Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
bobcat2
Posts: 5202
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by bobcat2 » Mon Jul 18, 2016 9:58 pm

Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Presentation on modern retirement by John Shoven of Stanford. No need for me to comment, Shoven's presentation speaks for itself.
Link to presentation slides - http://gflec.org/wp-content/uploads/201 ... 376d5a.pdf

Note - Shoven's presentation was made just before Congress changed the rules on file and suspend so that small part of the presentation is no longer relevant, but the rest is.


Here is a link to the booklet Shoven and Sita Slavov authored on Social Security strategies.

Efficient Retirement Design by Shoven and Slavov
Link - http://docplayer.net/5675214-Efficient- ... -2013.html

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

jjface
Posts: 2527
Joined: Thu Mar 19, 2015 6:18 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by jjface » Mon Jul 18, 2016 11:01 pm

Thanks for the post.

People could actually try harder saving for retirement though and that would solve the problem!

AlohaJoe
Posts: 3458
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by AlohaJoe » Mon Jul 18, 2016 11:03 pm

We're certainly in the middle of some interesting times when it comes to old-age and working life, with very few straightforward answers.

The presentation has a few interesting nuggets (like the suggestion to remove the 15.3% social security tax after 160 quarters) but I became disappointed when they spent the majority of the time rehashing the same old "how to maximimise your social security" stuff that you can find on hundreds of blogs.

If you're going to make a big point out of "you can't finance a 30 year retirement with 40 year careers" I would expect them to spend more time on the extended career part of the problem instead of just glossing it over with "The easiest solution is to work longer". I think the problem is a lot more complicated than that; it would have been interesting to see them spend more time on that part of the equation and less time on squeezing Social Security.

Wayson
Posts: 75
Joined: Thu Jul 10, 2014 11:33 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Wayson » Mon Jul 18, 2016 11:07 pm

Well that's a depressing read. Page 9's assertion is: "You can't finance 30-year retirements with 40-year careers!"

Page 10 reveals the author's logic. He apparently assumes that personal savings will be small overall - e.g. a couple with an average income of $90k+ will only have $250k in their retirement funds by their early 60s - and that people will be reliant on government pensions and Social Security. The solution? 'Work longer', while eliminating all early retirement incentives. He completely lost me when he said that we should look at how Japanese labor markets work, and then adopt those notions.

The final conclusion, if you were curious, was "Americans can’t finance 30-year retirements publicly or privately."

Suffice it to say, I disagree.

Bill Bernstein
Posts: 555
Joined: Sat Jun 23, 2007 12:47 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Bill Bernstein » Mon Jul 18, 2016 11:32 pm

Excellent presentation, but there's an even simpler way to look at it, which is the paradigm of Arnott and Cascells, FAJ, 2003:

Imagine a desert island with 4 inhabitants, each of who performs a separate, vital economic task (growing food, building shelter, repairing equipment, etc.). The medium of exchange is coconuts. Further imagine that one has saved enough coconuts to retire.

We now have 3 workers supporting one retiree--a 1:3 dependency ratio.

Then, another retires; we now have a 1:1 dependency ratio, and the island's GDP has fallen by 33.3%. No matter how many coconuts that second retiree has saved, the aggregate GDP, and with it the standard of living, has also fallen by 33.3%.

In a closed system, stocks and bonds, like the island's coconuts, are just a medium of exchange. As our dependency ratio creeps towards 1:1 (a world in which everyone works from 25 to 60, retires from 60 to 95 is not unimaginable), per capita income must also fall.

I.e., we can't save our way out of this problem.

By definition, either the average person retires later, or the average person accepts a greatly reduced standard of living.

You might argue that with free international capital flows, we don't live in a closed system. True enough. The problem is that among the world's developed nations, the U.S. has the most favorable demographics. I.e., the rest of the developed world is in no position to bail us out.

Bill

letsgobobby
Posts: 11362
Joined: Fri Sep 18, 2009 1:10 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by letsgobobby » Tue Jul 19, 2016 12:39 am

I don't understand the analogy. If the two retired workers had a million coconuts, there'd be incentive for the remaining two workers to learn the two is sing skills and substantially increase their working hours - and possibly their productivity. Why must GDP fall?

User avatar
warowits
Posts: 354
Joined: Tue Sep 29, 2015 2:38 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by warowits » Tue Jul 19, 2016 12:43 am

Bill Bernstein wrote: I.e., we can't save our way out of this problem.
Not as a nation, but individually I mean to give it a try. :D
There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

User avatar
warowits
Posts: 354
Joined: Tue Sep 29, 2015 2:38 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by warowits » Tue Jul 19, 2016 1:05 am

jjface wrote: People could actually try harder saving for retirement though and that would solve the problem!
Individually sure, but as a nation the answer has to be longer careers and/or increases in productivity (or reduced income). If the whole nation saved like Bogleheads it would not fix the problem, because it would not increase GDP. Saving works best when you are the only one who does it.
There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

jjface
Posts: 2527
Joined: Thu Mar 19, 2015 6:18 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by jjface » Tue Jul 19, 2016 1:42 am

warowits wrote:
jjface wrote: People could actually try harder saving for retirement though and that would solve the problem!
Individually sure, but as a nation the answer has to be longer careers and/or increases in productivity (or reduced income). If the whole nation saved like Bogleheads it would not fix the problem, because it would not increase GDP. Saving works best when you are the only one who does it.
If the first had enough coconuts to retire then where did they come from? There must be food circulating in the system or some other resource that created the coconut that someone else has yet to consume. So the other 3 are not working to support the retiree as there is already enough in the system to support the fourth. Now if there is waste or there was a 5th on the island who took more than his fair share before passing then that is where the dependency arises - so if they can learn to eliminate waste and then learn to improve efficiency that dependency is reduced or can be eliminated without an increase in the others working longer or making do with less.

A war or deadly disease might also "solve" the problem but undesirably.

Or the retiree could just eat the coconuts :oops:

AlohaJoe
Posts: 3458
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by AlohaJoe » Tue Jul 19, 2016 2:06 am

This appears to be the paper that William Bernstein mentioned above: http://www.cfapubs.org/doi/pdf/10.2469/faj.v59.n2.2511

qwertyjazz
Posts: 1055
Joined: Tue Feb 23, 2016 4:24 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by qwertyjazz » Tue Jul 19, 2016 6:29 am

Bill Bernstein wrote:Excellent presentation, but there's an even simpler way to look at it, which is the paradigm of Arnott and Cascells, FAJ, 2003:

Imagine a desert island with 4 inhabitants, each of who performs a separate, vital economic task (growing food, building shelter, repairing equipment, etc.). The medium of exchange is coconuts. Further imagine that one has saved enough coconuts to retire.

We now have 3 workers supporting one retiree--a 1:3 dependency ratio.

Then, another retires; we now have a 1:1 dependency ratio, and the island's GDP has fallen by 33.3%. No matter how many coconuts that second retiree has saved, the aggregate GDP, and with it the standard of living, has also fallen by 33.3%.

In a closed system, stocks and bonds, like the island's coconuts, are just a medium of exchange. As our dependency ratio creeps towards 1:1 (a world in which everyone works from 25 to 60, retires from 60 to 95 is not unimaginable), per capita income must also fall.

I.e., we can't save our way out of this problem.

By definition, either the average person retires later, or the average person accepts a greatly reduced standard of living.

You might argue that with free international capital flows, we don't live in a closed system. True enough. The problem is that among the world's developed nations, the U.S. has the most favorable demographics. I.e., the rest of the developed world is in no position to bail us out.

Bill
There is the micro vs macro analysis. My plan does not have to be reproducible throughout society to work for me.
But there is also the micro worry from the macro dynamic. No one saves anything even as valuable as coconuts for use or increae in productivity. We save methods of exchange and rights - some property and some government (SS). They do not add to the total use or productivity. We rely on the system valuing these measures to encourage the productivity of current workers and identity issues of those saving is someone's family member. What government or institution would want to hurt their own family? We also rely on increases in productivity and the fact that a retiree may be willing to live on what they had 50 years ago which may be less than the current average.
In other words, demographics is not destiny in either the micro or macro level. But it sure should make us doubt the value of savings in 50 years.
G.E. Box "All models are wrong, but some are useful."

User avatar
Johnnie
Posts: 497
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Johnnie » Tue Jul 19, 2016 8:54 am

warowits wrote:
jjface wrote: People could actually try harder saving for retirement though and that would solve the problem!
Individually sure, but as a nation the answer has to be longer careers and/or increases in productivity (or reduced income). If the whole nation saved like Bogleheads it would not fix the problem, because it would not increase GDP. Saving works best when you are the only one who does it.
But if the whole nation saved like Bogleheads - who do not stuff mattresses with greenbacks - there would more capital available to invest in new and more productive ways to provide goods and services, and more wealth created. IOW, there are two sides to the savings equation.

Granted, at the moment the world seems to awash in surplus capital, or central bank funny money, or something, and light on innovative ways and opportunities to put it to work. But in the long run (preferably not the Keynesian definition) this too will pass.
"I know nothing."

Philociraptor
Posts: 41
Joined: Thu May 22, 2014 9:22 am
Location: DFW, Texas

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Philociraptor » Tue Jul 19, 2016 9:22 am

Bill Bernstein wrote:Excellent presentation, but there's an even simpler way to look at it, which is the paradigm of Arnott and Cascells, FAJ, 2003:

Imagine a desert island with 4 inhabitants, each of who performs a separate, vital economic task (growing food, building shelter, repairing equipment, etc.). The medium of exchange is coconuts. Further imagine that one has saved enough coconuts to retire.

We now have 3 workers supporting one retiree--a 1:3 dependency ratio.

Then, another retires; we now have a 1:1 dependency ratio, and the island's GDP has fallen by 33.3%. No matter how many coconuts that second retiree has saved, the aggregate GDP, and with it the standard of living, has also fallen by 33.3%.

In a closed system, stocks and bonds, like the island's coconuts, are just a medium of exchange. As our dependency ratio creeps towards 1:1 (a world in which everyone works from 25 to 60, retires from 60 to 95 is not unimaginable), per capita income must also fall.

I.e., we can't save our way out of this problem.

By definition, either the average person retires later, or the average person accepts a greatly reduced standard of living.

You might argue that with free international capital flows, we don't live in a closed system. True enough. The problem is that among the world's developed nations, the U.S. has the most favorable demographics. I.e., the rest of the developed world is in no position to bail us out.

Bill
I like the analogy, but it doesn't really account for improvements in the means of production. The two remaining workers' productivity is constantly increasing, meaning they can work "normal" hours but still produce enough for everyone. In the real world, production rates are always improving. Take food for example, we already produce enough for nobody to be hungry, it's just a question of distribution.

User avatar
bobcat2
Posts: 5202
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by bobcat2 » Tue Jul 19, 2016 9:25 am

Johnnie wrote:
warowits wrote:... as a nation the answer has to be longer careers and/or increases in productivity (or reduced income). If the whole nation saved like Bogleheads it would not fix the problem, because it would not increase GDP.
But if the whole nation saved like Bogleheads - who do not stuff mattresses with greenbacks - there would more capital available to invest in new and more productive ways to provide goods and services, and more wealth created. IOW, there are two sides to the savings equation.

Granted, at the moment the world seems to awash in surplus capital...
The moment you speak of is eight years and counting. :D As John Shoven, Bill Bernstein, Robert Merton, warowits above, and many others have pointed out this problem cannot be solved by people having short work lives and long retirements. Greater life expectancy is a blessing, but with longer lives comes a need to work longer.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

User avatar
bobcat2
Posts: 5202
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by bobcat2 » Tue Jul 19, 2016 9:30 am

Philociraptor wrote: In the real world, production rates are always improving.

In the real world US productivity rates have grown much slower since 1970 than they did from 1920-1970.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

qwertyjazz
Posts: 1055
Joined: Tue Feb 23, 2016 4:24 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by qwertyjazz » Tue Jul 19, 2016 9:37 am

Are we talking about 2 different things when we speak of the world being awash in capital? There is the capital that actually makes things - human and machine. There are the mechanisms of exchange (coconuts) that buy things. Am I understand the argument correctly in rephrasing it as we cannot only focus on the second type of capital?

Thank you
QJ

User avatar
bobcat2
Posts: 5202
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by bobcat2 » Tue Jul 19, 2016 9:57 am

qwertyjazz wrote:Are we talking about 2 different things when we speak of the world being awash in capital? There is the capital that actually makes things - human and machine. There are the mechanisms of exchange (coconuts) that buy things. Am I understand the argument correctly in rephrasing it as we cannot only focus on the second type of capital?

Thank you
QJ
The world is awash in financial capital. Demand for products and services is low and has resulted in low levels of investment. On top of that overall innovation has slowed since the early 1970s. While innovation in information technology has been rapid, broad economy wide innovation has slowed. As spectacular as computer innovation has been, it has not had the broad economy wide affects that electricity and the internal combustion engine had on the first 2/3s of the 20th century. Maybe in the future information technology innovations will have the broad impact that electricity and the internal combustion engine had in that earlier time, but so far that has not been the case.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

User avatar
Kenkat
Posts: 4130
Joined: Thu Mar 01, 2007 11:18 am
Location: Cincinnati, OH

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Kenkat » Tue Jul 19, 2016 10:05 am

I think what you see already happening is that some people will have to finance a 30 year retirement by supplementing their retirement by working. Not necessarily a full time job and not necessarily a career type job, but something pulling in extra income. Those who save the most may avoid this completely, those that save the least may be working full time at Wal-Mart when they are 70, and a number will fall in between.

One thing that will happen I think is that as the number of retirees climbs in proportion to those working, there will be upward pressure on wages. This will create either higher pay for those still working, provide incentive for those retired to pick up a few hours at a part time job, or probably some combination of both.

I do agree that not everyone can just retiree early and live longer. Behaviors will have to be adjusted to account for this by some, possibly all. I do think it is possible for those who save a lot when working and have modest expenses may still be able to pull it off.

User avatar
randomizer
Posts: 1322
Joined: Sun Jul 06, 2014 3:46 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by randomizer » Tue Jul 19, 2016 10:20 am

AlohaJoe wrote:This appears to be the paper that William Bernstein mentioned above: http://www.cfapubs.org/doi/pdf/10.2469/faj.v59.n2.2511
Thanks for this. Fascinating and clear, albeit depressing. I guess working a few more years is not so bad... Sure makes me think about my own mortality though.
75:25 — HODL the course!

staythecourse
Posts: 5739
Joined: Mon Jan 03, 2011 9:40 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by staythecourse » Tue Jul 19, 2016 10:56 am

Apologize in advance as I only skimmed the presentation that was linked...

Have no clue who the author is made the presentation, but it is pretty simplistic and would have expected better if he is a big shot.

First, what do you mean you "CAN"T" finance a 30 yr. retirement in a 40 yr. career? The word "CAN'T" is a term for meaning never. So is the author actually saying NO ONE has EVER lived for 30 yrs. in retirement after working 40 yrs.? The truth is of course they have so he is already wrong. Folks have done it on careers shorter then that. So how about changing it to "difficult" or "challenging"?

Second, his first few slides show a 65 yr. old living longer then they did in the past. Absolutely, but the % are still against one getting to 80 or 90. Just like they were 50 yrs. ago. It is not the norm (>1S.D. or 2/3 of folks). So we are not talking about the majority of the population. So is the idea to make fundamental changes to help the small minority?

Third, are we sure if you do you will have a less comfortable existence then you would have at the same age if it was 50 yrs. ago? I don't think so. We have MANY more social programs then we did back then. A poor 80 yr. old is better off now then he would have been 50 yrs. ago. I cringe to think what happened to a 80 yr. old in 1960 who had no money.

Fourth, It is naive and just plain simplistic to say, "Well the answer is just work longer". NO DUH. You don't need to be an expert to figure that one out. The issue is who is going to give a 65 yr. old a job over a 20 yr. old who would do the job cheaper (due to lack of experience). Even if you did find jobs for all 65 yr. olds to work to 80 or whatever what are the new grads going to do? How will they find jobs? In that case how would a young person start saving for retirement if an older worker is given preference to stay in a job? The number of jobs are only going to shrink going forward due to automization and globalization so where are all these jobs to be had?

Fifth, He doesn't include many aspects that make the next 50 yr. different then the last 50. The biggest is likely to be the single largest transgenerational transfer of money EVER. How will that impact retirements going forward? Or how about how many folks will move out of the country to low cost foreign countries? Or how about states likely to change laws to compete for future retirees? Too many possibilities.

Sixth, Couldn't one just make one slide as the answer being cut down on expenses, adapt year to year, and buy SPIAs to eliminate longevit risk? These are nothing new.

Seventh, I am sick of presentations all saying the same thing. The question to answer is not if there is a problem, but EXACTLY are you going to solve the problem.

Just some points of the top of my head. All I know in my short life is when folks make extreme viewpoints they are almost never right. The truth is there will be unique challenges going forward as there are in EVERY generation yet the world still spins and folks still live their lives.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

cpw84
Posts: 132
Joined: Thu Mar 17, 2016 2:12 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by cpw84 » Tue Jul 19, 2016 12:07 pm

Philociraptor wrote:
Bill Bernstein wrote:Excellent presentation, but there's an even simpler way to look at it, which is the paradigm of Arnott and Cascells, FAJ, 2003:

Imagine a desert island with 4 inhabitants, each of who performs a separate, vital economic task (growing food, building shelter, repairing equipment, etc.). The medium of exchange is coconuts. Further imagine that one has saved enough coconuts to retire.

We now have 3 workers supporting one retiree--a 1:3 dependency ratio.

Then, another retires; we now have a 1:1 dependency ratio, and the island's GDP has fallen by 33.3%. No matter how many coconuts that second retiree has saved, the aggregate GDP, and with it the standard of living, has also fallen by 33.3%.

In a closed system, stocks and bonds, like the island's coconuts, are just a medium of exchange. As our dependency ratio creeps towards 1:1 (a world in which everyone works from 25 to 60, retires from 60 to 95 is not unimaginable), per capita income must also fall.

I.e., we can't save our way out of this problem.

By definition, either the average person retires later, or the average person accepts a greatly reduced standard of living.

You might argue that with free international capital flows, we don't live in a closed system. True enough. The problem is that among the world's developed nations, the U.S. has the most favorable demographics. I.e., the rest of the developed world is in no position to bail us out.

Bill
I like the analogy, but it doesn't really account for improvements in the means of production. The two remaining workers' productivity is constantly increasing, meaning they can work "normal" hours but still produce enough for everyone. In the real world, production rates are always improving. Take food for example, we already produce enough for nobody to be hungry, it's just a question of distribution.
If you manage to live on less expense than the average person, per Bill's example, you're probably going to do ok. This fits the "accept a greatly reduced standard of living" case, with extra savings if you embraced that approach before retirement. This bodes well for minimalists like myself. To your point, I think that standard of living itself could go up on average as a result of improvements and innovations. There are services today that people pay for that they couldn't even imagine decades ago. I think that gives a lot of us more wiggle room to slip under the average standard of living.

The lesson I gather from this is to learn to live on less and save more, not chasing the latest unnecessary expenditures. People will continue to spend more and demand new services and technologies. The whole expected comfortable standard of living will rise with these new services and technologies. The only changes I see to that trend are out of necessity. For example, a lot of young people, stuck with student debt and poor job prospects, are leading the charge of cord cutters. They are sacrificing the standard of living their parents expected - the idea that everyone has cable.

Philociraptor
Posts: 41
Joined: Thu May 22, 2014 9:22 am
Location: DFW, Texas

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Philociraptor » Tue Jul 19, 2016 1:37 pm

cpw84 wrote:
Philociraptor wrote:
Bill Bernstein wrote:Excellent presentation...
I like the analogy, but...
If you manage to live on less expense than the average person, per Bill's example, you're probably going to do ok. This fits the "accept a greatly reduced standard of living" case, with extra savings if you embraced that approach before retirement. This bodes well for minimalists like myself. To your point, I think that standard of living itself could go up on average as a result of improvements and innovations. There are services today that people pay for that they couldn't even imagine decades ago. I think that gives a lot of us more wiggle room to slip under the average standard of living.

The lesson I gather from this is to learn to live on less and save more, not chasing the latest unnecessary expenditures. People will continue to spend more and demand new services and technologies. The whole expected comfortable standard of living will rise with these new services and technologies. The only changes I see to that trend are out of necessity. For example, a lot of young people, stuck with student debt and poor job prospects, are leading the charge of cord cutters. They are sacrificing the standard of living their parents expected - the idea that everyone has cable.
I suppose I take issue with conflating "greatly reduced standard of living" with fewer expenses. I feel like having fewer expenses actually improves my standard of living by uncomplicating my life and allowing a higher savings rate (40% of gross last year). My personal response to the presentation is not to work longer but instead to live further below your means and save more during your working years.

User avatar
MossySF
Posts: 2272
Joined: Thu Apr 19, 2007 9:51 pm
Contact:

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by MossySF » Tue Jul 19, 2016 9:13 pm

This article/thread is not talking about individuals but the economy as a whole.

You can out-save your peer in order to get a better comparative retirement. If you are saving 50% and while everybody else is saving 5%, your massive portfolio can fund your trips for Swiss Alps skiing, Great Barrier Reef snorkeling, Hong Kong shopping.

But if the entire economy is saving 50%, your 50% only produces an average retirement standard of living. Everybody on the island with $1M but only 1 coconut to buy means the coconut will cost $1M. (Probably more than $1M .. perhaps multiple people will group together to buy that single coconut to crowd out the minority.)

There is an effect of savings/investing increasing productivity to increase the number of coconuts on the island -- but there's a limit. From looking at the investment mania bubbles/crashes, it feels like the limit is roughly pegged to the population & natural resources. When you use capital to start businesses, they compete with each other and in competition, there are winners and losers so that also implies a limit to the extra productivity from extra capital investments.

Atilla
Posts: 1224
Joined: Tue Feb 09, 2010 7:44 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Atilla » Tue Jul 19, 2016 9:40 pm

So far my father in law is financing a 30+ year retirement on a 30 year career with no end in sight.

But he was a civil servant.
The Village Idiot - here for your entertainment.

User avatar
Watty
Posts: 13439
Joined: Wed Oct 10, 2007 3:55 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Watty » Tue Jul 19, 2016 10:53 pm

Wayson wrote: He completely lost me when he said that we should look at how Japanese labor markets work, and then adopt those notions.
He probably didn't mean "Karōshi" but it would work.

https://en.wikipedia.org/wiki/Kar%C5%8Dshi

dltnfs
Posts: 282
Joined: Sun Feb 16, 2014 11:54 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by dltnfs » Tue Jul 19, 2016 11:08 pm

A lot of reasoning here seems to assume that the only purpose of saving is to purchase future labor. That's one possibility, but an investment in infrastructure (roads, buildings, bridges, machinery) will return future benefits independently of that.

Even if everyone lived as hermits alone in the wilderness, I could out-save my peers by building a longer-lasting house, stockpiling firewood, clearing brush to plant fields near my house, etc.

User avatar
MossySF
Posts: 2272
Joined: Thu Apr 19, 2007 9:51 pm
Contact:

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by MossySF » Tue Jul 19, 2016 11:51 pm

dltnfs wrote:A lot of reasoning here seems to assume that the only purpose of saving is to purchase future labor. That's one possibility, but an investment in infrastructure (roads, buildings, bridges, machinery) will return future benefits independently of that.

Even if everyone lived as hermits alone in the wilderness, I could out-save my peers by building a longer-lasting house, stockpiling firewood, clearing brush to plant fields near my house, etc.
But sometimes that returns on that are way into the future where you don't benefit from it. China went on an inftrastructure building spree since 2008. There are now empty cities, highways, airports, train stations everywhere. In 20 years, growth will expand to use it up. But that doesn't help the current retirees depending on economic growth ... nor does it help the investors who aren't getting any returns (or perhaps even seeing losses) because their stock valuations have gone down or the companies can't repay the bonds.

Now -- despite all that's been said in this thread -- we are overlooking the human factor. We are social animals. Many experiments on monkeys/apes and surveys done on humans have shown that we don't care about the absolute value being received -- just that we are getting our "fair share". Many studies have shown we'd rather be paid a lesser amount that is more than our coworkers than vice versa (larger nominal amount but less than coworkers). So in a shrinking pie, all that matters is your position compared to your peers -- after some period of angst and adjustment. We may not be able to fund retirement at a nominal/static $X dollars but we can fund retirement at a relative dollar amount. And if everybody has less money to buy, that drives the prices down where we end up with the same standard of living anyways. The single coconut tree on the island grows Y coconuts per year regardless of the retired vs working ratio.

User avatar
baw703916
Posts: 6676
Joined: Sun Apr 01, 2007 1:10 pm
Location: Seattle

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by baw703916 » Wed Jul 20, 2016 12:17 am

Is everyone going to have a happy retirement in the Lake Wobegon Retirement Community, where all the nest eggs are above average?
Most of my posts assume no behavioral errors.

Texanbybirth
Posts: 812
Joined: Tue Apr 14, 2015 12:07 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Texanbybirth » Wed Jul 20, 2016 10:49 am

This study seems to corroborate some of the demographic problems mentioned in the above posts:

http://durableportfolios.com/docs/398/9 ... _Final.pdf

"While retirement funding is emerging as a major challenge for most economies around the world, the problem is unequivocally more pressing in developed nations due to a massive demographic transition that is changing the retirement landscapes in these economies." pg 3

User avatar
dmcmahon
Posts: 1870
Joined: Fri Mar 21, 2008 10:29 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by dmcmahon » Wed Jul 20, 2016 11:28 am

The islanders and coconut analogy shows only that it's not practical to accumulate claims on future production as a means to finance retirement unless the pool of workers is expanding. In the real world of the island, retirement of any of the workers can only be financed by either stockpiling necessities or by building automated production facilities. If the first worker had stockpiled everything he would ever need to consume, plus enough consumables to barter for any services he might need in future, it would work. This is of course impractical, so he would be well advised to use excess productivity (the ultimate source of the coconuts) to construct a robot.

User avatar
jwillis77373
Posts: 393
Joined: Mon Jun 25, 2007 9:52 pm
Location: Texas

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by jwillis77373 » Wed Jul 20, 2016 1:38 pm

Strange the premise is based on a "Closed" system.

For all those who propose diversification through International Investing, its somewhat missing the point that borders and economies are already "porous" they have been since Marco Polo's time and before.

In reality you could look at each nation or nation-economy as a colony of microbes or cluster of a species. They tend to grow to consume all resources and experience expansions and contractions... depending on their individual differences due to evolution. The contractions come when large division between the well off and less well off exist, hanging on to old ideas and ways of doing things and protectionism.

It may all be in our heads, but we evolve business strategies and ways of growing, typically different from our neighbors.. its only fairly recently we've started trying transplants of ideas and cloning economic models (and entire businesses) from one system to another. Moving Manufacturing overseas and from country to country, Outsourcing technology support, and then development to India, ect.. All predicated on the belief in common goals and a stable flow of goods and services under international regulation and laws (which isn't the norm, its usually more competitive and less harmonious.. we are in a new Victorian age right now)

It might lead to a homogenous World Economy and World Government someday.. but the EU is a prime example that it isn't now.. and its not in the near future. We're more likely to slip out of the 'New Victorian Age' and go through a few Economic World Wars first.

As for this retirement paradox.. I would have thought the answer both obvious and a certainty.

First people tend to die in retirement "faster" than if they kept on working, nothing leads to decline and health problems faster than sitting around waiting for the mailman.. its almost euthansia. I don't discount ageism and "forced retirement" due to being unable to find a job, but accepting that fate and 'settling' is generally a lot less healthy. - so.. larger retirement population, shorter lifespans.

Second Immigration or Importation of laborers and making them citizens who pay into the Tax collection system, as opposed to illegal immigrants exporting Tax and Income to other countries.. or just not paying Taxes and living outside the system is both a double edged (problem and solution). Many countries around the world have to dance with this issue. - so.. Social Security system lacking paying workers into the system; convert immigrants into tax paying citizens (or visa workers with mandatory equal pay for visa workers, equal to what residents get paid, who must then make up the difference in Social Security taxes.. anything else like H-1B visas is corporate welfare). < this opinion is close to a political view.. but I hope its not something taken as such.. its just a fact if you discount immigrant labor, even if they pay social security taxes, they will pay less into the system.

A 40 year career would scale from a low income to a maximum income, but say they had an increase in pay to keep up with inflation and a marginal increase based on merit or job changes.. 5 to 6% minus 3% inflation so 2-3%.. then if they saved something like 10% of income per year and invested in low cost index funds, in a stable local national market with no taxes since they used Traditional or Roth IRA/401k/403b/457 we are talking something like 7% before taking the market into account. 40 years is enough time for the rule of 7/11 to double the balance conservatively around four times.. (10%, 20%, 40%, 80% .. social security was designed with idea of providing 20% - and we're still not depending on the market gains, which are not a certainty, but over 200 years they have been more than zero) I think there is a lot of room for wasting time, and down right bankruptcy and still come out on top.. and have a 30 year retirement.. if they live that long.

-- the problems with this potential is education; fresh out of high school a person is supposed to make major decisions about their next ten years, and pick a loan provider an educational institution, or the military (or rarely start a business, more often replicate their parents career choice).. all with no experience based on parents "past performance data" in a world that is constantly changing and will not look anything like their parents.. because once that path has played out everyone else is picking the path to being the CEO of Google and going off to take Computer Science or be a Doctor (which are notoriously bad investors, and that assumes a fair level playing feild with no Nepotism or $1 million dollar loans from Dad).

Pair two people up each with their family baggage and throw a kid or two in the mix and no one person is making a unilateral decision about anything in the family. Plus they slowly accept caregiver status for each extended family member of the newly co-joined and extended family. (it makes singlehood almost seem to have multiple advantages).

garlandwhizzer
Posts: 1882
Joined: Fri Aug 06, 2010 3:42 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by garlandwhizzer » Wed Jul 20, 2016 1:54 pm

I agree with Bill Bernstein on this one. Thanks, Bill, for your input.

There are real challenges ahead in financing retirement particularly in developed economies. One answer for individuals, as many posters have pointed out, is to save and invest more, reducing personal consumption in favor of investment or paying down debt which improves the individual's odds for financing retirement. The downside of this approach is that by reducing consumption in aggregate reduces aggregate demand for goods and services which is the driving force for future economic growth. This effect is already happening in all DMs now where increasing numbers of consumers are seeing the writing on the wall about retirement, shifting from consumption to saving and investing or paying down debt. Unfortunately aggregate demand remains sluggish and that, rather than saving or paying down debt, is what drives total economic growth. It creates a paradox. The developed world is awash with savings and all investment assets in the US, the safest place to invest, have been driven up to richly valued levels. On the other hand, in spite of all these savings and the lowest interest rates in history, DM economic growth is essentially nonexistent and US growth is much lower than historical averages, largely resistant to almost a decade of the most aggressive monetary easing in history. The bottom line problem that keeps us from robust growth is weak growth of aggregate demand which is in turn related to high debt levels both personal and governmental, aging demographics, declining worker productivity growth (which has been the case for a decade) and, finally in recent years, the US consumer shift away for debt-fuelled consumption into saving and investment. Consumers are fearful and uncertainty reigns. These are not easy problems to fix on a macro level for the society as a whole. Working longer, consuming less aggressively, saving more, reducing debt load, and probably a reduction in the standard of living will happen by necessity for many of us as we age whether we like it or not. Many if not most of those approaching traditional retirement at present are ill-prepared. The take home message for many individuals is don't wait till you're 55 to start, but rather to begin as early as possible in life preparing for what is to come: saving and investing more, avoiding excessive personal debt, and living more frugally.

There is a real chance for a positive outcome rather than this sad scenario. It has to start with economic growth. If the US begins a trajectory of increasing economic growth it could start the ball rolling for the tightly interconnected global economy. Ems would need to stabilize in the transition to consumption-based economies, and DMs would need to control deflation risk and start on a path of increasing economic growth perhaps stimulated by increased exports to US and EM. If all this happens the future may be less challenging than these dire projections suggest. Currently there are mixed signals from US economic data. If data turns consistently positive the dawning of economic growth may spread from the US in this tightly connected global economy. The US consumer has historically been one of the main engines that drives much of the entire world's economic growth. That trend can resume when and if improved personal balance sheets make US consumers feel less fearful for the future and more willing to spend in the present. Improving personal financial balance sheets, while advantageous to the individual for future retirement, has collectively in aggregate a negative effect on economic growth in the present. It is a delicate balancing act.

Garland Whizzer

User avatar
jwillis77373
Posts: 393
Joined: Mon Jun 25, 2007 9:52 pm
Location: Texas

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by jwillis77373 » Wed Jul 20, 2016 2:08 pm

I am going on here a bit.

But, like your job, your retirement isn't going to be anything like your parents.

Whether its making up for student loans, or living in a mansion they could never get a bank loan for.. or caring for parents into their 90's when their grandparents only made it into their 70's.

The entire mix is going to be a hodge podge of different factors.

There simply won't be static simple targets or simple answers for the problems we currently face or will face in the future.

Just like in investing, past performance does not predict future outcomes. (that's not a carte blanche to spend everything you make..) but also don't take on the problems (or hand wringing) that would have beset your parents.. for you.. it will be different.

My best guess is 'yeah economically it will be rougher than our parents had it.. and tougher to maintain a comfortable standard of lviing..' so make preparations with all due haste! But expect the unexpected.

User avatar
nedsaid
Posts: 9697
Joined: Fri Nov 23, 2012 12:33 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by nedsaid » Wed Jul 20, 2016 2:20 pm

bobcat2 wrote:
Philociraptor wrote: In the real world, production rates are always improving.

In the real world US productivity rates have grown much slower since 1970 than they did from 1920-1970.

BobK
How can this be? We have had the personal computer revolution, the internet, smart phones, software that has revolutionized white collar work, robots performing manufacturing functions, the rise of artificial intelligence, three dimensional printing, biotechnology, etc. etc. A whole lot has happened since 1970 and the process seems to be accelerating.

I think the productivity figures are just plain wrong. The economy has changed so much that perhaps measurement techniques are not capturing what is going on.
A fool and his money are good for business.

User avatar
nedsaid
Posts: 9697
Joined: Fri Nov 23, 2012 12:33 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by nedsaid » Wed Jul 20, 2016 2:23 pm

Another factor with longer lifespans that people are not considering. What happens if you retire and your parents are still living? Just because you retire doesn't mean that obligations to parents go away.

In my family, my parents are still living. One sibling has retired and another will retire in about a year. Hmmm.
A fool and his money are good for business.

crake
Posts: 227
Joined: Thu Mar 14, 2013 2:12 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by crake » Wed Jul 20, 2016 2:30 pm

Bill Bernstein wrote:Excellent presentation, but there's an even simpler way to look at it, which is the paradigm of Arnott and Cascells, FAJ, 2003:

Imagine a desert island with 4 inhabitants, each of who performs a separate, vital economic task (growing food, building shelter, repairing equipment, etc.). The medium of exchange is coconuts. Further imagine that one has saved enough coconuts to retire.

We now have 3 workers supporting one retiree--a 1:3 dependency ratio.

Then, another retires; we now have a 1:1 dependency ratio, and the island's GDP has fallen by 33.3%. No matter how many coconuts that second retiree has saved, the aggregate GDP, and with it the standard of living, has also fallen by 33.3%.

In a closed system, stocks and bonds, like the island's coconuts, are just a medium of exchange. As our dependency ratio creeps towards 1:1 (a world in which everyone works from 25 to 60, retires from 60 to 95 is not unimaginable), per capita income must also fall.

I.e., we can't save our way out of this problem.

By definition, either the average person retires later, or the average person accepts a greatly reduced standard of living.

You might argue that with free international capital flows, we don't live in a closed system. True enough. The problem is that among the world's developed nations, the U.S. has the most favorable demographics. I.e., the rest of the developed world is in no position to bail us out.

Bill
Bill, what your above example seems to be missing is that the retirees coconuts (capital) can be used as an investment means to increase his own or his fellow inhabitants efficiency at whatever their job is.

To keep with the simplified coconut theme lets imagine each worker can only pick 10 coconuts per day because it is an arduous task to climb the tree and get them. They also each consume 10 coconuts per day. If by some chance one worker finds a way to pick 11 coconuts and save the excess after 10 days he'll be able to take some time off. Our industrious worker decides to use this time off to invent a coconut picking tool which ups his productivity to 15 coconuts per day. At this rate he will eventually have enough coconuts to retire and in addition, his colleagues have probably learned and emulated his advanced coconut picking methods. In this example it is possible for people to retire and maintain or increase GDP because the savings are being used to foster innovation rather than being stuck under a mattress as your example seems to assume.

Shouldn't the same logic apply to the real world? If no one saved there would be no capital which could be used to allow for innovation. If more people save the cost of capital will become cheaper and thus I would expect innovation to increase, i.e less people producing more. As a result I do not agree your premise that:
I.e., we can't save our way out of this problem.

By definition, either the average person retires later, or the average person accepts a greatly reduced standard of living.

TOJ
Posts: 348
Joined: Wed Mar 02, 2016 9:19 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by TOJ » Wed Jul 20, 2016 2:41 pm

"Significantly reduced standard of living", or significantly smaller bills? Capped property taxes, no kids (or college), paid off house, no car notes, no commutes, no dry cleaning bill. I can think of several things I won't be paying for at 65 that I do pay now. If you live on 75% of your gross, and some of that 75% is paying for stuff a retiree doesn't need to pay for, I don't see it being such a dire situation.

User avatar
bobcat2
Posts: 5202
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by bobcat2 » Wed Jul 20, 2016 3:44 pm

nedsaid wrote:
bobcat2 wrote:In the real world US productivity rates have grown much slower since 1970 than they did from 1920-1970.
How can this be? We have had the personal computer revolution, the internet, smart phones, software that has revolutionized white collar work, robots performing manufacturing functions, the rise of artificial intelligence, three dimensional printing, biotechnology, etc. etc. A whole lot has happened since 1970 and the process seems to be accelerating.

I think the productivity figures are just plain wrong. The economy has changed so much that perhaps measurement techniques are not capturing what is going on.
Hi nedsaid,

I’m fairly confident your opinion is widely shared on this forum. I am also certain your opinion is wrong. You are ignoring how great the productivity gains were from the 1870s to 1970. That was the century of miracles.

From the 1870s to 1970 we had the introduction and full implementation of the following technological breakthroughs: mass production of electricity, internal combustion engine, indoor plumbing for clean water and sanitation, mass production of chemicals & pharmaceuticals for the first time, and a communication revolution in terms of the telephone, radio, phonograph, motion picture, and television.

My maternal grandmother was born in 1880. When she was a young woman she traveled by foot or horse, except for the very occasional long distance travel by railroad. There was no electricity. Lighting was by candle. Dinner was prepared by wood burning stove. Water for bathing, or cleaning the house or clothes, came from a well and was carted into the house by buckets. The restroom was the outhouse. The house was heated by wood fireplace. There were no antibiotics and hospitals were a joke, comparable at best to poorly run nursing homes today.

My grandmother died in 1972. By the time she was elderly her house had electric lights, gas central heat, air conditioning, telephone, radio, record player, television, electric range, electric dishwasher, electric washing machine, electric clothes dryer, refrigerator, freezer, electric garbage disposal, and of course indoor running water & toilet. She drove a car and late in her life she traveled by jet plane to the west coast, as fast as I can today.

When she was a little girl car travel at 60 miles per hour and airplane travel were science fiction fantasies. Late in her life she watched on television as American astronauts traveled to the moon and back. Her experiences with these tremendous technological breakthroughs were no different than anyone else over that time period. It is fair to say that over her lifetime productivity increases were greater than they had been over the prior 2000 years!

The computer gains of the last several decades are much more narrowly focused than the economy wide impacts of the internal combustion engine, and the introduction of electricity and indoor plumbing. It may be true that the productivity numbers understate recent productivity gains. But it is most certainly true that the understatement of the earlier productivity gains due to electricity, the internal combustion engine, and indoor plumbing were much greater. In other words, the productivity slowdown of recent decades is understated, not overstated, in the productivity numbers.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

User avatar
SimpleGift
Posts: 3106
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by SimpleGift » Wed Jul 20, 2016 4:43 pm

nedsaid wrote:How can this be? We have had the personal computer revolution, the internet, smart phones, software that has revolutionized white collar work, robots performing manufacturing functions, the rise of artificial intelligence, three dimensional printing, biotechnology, etc. etc. A whole lot has happened since 1970 and the process seems to be accelerating.
For a better grasp of the viewpoint that the digital revolution is having relatively limited impacts on U.S. productivity growth, one good source is Robert Gordon’s recent book, The Rise and Fall of American Growth. While there may be problems with the current measures of productivity, I find it hard to disagree with Mr. Gordon’s basic premise:
Robert Gordon wrote:Although [the digital age] was revolutionary, its effect was felt in a limited sphere of human activity, in contrast to [the industrial age], which changed everything. Categories of personal consumption that felt little effect from the [digital] revolution were the purchase of food for consumption at home and away from home, clothing and footwear, motor vehicles and fuel to make them move, furniture, household supplies, and appliances. In 2014, fully two-thirds of [U.S.] consumption expenditures went for services, including rent, health care, education, and personal care.

This brings us back to Solow’s quip — that we can see the computer age everywhere but in the productivity statistics. The final answer to Solow’s computer paradox is that computers are not everywhere. We don’t eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the 1950s, and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety.
Cordially, Todd

qwertyjazz
Posts: 1055
Joined: Tue Feb 23, 2016 4:24 am

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by qwertyjazz » Wed Jul 20, 2016 4:55 pm

bobcat2 wrote:
nedsaid wrote:
bobcat2 wrote:In the real world US productivity rates have grown much slower since 1970 than they did from 1920-1970.
How can this be? We have had the personal computer revolution, the internet, smart phones, software that has revolutionized white collar work, robots performing manufacturing functions, the rise of artificial intelligence, three dimensional printing, biotechnology, etc. etc. A whole lot has happened since 1970 and the process seems to be accelerating.

I think the productivity figures are just plain wrong. The economy has changed so much that perhaps measurement techniques are not capturing what is going on.
Hi nedsaid,

I’m fairly confident your opinion is widely shared on this forum. I am also certain your opinion is wrong. You are ignoring how great the productivity gains were from the 1870s to 1970. That was the century of miracles.

From the 1870s to 1970 we had the introduction and full implementation of the following technological breakthroughs: mass production of electricity, internal combustion engine, indoor plumbing for clean water and sanitation, mass production of chemicals & pharmaceuticals for the first time, and a communication revolution in terms of the telephone, radio, phonograph, motion picture, and television.

My maternal grandmother was born in 1880. When she was a young woman she traveled by foot or horse, except for the very occasional long distance travel by railroad. There was no electricity. Lighting was by candle. Dinner was prepared by wood burning stove. Water for bathing, or cleaning the house or clothes, came from a well and was carted into the house by buckets. The restroom was the outhouse. The house was heated by wood fireplace. There were no antibiotics and hospitals were a joke, comparable at best to poorly run nursing homes today.

My grandmother died in 1972. By the time she was elderly her house had electric lights, gas central heat, air conditioning, telephone, radio, record player, television, electric range, electric dishwasher, electric washing machine, electric clothes dryer, refrigerator, freezer, electric garbage disposal, and of course indoor running water & toilet. She drove a car and late in her life she traveled by jet plane to the west coast, as fast as I can today.

When she was a little girl car travel at 60 miles per hour and airplane travel were science fiction fantasies. Late in her life she watched on television as American astronauts traveled to the moon and back. Her experiences with these tremendous technological breakthroughs were no different than anyone else over that time period. It is fair to say that over her lifetime productivity increases were greater than they had been over the prior 2000 years!

The computer gains of the last several decades are much more narrowly focused than the economy wide impacts of the internal combustion engine, and the introduction of electricity and indoor plumbing. It may be true that the productivity numbers understate recent productivity gains. But it is most certainly true that the understatement of the earlier productivity gains due to electricity, the internal combustion engine, and indoor plumbing were much greater. In other words, the productivity slowdown of recent decades is understated, not overstated, in the productivity numbers.

BobK
Thank you for the perspective. It puts the coconut analogy in perspective. The quality of life of someone in the 25 th percentile is better than the median 100 years ago. Being in the bottom 10th percentile with advances may not be so bad in 50 years. It may not be as grand as productivity trends of the automotive age, but I still think it will be better than today

Runner01
Posts: 286
Joined: Thu Dec 12, 2013 7:14 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Runner01 » Wed Jul 20, 2016 5:03 pm

There are nearly 4 billion people on this planet that live on less than $2 per day. Those people are just waiting for their opportunity to work hard and earn a middle class lifestyle. And when those people do they are going to want Nike sneakers, Fords, Big Macs, iPhones, etc. I honestly don't worry about lack of growth in my lifetime and certainly not my son's (he is 18 months). Maybe by the time my grandchildren reach adulthood we will have enter a post scarcity society :sharebeer or maybe my wife and I will have built a fortune that provides them with their own post scarcity economy (I say sarcastically). I am an optimist (maybe to an irrational level) though so YMMV. I plan on continuing to amass capital so long as I have free cash flow and enjoy living a lifestyle better than most humans who have ever lived.

User avatar
nedsaid
Posts: 9697
Joined: Fri Nov 23, 2012 12:33 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by nedsaid » Wed Jul 20, 2016 5:32 pm

bobcat2 wrote:
nedsaid wrote:
bobcat2 wrote:In the real world US productivity rates have grown much slower since 1970 than they did from 1920-1970.
How can this be? We have had the personal computer revolution, the internet, smart phones, software that has revolutionized white collar work, robots performing manufacturing functions, the rise of artificial intelligence, three dimensional printing, biotechnology, etc. etc. A whole lot has happened since 1970 and the process seems to be accelerating.

I think the productivity figures are just plain wrong. The economy has changed so much that perhaps measurement techniques are not capturing what is going on.
Hi nedsaid,

I’m fairly confident your opinion is widely shared on this forum. I am also certain your opinion is wrong. You are ignoring how great the productivity gains were from the 1870s to 1970. That was the century of miracles.

From the 1870s to 1970 we had the introduction and full implementation of the following technological breakthroughs: mass production of electricity, internal combustion engine, indoor plumbing for clean water and sanitation, mass production of chemicals & pharmaceuticals for the first time, and a communication revolution in terms of the telephone, radio, phonograph, motion picture, and television.

My maternal grandmother was born in 1880. When she was a young woman she traveled by foot or horse, except for the very occasional long distance travel by railroad. There was no electricity. Lighting was by candle. Dinner was prepared by wood burning stove. Water for bathing, or cleaning the house or clothes, came from a well and was carted into the house by buckets. The restroom was the outhouse. The house was heated by wood fireplace. There were no antibiotics and hospitals were a joke, comparable at best to poorly run nursing homes today.

My grandmother died in 1972. By the time she was elderly her house had electric lights, gas central heat, air conditioning, telephone, radio, record player, television, electric range, electric dishwasher, electric washing machine, electric clothes dryer, refrigerator, freezer, electric garbage disposal, and of course indoor running water & toilet. She drove a car and late in her life she traveled by jet plane to the west coast, as fast as I can today.

When she was a little girl car travel at 60 miles per hour and airplane travel were science fiction fantasies. Late in her life she watched on television as American astronauts traveled to the moon and back. Her experiences with these tremendous technological breakthroughs were no different than anyone else over that time period. It is fair to say that over her lifetime productivity increases were greater than they had been over the prior 2000 years!

The computer gains of the last several decades are much more narrowly focused than the economy wide impacts of the internal combustion engine, and the introduction of electricity and indoor plumbing. It may be true that the productivity numbers understate recent productivity gains. But it is most certainly true that the understatement of the earlier productivity gains due to electricity, the internal combustion engine, and indoor plumbing were much greater. In other words, the productivity slowdown of recent decades is understated, not overstated, in the productivity numbers.

BobK
What I was thinking of was the technological progress since 1970. Certainly if you go back to let's say the beginning of the industrial revolution, I see what you mean. Now deceased family members could tell much the same story as your grandmother. A grandparent or great grandparent of a classmate came out west on a Wagon Train and flew on a passenger jet before she died.

The thing that I am seeing is the fast advance of technology, professional occupations like law and accounting are being challenged by software. In other words, the time will come when software will start putting accountants and lawyers out of work. Sort of like travel agents and the internet, they will still exist but will have to add even greater value added. It isn't just blue collar industrial jobs that have been displaced by technology. We have talked on this forum how the robots now are going after financial advisors. Artificial Intelligence is just getting started. Maybe someday, I will send off a robot off to work every day in my place. Self driving cars are here though the technology is still very imperfect.

Hard to say if we will see the acceleration effect we saw from the dawn of the industrial revolution. The momentum of technological change just kept building on itself. Perhaps things slowed down because human societies have limits on how fast they can adapt to change.
A fool and his money are good for business.

User avatar
Johnnie
Posts: 497
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by Johnnie » Wed Jul 20, 2016 6:09 pm

It has been a heckuva ride since 1970 though, and easy to lose track of how far we have advanced.
From FREDERICK W. SMITH, FedEx founder and CEO, in the WSJ, 3/25/16; adapted from remarks prepared for the 50th-anniversary reunion of the Yale University class of ’66:

From How Trade Made America Great

In April 1966, Malcolm McLean launched his first international Sea-Land container operation between New York and Rotterdam. McLean’s shipping-container revolution cut the cost of seaborne trade by a factor of 50 versus loose-cargo stevedoring.

…During the 1970s and 1980s, while container ships and planes became increasingly efficient with each successive model, newly developed fiber-optic cables (patented in 1966) began running underseas, connecting the world at the speed of light, lowering voice and data-communication costs by orders of magnitude. Financial markets became globally integrated and transactions multiplied at an astounding rate.

...From 1977 to 1994, a century’s worth of heavy regulation of transportation rates, routes and services that had begun with the railroads was cast aside, with profound effects on the U.S. economy. By the beginning of the 21st century, overall logistics costs were reduced from 16% of GDP during the 1970s to under 9%, thereby making possible substantial increases in government social spending resulting from the Medicare and Medicaid legislation in the 1960s.

…Together, these regulatory changes and transport innovations made possible the fantastic growth of travel and trade, which grew two-and-a-half times the rate of world GDP for a quarter-century.

From less than $50 billion in total trade in 1966, the U.S. now imports and exports over $4 trillion annually in goods and services. Container ships have grown from carrying a few hundred boxes on each trip to the new Triple-E behemoths that transport over 18,000 containers called TEUs, or 20-foot-equivalent units. The cost is 1/500th of the shipping rates per pound of the early 1960s.

The profusion of agricultural products from the “Green Revolution” pioneered by Norman Borlaug, combined with ever more efficient shipping, has resulted in massive amounts of grain traded around the world, something unimaginable to farmers 50 years ago. American railroads were integral to the growth in the nation’s maritime trade by moving containers from Pacific ports to the mega markets in the East.

All of these factors have created a global trade market that exceeds $15 trillion annually. Now, the Panama Canal is being widened, which will permit, beginning later this year, massive container ships to cross the Pacific and unload directly into improved Gulf of Mexico and Atlantic Coast ports, further reducing the cost of Asia-U.S. trade.

Three other factors central to the development of these enormous global commercial systems have occurred since 1966: The evolution of a vast world-wide oil market; the integration of the economies of the U.S., Mexico and Canada with the North American Free Trade Agreement (Nafta) of 1994; and the emergence of China as a great commercial power...
"I know nothing."

User avatar
zaboomafoozarg
Posts: 1930
Joined: Sun Jun 12, 2011 12:34 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by zaboomafoozarg » Wed Jul 20, 2016 6:12 pm

My goal is to financing a 50 year retirement on a 25 year career.

User avatar
#Cruncher
Posts: 2582
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by #Cruncher » Wed Jul 20, 2016 8:10 pm

Following the subject of this thread I developed a little spreadsheet to estimate -- depending on when one retires and starts collecting Social Security (SS) --- how much one needs to save each year while one is working. It uses the following assumptions:

Code: Select all

Row          Col A                      Col B
  1  Real growth while working             4%
  2  Real growth while retired             2%
  3  Estimated SS at age 70 (real $)   26,400
  4  SS % of needs (if retire at 70)      50%
  5  Die at age                            90
  6  Begin work at age                     27
  7  Year born                           1954
  8  Normal retirement age (NRA)        66.00
Dollars are assumed to be in terms of today's purchasing power and growth rates accordingly are assumed to be "real". It assumes one works until starting to collect SS. But It assumes no increase in SS due to the working -- only due to the waiting. Here are the results of the example assumptions above.

Code: Select all

Row   Col A      Col B    Col C      Col D     Col E     Col F      Col G     Col H   Col I
     Retire &                                                        Need    Annual
     Begin SS    Years    Years               Annual    Yearly       When   Savings  Versus
     at Age     Worked  Retired     vs NRA   Benefit      Need     Retire     Req'd  Age 70
 12      62         35       28     75.00%    15,000    37,800    804,432    10,922     2.8
 13      63         36       27     80.00%    16,000    36,800    762,014     9,820     2.5
 14      64         37       26     86.67%    17,333    35,467    713,626     8,734     2.2
 15      65         38       25     93.33%    18,667    34,133    666,401     7,752     2.0
 16      66         39       24    100.00%    20,000    32,800    620,377     6,862     1.7
 17      67         40       23    108.00%    21,600    31,200    570,717     6,006     1.5
 18      68         41       22    116.00%    23,200    29,600    522,678     5,236     1.3
 19      69         42       21    124.00%    24,800    28,000    476,314     4,544     1.2
 20      70         43       20    132.00%    26,400    26,400    431,678     3,924     1.0
If one worked until age 70, one would have to save $3,924 per working year. But if one only worked until age 62, one would have to save $10,922 per working year -- 2.8 times as much.

Here are the key formulas. The ones in row 12 are copied down to row 20.

Code: Select all

B8:    66.00 =IF(B7<=1954,66,IF(B7<1960,66+(B7-1954)/6,67))
D12:  75.00% =IF(A12<B$8,1-MIN(36,(B$8-A12)*12)*5/900-MAX(0,(B$8-A12)*12-36)*5/1200,1+(A12-B$8)*0.08)
E12:  15,000 =B$3*(D12/D$20)
F12:  37,800 =B$3*(1/B$4)-E12
G12: 804,432 =-PV(B$2,C12,F12,0,0)
H12:  10,922 =-PMT(B$1,B12,0,G12,0)
The "Normal Retirement Age (NRA)" formula in cell B8 is based on the first two columns of this SSA table. The 5/900 and 5/1200 factors in the "vs NRA" formula in cell D12 are from this SSA web page.

dltnfs
Posts: 282
Joined: Sun Feb 16, 2014 11:54 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by dltnfs » Wed Jul 20, 2016 10:55 pm

bobcat2 wrote:
nedsaid wrote:I think the productivity figures are just plain wrong. The economy has changed so much that perhaps measurement techniques are not capturing what is going on.
Hi nedsaid,

I’m fairly confident your opinion is widely shared on this forum. I am also certain your opinion is wrong.
Wrong with respect to your own preferences? The average preferences of people alive today? The average preferences of the people alive around each major technological shift? (I guess that last one is the best opportunity to infer something from people's revealed preferences, and get an objective estimate of consumers' aggregate preferences? Were economists doing that yet in 1920?)

I'd pay >3x as much to ride a car vs. horse to work, but I know people who gladly choose the horse at the inverse ratio now. Probably most people alive today have never considered the question. Any attempt to compare the real values of entirely different ways of living requires information about those preferences that's difficult or impossible to measure.

User avatar
nedsaid
Posts: 9697
Joined: Fri Nov 23, 2012 12:33 pm

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by nedsaid » Thu Jul 21, 2016 2:42 am

I have thought about this. Maybe I am more right than I thought earlier. What we have been seeing is an information revolution. The smartphone in someone's pocket has probably more computer power than my first personal computer I bought in 1996. Literally, the world is in your pocket. The smartphone of course, is only one part of the information revolution. The internet is another piece of it.

One quick example is that the newspaper has called me twice during the last month wanting me to subscribe again. I cancelled probably over a year ago as delivery went from 7 days a week to 4 days a week and then to 3. I felt like I was paying a 7 paper price for 3 papers a week and I finally cancelled. I also felt that the paper didn't listen to their customers. Not sure I will ever subscribe again. This is an industry that the information revolution is killing off pretty fast.

The encyclopedia is another thing that is dying off just as the newspaper. Too bad and in a way I feel bad about it. But again, all of that is now in your pocket.
A fool and his money are good for business.

AlohaJoe
Posts: 3458
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by AlohaJoe » Thu Jul 21, 2016 4:01 am

#Cruncher wrote:Die at age 90
This seems like a fairly aggressive (low) choice. For someone who retires at age 70, the mean lifespan is another 22.98 years (age 93). But that means 50% of people will live longer. At the 90th percentile, they will live 30.15 years after retirement.

Due to the slightly unintuitive way mortality works, you really need to use a different "die at age" for each retirement cohort.
6 Begin work at age 27
This seems quite late. Why not 22?

User avatar
#Cruncher
Posts: 2582
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by #Cruncher » Thu Jul 21, 2016 5:36 am

AlohaJoe in previous post wrote:For someone who retires at age 70, the mean lifespan is another 22.98 years (age 93).
How do you get this number, AlohaJoe? According to the SSA 2013 Period Life Table the life expectancies for a 70-year old male & female are 14.24 & 16.43 more years respectively. Even expectancy for either of them to be alive is only 19.81 (using this longevity estimator).
AlohaJoe in previous post wrote:Due to the slightly unintuitive way mortality works, you really need to use a different "die at age" for each retirement cohort.
This would make the spreadsheet more complicated for not much improvement is results. There's not that much difference from age 62 to 70, especially for females and for "Either".

Code: Select all

Age    Male   Female   Both   Either
---    -----  ------   -----  ------
 62    81.97   84.78   77.96   88.79
 70    84.24   86.43   80.86   89.81
       -----   -----   -----   -----
Diff    2.27    1.65    2.90    1.02
(Age plus life expectancy from this longevity estimator using SSA 2013 Period Life Table.)
AlohaJoe in previous post wrote:Why not 22 [instead of 27 to begin work]?
Here are the results with a "Die at age" increased from 90 to 95, and "Begin work at age" decreased from 27 to 22. There's less effect (compared to my previous post) than I expected. One needs to save $3,701/yr for an age 70 retirement (vs $3,924) and $9,542/yr for an age 62 retirement (vs $10,922). The age 62 amount is 2.6 times as much as the age 70 amount (vs 2.8).

Code: Select all

Row   Col A      Col B    Col C      Col D     Col E     Col F      Col G     Col H   Col I
     Retire &                                                        Need    Annual
     Begin SS    Years    Years               Annual    Yearly       When   Savings  Versus
     at Age     Worked  Retired     vs NRA   Benefit      Need     Retire     Req'd  Age 70
 12      62         40       33     75.00%    15,000    37,800    906,768     9,542     2.6
 13      63         41       32     80.00%    16,000    36,800    863,635     8,651     2.3
 14      64         42       31     86.67%    17,333    35,467    813,524     7,761     2.1
 15      65         43       30     93.33%    18,667    34,133    764,466     6,949     1.9
 16      66         44       29    100.00%    20,000    32,800    716,496     6,208     1.7
 17      67         45       28    108.00%    21,600    31,200    663,976     5,486     1.5
 18      68         46       27    116.00%    23,200    29,600    612,924     4,831     1.3
 19      69         47       26    124.00%    24,800    28,000    563,389     4,238     1.1
 20      70         48       25    132.00%    26,400    26,400    515,419     3,701     1.0

AlohaJoe
Posts: 3458
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Trying the Impossible - Financing 30-Year Retirements with 40-Year Careers

Post by AlohaJoe » Thu Jul 21, 2016 9:39 pm

Thanks for updating the spreadsheet! I agree that the small size of the changes is a bit surprising.
#Cruncher wrote:
AlohaJoe in previous post wrote:For someone who retires at age 70, the mean lifespan is another 22.98 years (age 93).
How do you get this number, AlohaJoe? According to the SSA 2013 Period Life Table the life expectancies for a 70-year old male & female are 14.24 & 16.43 more years respectively. Even expectancy for either of them to be alive is only 19.81 (using this longevity estimator).
The SSA tables are for all Americans. In another thread there's a perfect chart that shows the problem with using that number in most Bogleheads discussions.

Image

The kind of person we talk about in Bogleheads is almost guaranteed to not be in the lower deciles, so including their life expectancies gives a skewed picture of how long people who are actively saving for retirement need to plan for. It also includes people with terminal conditions, which further skews things downwards.

(When I said "the unintuitive way mortality works" I meant that you need to include both the person's age and their wealth level; I agree with you that for purposes of spreadsheet forum discussions that level of detail is probably unneeded most of the time.)

The Society of Actuaries provides a table of "life expectancy of annuitants", which is roughly "the kind of person who is actively planning for retirement". They provide it in their 2012 Individual Annuity Mortality Basic Table with Projection Scale G2 and 2005-08 Individual Payout Annuity Experience Report contract years actual/expected rate adjustment. If, like me, you are lazy, you can just use the calculator on gordoni's website and look at the "healthy cohort mortality" https://www.aacalc.com/calculators/le

I think for the vast majority of conversations on Bogleheads those are the numbers we should be using (since the focus is usually on Safety First).

Post Reply