Friday, November 22, 2013

The Retirement Model

Lifehacker urges that we will improve our chances of solace in retirement by a factor of 10.  It's intriguing, although I am not sure it is fully articulated. I suppose the point is: would you give up 10 later on for one now?  I guess I see that except if we are doing the time-is-money comparison we'd want to discount that future 10 back to present value we might wind up right where we started from, which is not exactly what they had in mind, now is it?

Joel is not impressed.  " Too optimistic about the rate of return in my humble opinion," he says.  I haven't cross-examined him on the point but I think I see where he is going.  Sure enough, (1.06)^40=10.29, which is to say that a dollar compounded at such  a rate from age 25 would yield $10.29 at age 65.  And I take it on faith that the S and P has yielded something like six percent over the past couple of generations (I haven't done the homework myself).   I'll even concede that we're talkin' real returns here, i.e., inflation adjusted.  Still, are we looking forward to another 40 years of six percent real?  Oh my.  On the other hand, I don't suppose many people forecast the real returns of the last generation, either.

[Compare: public employee pension funds are still assuming 7-7.5 percent, and that is part of the problem, not so?]

And of course the rate is just the beginning.  Recall, so far we are talking about investment at age 25. And how many 25-year-olds do you know who are fully funding their 401ks  right now, huh?  Huh?  But to get the same $10 from, say, a mere  30 years, you'd need to start with a buck 75.  From 20 years, a bit over $3.10.  From ten years, you don't even want to know.

So I agree with Joel that a 10 factor is a fantasy.  FWIW, I do think I have some sense of why we are in such a pension mess, though understanding it may not be much help.  The trouble is--well, sure, there are corrupt and incompetent managers, lying politicians, greedy unions and all that.  But a major difficulty, IMO, is that the whole structure of the pension system is such that none but the mavens has any sense what a pension really costs.  You worked for BigCo for 40 years, you looked forward to a defined-benefit payout. Just as you come to the golden day, the fund collapses and you get nothing or, if lucky, the measly payout from the Pension Benefit Guarantee Corporation. Well, of course you were disappointed: the employer was robbing you blind. The trouble is, if the employer had dealt with you honestly, it surely would have affected your compensation all those years on the job.  Similar with public: we could make those glorious promises to people like, well,  me, only to the extent that we weren't paying for them.  A new world in which we all live longer, and want not to have to work forever, and where we have to tot up the true cost of those golden years--it won't be nearly as much fun as it was to live on smoke and mirrors.

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