Invest in yourself and your health, prepare for the possibility of retiring later, don't ignore your spouse so much that they divorce you, etc.)
- rtkwe 13y ago
  The retirement timeline for most people falls into that 'very long term' time frame.

onebaddude 13y ago

>"40% short term bonds (which underperform long term bonds) This is not true. What if you are buying during an inverted yield curve? Do you think buying long bonds, today, with rising rates on the horizon, would do better than rolling short bonds? The real mistake in the article is assuming there's some "safe" allocation ratio(60/40 or 40/60!). There are periods (like now with bonds, or stocks in summer 2000) where buying certain assets are a recipe for disaster. But we do anyway. People are going to have to become far more financially literate about their financial futures. >There are no massive events that wipe out returns. We've had two in the past 13 years. There is no need to "assume" those things away when planning long term. For example, equities have recovered their value plus more since the 2008 plunge. The people who lose are the people who sell into the panic (or those who happened to be retiring right at that moment, bad luck). But volatility happens. If you held on, you're back on track.

mathattack 13y ago
On bonds, I'm not sure actually. I am generally short term bearish on the asset class, but I'm not a pro, and I tend to be bearish on most asset classes. Bill Gross wrote about it recently. (http://www.pimco.com/EN/Insights/Pages/Bond-Wars.aspx http://www.pimco.com/EN/Insights/Pages/Bond-Wars.aspx) Over most time horizons, when the yield curve isn't inverted, the longer bonds due perform better, but not necessarily enough to justify the volatility. In terms of equities - I agree, you should hold them. In general equity investments should be "Buy and hold for a long long time". That said, if you look at the past 20 years, there were many 5-10 year periods where you would be down or flat. If you are assuming a fixed retirement date, there are a lot of bad years to retire. http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=spy;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; http://finance.yahoo.com/echarts?s=SPY+Interactive#symbol=sp... I believe that it's much safer to assume we may have to keep working while we keep saving and waiting for asset values to return.
- onebaddude 13y ago
  >"but I'm not a pro" Me neither. I'm trying to put my money where my mouth is and learn as much as possible. Otherwise, I'll be a broke "retiree" like everyone else! >"Bill Gross wrote about it recently" Gross is an interesting dude, and you can't take away from his success. But his fund could be in trouble if we see a "too fast" rise in rates. He likes to talk his book. >"we may have to keep working" This, on many levels. To keep this in the spirit of HN, I think there are going to be some interesting opportunities in the financial education/boomer retirement help space.

jonstewart 13y ago

I knew Wade in undergrad. A mutual friend said of him, "Someday I'll get to say I knew Wade way back when." A LifeHacker post is a LifeHacker post is a LifeHacker post. For the details you want, Wade's blog is here: http://wpfau.blogspot.com/ http://wpfau.blogspot.com/ Jon