I think there are some things that James Moore is neglecting to consider in this piece at Marketwatch on how much more difficult it is to save for retirement today:
The reason for roughly one-quarter of the increase is good news: We are living longer! Life expectancy for a man aged 65 has increased by about 1.6 years per decade over the last few decades, and so today’s 65-year-old can expect to live on average roughly four years longer than his father. The story is similar for women, although not quite as dramatic.
The second piece of the increase in the annuity factor is attributable to lower, much lower, interest rates. Twenty-five years ago, the yield on the 10-year U.S. Treasury TMUBMUSD10Y, +0.00% was a little over 8% versus its current level of around 1.5%. The long steady decline in rates is the major culprit, responsible for three-quarters of the increased cost.
In finance we use an interest rate to calculate the present value of future payments, but to make it more applicable, think about it in reverse: At today’s low rates, savers earn much less yield on the same amount saved than they did 25 years ago.
Put another way, every $100,000 in your retirement savings at 65 buys you about $5,900 of annuity income a year; 25 years ago it was about $11,600.
So three smart things to do:
1) Start saving early
2) Save more
3) Work a little longer.
which are that
- Every additional dollar saved is a dollar that disappears into the financial economy and doesn’t go into the real economy where it might create more jobs.
- People actually need to eat, pay rent, and buy clothing. They can’t save the entirety of their wages. There are limits on how much they can actually save.
- Somebody who’s aged 45 and out of work, a significant fraction of the long-term unemployed, probably won’t have the opportunity of working longer.
- A significant fraction of the young people today have substantial education debt not dischargeable in bankruptcy. The limits on their saving are even greater.
He’s preaching to the top 10% and maybe to the top 1% of income earners. What about the rest of the people? His prescription is a bit too Marie Antoinette like for my liking. Keep in mind what happened to Marie Antoinette.
If there’s any question about the point of this post, take the advice of the title. Do the math. I’ll give you a head start.
If you earned $10,000 in 1977 and $30,000 in 2016, in order to maintain your present standard of living and using his figures, you’ll need to have saved about $250,000, an average of $6,250 per year over the period of 40 years.
The median income in 1977 was about $13,000. $10,000 per year wasn’t poor. It was an ordinary working Joe’s income. From that you deduct payroll taxes, income tax, and state taxes, leaving a take home pay of around $7,500. You’re not going to save $6,250 out of that so saving will have needed to be weighted by year.
You’ll also need to take into account the effect on GDP. My calculations say that not only is his prescription impossible for anybody but the highest income earners, it would have been disastrous for the economy. If you think something different, show your work.
Want to use median income at both ends? Median income in 1977 was around $13,000. Now it’s $52,000. To maintain standard of living and using his figures you’ll need to have saved about $500,000. Now figure out the implications of saving at that rate.
Not going to read the original article, but did he mention that the inflation rate in 1991 was about 6%. I am not a bond guy, but can we really have Treasuries yielding 8% with inflation rates below 2%?
Also, median household income is down. Link goes to nifty little piece looking where it is down the most. never would have guessed Indiana would be worse than Illinois.
https://www.bloomberg.com/view/articles/2016-08-19/where-median-incomes-have-fallen-the-most
Median household income is up relative to 1977. Real median household income is down.
So much of long term saving depends on compounding interest, so the math can work…depending.
National Razor Party, 2016.
You work as long as you can, then sponge off the kids, then the government. And very serious advice here to the young, because if you are old you’ve already screwed this up. Take care of your health, the financial cost of long term manageable illness might surprise you. Choosing between food and medication sucks.