Wisconsin governor goes bonkers

Question…Since money saved is usually put into some bank/credit union/whatever where it is then in theory loaned back out again isn’t the money recirculated into the economy in that fashion? Money put into mutual funds doesn’t just go into some hole in the ground never to see the light of day again. There must be some level of saving that is “good” for the economy?

Scuzz, check the small print. People are living together, yes, but in smaller houses than the ones which they had previously for multiple generations. The space per person has shrunk.
This is even more noticeable in rental housing.

There’s also a big difference in what happens to cash based on who it’s with, a major bank or a mutual/credit union…

A 25 year old who invests $1,000 a year (adjusted for inflation) of their $25k salary will (using historical rates) retire with $300k.

At that point, they can take about $30k per year out for the rest of their lives. Throw in social security and their annual income would be better than it was before they retired (assuming we’re talking about someone who never could break the $25k a year salary level).

Well, for the United States, Social Security (and its oft-forgotten partner, mandatory retirement) was created to help move older, more experienced people out of the work force and make room for younger unemployed to help stave off the Great Depression.

Prior to that, and even today for the overwhelming majority of the world’s population, your retirement plan is your children.

Brad - That’s completely ignoring actual returns (low, and historical rates vastly overstate what small portfolios are now seeing - even a few years like this can rapidly erode the value of a portfolio), high fees and the significant chances of major losses at some point. Moreover, returns when retired are also shrinking rapidly, unless they remain in high-risk categories. The low-risk returns are significantly under inflation.

Rimbo - Yup, and that’s why the young are taking it in the neck from abolishing retirement ages in the UK right now. (Employers can no longer force retirement on age, and a VERY significant percentage of people even now are refusing to…)

Well, of course it has; the population has increased, but the size of the planet we live on has remained (roughly) the same.

Rimbo, I suggest you read the historical data on this. Moreover, there are plenty of places in America where land is NOT the significant limiting factor and it’s FAR more significant a change than that simplistic explanation calls for.

Where do you get the smaller houses thing? Here in the US home sizes have increased over the years. Many of these families come together to save a home. The combined incomes and benefits make that possible.

I think I read somewhere just recently where the average home built in the last ten years in over 1,800 sf.

Uhm…when you only make 25K a year, 1000 dollars a year is a lot to put in a retirement account, especially if you have student loans and live in a city of any size. 25-year-olds are also not known for their planning for 40 years down the line. Yes, it is only 4% of your salary – but it’s a lot easier for someone who makes 100K a year to save $4000 a year than for someone who makes 25K to save $1000 a year.

It is certainly possible – I say this as someone who specifically chose to work somewhere with stable employment and a low cost of living so that I could save a lot of money for a very specific purpose – but I think it is unrealistic to expect that that is going to be the norm. And if it was the norm, I think you’d see a lot of other problems in the economy due to contraction in demand.

There’s also the wrinkle that any sort of medical emergency these days could wipe out a substantial portion of your savings, especially if you aren’t getting health insurance because you can’t afford it or because your bargain-basement health insurance didn’t cover it.

Please tell me where I can get 10% guaranteed returns or anything approaching it.

My scenario was premised on putting $1k into say an index stock on eTrade.

I’d imagine someone with an actual portfolio manager would do a lot better. But I’m assuming someone with only $1k per year might only be able to do an IRA.

EvenEinstein had trouble with compound interest. ;-)

Haven’t there been studies that show actual portfolio managers rarely do any better than index funds (and many do substantially worse)?

It affects the distribution of those wages, but it doesn’t reduce them overall. Cases where international trade reduce income are rare. So far the impact on tax revenue has been minimal; if anything it’s probably increased it by driving more income to higher-bracket earners.

When FDR picked 65 as the age for Social Security life expectancy was about 65.

This is a completely inaccurate bit of conventional wisdom.

If we look at life expectancy statistics from the 1930s we might come to the conclusion that the Social Security program was designed in such a way that people would work for many years paying in taxes, but would not live long enough to collect benefits. Life expectancy at birth in 1930 was indeed only 58 for men and 62 for women, and the retirement age was 65. But life expectancy at birth in the early decades of the 20th century was low due mainly to high infant mortality, and someone who died as a child would never have worked and paid into Social Security. A more appropriate measure is probably life expectancy after attainment of adulthood.

As Table 1 indicates, the average life expectancy at age 65 (i.e., the number of years a person could be expected to receive unreduced Social Security retirement benefits) has increased a modest 5 years (on average) since 1940. So, for example, men attaining 65 in 1990 can expect to live for 15.3 years compared to 12.7 years for men attaining 65 back in 1940.

Wow, Brad, that’s really bad info.

10% withdrawal rate in retirement? Pfft…

Also, by my calculations, for $1000 real contributions from a 25 year old to grow to $300K real by retirement, you’d need somewhat over 8% real returns (after any taxes, as well).

You seem to think that 8% or better real returns represent a typical/likely/expected case for folks investing or retiring now. I think you’re way off.

I’m using the historical average and then subtracting various fees, inflation adjustments. etc.

You only need an effective rate of a little over 5% annually to get $300k by the time you retire.

Why start at 25? If we’re discussing “the poor” here we’re probably talking about someone who started work at 18 (never went to college).

So using a compound interest calculator. You can get to $300k.

The general rule of thumb is you can take 5% out annually and not deplete your portfolio. But someone retiring we can assume is ok with their portfolio being depleted gradually over time. So you’d double that – 10%. That would give them enough to go well beyond the average life expectancy in style.

5% sounds roughly correct…but if you are withdrawing 10% of your IRA, you’ll probably kill it before you don’t need it anymore (assuming you retire at 65). Especially since when you’re in your retirement you’re probably shifting your retirement fund to less-risky, lower-yield investments like bonds, where the return is probably closer to 2-3%, I’d guess.

To be pedantic, 40 years at $1,000 a year only gets you ~$200k at 7%. It takes 8.5% to clear $300k. That’s roughly inline with 20th century United States performance, but I would never recommend anyone use that rate for planning, due to:

  1. It’s only the US, and only in the 20th century.
  2. That level of return is highly dependent on the equity premium puzzle. If that gap - which makes real no rational sense in any framework I’ve seen - was somehow specific to that time period - the kind of investors? The kind of growth? - you’d be looking at US bond returns instead, which are ballpark 2-4%.

$300k is plenty to retire on if your starting salary is only $25k though - assuming you’re also getting Social Security.

In practical terms, society is designed in a way where anyone outside the upper middle class has a very hard time saving before 30 or so, and there’s social norms against it. God forbid you live with your parents, for example; no one will date you. Also note that if they did suddenly start saving in droves it’d drive the overall capital rate of return through the floor. You can see this in developing countries like middle-century Singapore or Japan - high rates of saving, much lower returns on capital.

Young people have saved little for centuries, and people have been complaining about it for that entire time. The personal savings rate was virtually unchanged 1950-1990. It dropped in just about the entire developed world starting in the 1990s. As the paper describes, the only explanation anyone takes seriously is wealth effects on house prices and equities; at the time of publication households 80% had actually saved too much. Obviously the economic crash has changed that, but predicting economic crashes and baking it into their retirement planning is not the job of the general public.

Historically, the average annual return is 9.8%. But I am assuming that there will be fees, taxes, and just plain back luck. On the other hand, I am also assuming that the person in question goes their whole life at the bottom of the economic food chain. It also assumes that people would still expect to retire in their mid-60s which seems implausible to me (mainly because we’re getting relatively healthier).

But let’s assume you retire in your mid-60s with your $300k nest egg with the balance being kept in a conservative portfolio that’s only netting 5% per year. You could take out 10% of that annually and keep going without it running out for a long time.

This, again, assumes you have no other assets (like a house which one can do a reverse mortgage).

Youth is wasted on the young. That’s why I think we should eat them (old people are all stringy and yucky).