Champions of the 401(k) Lament the Revolution They Started
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Just some thoughts, I'm not proposing a comprehensive solution. It's just that we keep wondering how people will fund retirement and I keep coming back to - if it didn't cost so much to exist, there wouldn't be the concern about where the money will come from.
Traditionally this existed as parents moving in with their adult children. Half of the bargain would be babysitting your grand kids. In exchange you got a roof over your head, food, and the joy of seeing your grandkids on a daily basis.
It does work. Modern society has agreed upon on taxing earned income to provide shared services. That's where the money to pay for all the things you describe comes from. The roads, firemen, police, you name it. It all comes from income taxes (or that and real estate taxes for some of the local stuff but primarily income tax).
By taking care of your grandchildren and generally being helpful to your kids, they're covering you end of all of those as well. They earn the money that buys you food. They earn the money that puts a roof on your head at night. And all that money would be taxed per usual. Arguably you'd be paying more taxes in this setup that if each of you split out and made a more meager existence due to the progressive nature of taxes (i.e. your son making $50K pays more than if each of you made $25K).
As a tangent, I've always wondered if my understanding that property is no guarantee of survival is incorrect.
When I was younger, I used to think having a fully-owned house is survival forever, since you have no more payments to make (besides utils). As I grew up and looked into the details, I realized property taxes stick with a property forever.
This begs the question. Why buy a house at all? It's not like if you are laid off, disabled or just incapable of finding and keeping a job, you will still have a dwelling to squat and survive in.
This makes a house a liability more than an asset (in survival terms, not monetary terms) in my mind.
Am I thinking right?
But let me tell you, there are 100,000 cabins in rural Michigan that can be had for under $50K and you could outfit with solar and a well and grow a garden - maybe even some farm animals in certain areas. You'll be 1/2 hour from the nearest hospital though, which retired people seem to want near by. With the number of HN readers who favor telecommuting, it surprises me that so many still concentrate is some of the highest rent areas in the country.
I don't have to worry about rent increasing every year or a change in management.
It is true that a house has its downsides and requires more effort. That is true of most anything with value.
What if renting is cheaper than buying (example SF bay area)?
More importantly, what if the purchase of house is made with the expectation of growth in value of the house and that expectation turns out to be incorrect after 30 years (as in Detroit)?
Beyond a certain cost of a house, wouldn't it be advisable to plunk money in funds rather than a house (and hoping it builds equity)?
- Saving is compulsory and amounts to around 15% of wages for the worker, and another 15% to the employer
- Principal growth depends on how the investment performs, but government guarantees at least 2.5%, which is around what you can get from just buying a 30-year Singapore gov't bond
- Account holders can choose a restricted number of asset classes to invest in (e.g. ETFs, bonds, gold), but you can't just put it all in a penny stock
- You can use the saved funds for health care, housing, education, and a limited number of other needs until retirement -- no taking all the money out and betting it on black
Long-term financial planning is inherently risky. Governments aren't necessarily good at managing that risk, but then shoving all that responsibility onto individuals doesn't work that well either, because the truth is that if someone screws up and becomes totally indigent, society still needs to bail them out, if only through paying huge emergency room bills.
This seems like a sane compromise: the worker and the government split the risk, but the government also sets sane defaults for employees. [2]
A lot of people earn very little and use CPF all up on housing and healthcare (especially if they have a health problem) and are left working menial jobs mopping floors practically until death.
It's pretty heart-rending to see elderly hunchbacked men and women cleaning up empty dishes (or selling tissues) underneath glittery multimillion dollar condos built by Bangladeshi migrant workers, but that's Singapore.
https://www.bloomberg.com/news/articles/2015-01-06/what-reti...
I'm not claiming that Singapore's system solves all edge cases (no system can), just that the current scheme seems like a sane, rational compromise between total or zero freedom.
The only crime here is 401ks being tied to employment and contribution limits.
Sure it can. Congress just has to pass a new tax (or increase the existing brackets) on your distributions.
The easier way to move money from savers to debtors is to cause inflation, but good luck getting that to happen in today's environment.
How a thing is originally presented matters, especially when it comes to what is politically possible.
You rarely get back your insurance premiums either.
It's called social security for a reason.
Unless there was a bankruptcy involved. Which, you know, happens to insurance companies.
Plays better than "this was just our decision", I suppose.
When I retire in a few years, after 30 or so years of work, my pension will be around 1/3 of my working salary. Not bad. I realize there's a risk that the fund will go under so I don't plan on depending on it, but it will be a nice supplement.
From a quick google search, the plan is currently underfunded by 15%, but that number will ebb and flow with the market. Over the years, the company would talk about our "total compensation" which would include how much was contributed to the pension fund so you can think of it just as part of our salary. I've never seen the numbers, but I have heard people talk that within our company, the average retiree only collects for 5-10 years before they pass away - depressing!
Don't rely on your pension.
The non-employer (or even worse municipal - yuck!) pension can be created synthetically through a combination of annuities and life insurance. The problem with that approach is that since the other side is a private company that cares about the pay outs (and not just promising obligations to be paid by someone else), it ends up costing way more. Guaranteeing a perpetual $X/month (inflation adjusted) pay out twenty-five years from now is way more expensive than people realize or would be willing to pay for.
The real answer is: Accept that fact that most people cannot retire at the same lifestyle the enjoyed while working or adjust the latter well in advance so that instead of saving 5-10% you're saving 50+% of your money.
Problem is most people don't really think about it until they're in their mid 30s at earliest. When you are in your 20s or early 30s and have young kids so many things seem like more important priorities. And most people in their 20s can't even really conceptualize retirement. It seems impossibly far away, time-wise. But missing that first 15 years has a huge impact on the total compounding potential. If you start saving at 35 you have to save a lot more.
Look around your office. Do you see anyone over 40? No? Are you saving enough to retire at 40? Then what do you think is going to happen?
EDIT: I will point out that this comment has fluctuated quite a bit between +2 and -2. So, clearly some very different experiences, which is good to hear. Perhaps not as dire as it looks.
Further, the "look around your office" result varies wildly from office to office. Looking around your average SV startup will skew to gullible, er, I mean risk-tolerant mid-20s engineers. My office is more than half composed of experienced engineers in their mid 30s and up who know their market rate.
http://www.computerworld.com/article/2512708/it-industry/rec...
Perhaps if you move, you'll find a more respectful and receptive environment for those who are seasoned.
Yes. A couple people on my team now, most of management (including our immediate supervisor, who just recently moved up from being a normal team member), whoever's in the cubes I saw those black "40" balloons on, the people who first built some of the corporate systems (well, the ones who haven't retired yet), etc.
Tech is a growing field. How big was it in 1995, compared to today? That's a decent approximation of what ratio of over 40 / under 40 you'd expect, assuming career changes aren't common enough to mess up the numbers too badly.
But, this is a large enterprise software company on the East Coast.
I don't see many people under 40 in my office.
Of course, even though my job is tech, the industry isn't (and it's even farther from being a silicon valley startup.)
Look around your office. Do you see anyone over 40?
Look at the "careers" or "about us" pages for the tech company of your choice -- look for the group pictures of smiling faces. How many people do you see over age 40?
It cracks me up when such companies boast about how "diverse" they are, then show a group photo that is 70+% male. 80%+ white and asian, and 90% below age 40.
30 year treasuries are currently yielding 3%. You could get 4% in a less tax favored safe investment. Inflation is between 1 and 2%.
Let's see what that does for that cash saved in your 20s. Suppose you earn a quarter as much in your 20s as in your 40s (most have a higher salary growth ratio than that). Then figure on 20 years of 4% growth, or 2.5% after inflation. 2.5% compounded for 20 years is 64%. So your savings in your 20s ultimately add only 2/5 as much as your savings in your 40s. It's not nothing, but it's hardly the essential key to retirement to start early. You'll be fine starting at 40.
And 10% is nowhere near enough. That's essentially hoping that Paul Ryan doesn't get to undercut Social Security because that's what you're going to be living on. You need to save about 30% of pre-tax pay and invest carefully from age 21. Or 35% if you start soon after age 35. That's to retire in your early sixties. You also have to pay taxes, so figure on 40% or so of your paycheck for take home pay.
Do you know anyone doing that? We're going to have a crisis on our hands, I predict.
http://www.nytimes.com/interactive/2011/01/02/business/20110...
Hope has nothing to do with it, 10 or 15 years before you plan to retire you start liquidating equities and going into bonds and treasuries. If the market is at a low point you hold off on equities until the market rises again.
For more: https://pressroom.vanguard.com/nonindexed/2013.10.23_A_more_...
That the market will rise again has held in the past in the U.S., so it's not so unreasonable to suspect it will in the future.
Note: This math assumes you're going to earn ~5% in the invested savings each year (after inflation), and that you can withdraw 4% of your invested sum each year in retirement.
And given this 2.5% figure, how can you suddenly withdraw MORE money than 4%? If you can't earn 4% reliably, withdrawing over 4% puts you at risk of running out of money unless you know at what age you will die (unlikely).
The end of exponential population growth as the Earth has already filled beyond its carrying capacity predictably eliminates all sources of growth except productivity growth. Previous generations could depend on a population and resource extraction growth boost of 2-5% per year, but that will pull back to negative drag as population of first world peoples shrinks and affordable oil production drags. That 7% growth is now equivalent to 2% in the conditions today's people will retire into.
I'm just eyeballing this, but after adjusting for inflation neither recent stock nor bond yields look out of the ordinary, historically speaking.
There are always reasons to expect growth to go down, and other reasons to expect it to go up. It isn't clear to me why cherrypicking solely from the former group is supposed to be convincing.
Retirement and all is great, but living for another day trump it. This is the life of most of people my age.
They aren't entirely unsustainable. It's possible for them to be underfunded, but that's structurally avoidable if anyone was concerned.
> Any system that tells a worker they can work for 25 years somewhere then receive 25+ years of pensions at their inflation adjusted final salary is a crock.
Sure, but real-world pensions rarely come anywhere close to that; even generous ones are almost never fully inflation-adjusted (while COLAs are common, they are often capped at, e.g., 2% annually -- each year, not cumulatively, so they permanently fall behind each year inflation is above the cap) and they usually don't come anywhere close to 100% at 25 years. (I think the most generous rank-and-file current CalPERS plan is 2% per year of service at 55 years, which maxes out at 2.418% at 63+ years, and so would take more than 40 years of service to reach 100% of the base used for calculation -- which for employees hired in something like the last decade is actually the average salary of the last 3 years, not the last single year.)
That's how CA employees end up with million dollar per year pensions. [0] Happily, some abuses have been reduced slightly in recent years. There's far to go yet.
While it is possible for pensions to be funded properly, it's not something state and municipal governments do and the few private companies with defined benefit pensions rarely do so either. In fact, it's literally illegal to fully fund pension benefits in the United States without paying a steep tax penalty for saving too much. The IRS and Congress know that exposing the full cost of what we're promising to pay out would shock too many people and they don't want to know. Better to defer the problem to the next Congress and let them sort it out.
The only hope is massive productivity growth. So, techies, get programming those robots and AI bots and new chemical materials and cheap new energy sources. The government has already assumed that they're all going to take off like crazy and forced us to bet the country on that assumption. We're going to need a tech explosion just to keep our heads above water.
Solar prices are almost down to $0.01/kwh decades ahead of schedule (ie we have effectively limitless energy; no more oil, super cheap EV mobility, etc). The inflation that needs to be addressed are healthcare, education, and real estate costs; solve those and pension/retirement/major pieces of the economy as a whole become moot.
We're not post-scarcity, but the rollercoaster car is headed on the upward trajectory. More pylons please.
There are many different pension systems maintained by CalPERS. It isn't one system for all public sector. Bell had its system, completely independent of, say, Stockton, which again is independent of the State employee pension system. But all managed by PERS.
Only a few of these systems allow for pension spiking via overtime and/or vacation pay. State Employee pensions do not allow this. In fact, pension rules have become even more restrictive over the past decade.
Your own link shows that those extreme examples had nothing to do with overtime and duty pay, and everything to do with senior local executives with close relations with local elected officials being granted ludicrously high base salaries by those elected officials.
Defined benefit plans need professional actuaries to estimate a future with so many unknown variables: interest rates, rates of investment return, employee lifespans in 20+ years, retirement ages, voluntary employee exit rates (just to name a few). Plus you have the problem of so few companies lasting anywhere near as long as a pension plan would last, so these legacy pensions have to get offloaded to the Pension Benefit Guarantee Corporation.
It's no wonder that the private sector has moved from 30% defined benefit and 10% 401k back in 1980, to 2% defined benefit and 33% 401k today.
The employee knows exactly how much the employee is contributing (and if it's being contributed in timely fashion), and (vested) contributions are safe from employer bankruptcy or change of jobs. The employee still has market risk, which was present before in that a pension with poor investment results may lead to the pension being assigned to the PBGC and result in a reduced pension.
The employer benefits by paying for today's workers only today, and does not have to manage and fund the pension.
There are certainly concerns about investment costs / poor investment choices within 401(k) plans, but I think some recent litigation results are likely to improve the landscape. Good plans are available, and companies may have a duty to provide a good plan.
It's ultimately just one part of the seismic shift in wealth to the 0.1%. "Sustainability" is just the thinly veiled excuse.
If the plan has any decent target date funds, it takes about five minutes to guesstimate your retirement age and pick that. It's probably not the best choice, but it's a reasonable one.
That's the beauty of Social Security: it's guaranteed not by market forces, but by the existence of government. So long as the US government exists and has the ability to tax, those who rely on SS and Medicare will be provided for.
[1] https://www.theguardian.com/business/us-money-blog/2016/may/...
There are companies that are in the business of managing investments for the very long term and are regulated so as to minimize the risks of bankruptcy. You or you company can incrementally buy a pension from such a company in the form of a deferred annuity.
The only disadvantage to a defined contribution plan with a deferred annuity option is that you and your employer can't mutually pretend there's such a thing as a free lunch in the form of risk free investments with eight percent returns. But on balance I'd consider that a good thing.
This is evidently not true, as employers did not, when discontinuing pensions, add equal economic value in other compensation. Pensions are a retention program as well as a compensation program.
What you mean to be saying is "accept the fact that without a radical change in how we view the purpose of employment and retirement, most people cannot . . ."
Basically, what's the goal? The goal right now is for each entity in the system to hold onto as much money as it possibly can. It's a company-first view of the problem, and therefore not one that really addresses the main point: People shouldn't be expected to work into their old age.
That's why people don't have a higher savings rate. Most people are idiots when it comes to spending, the dumbest habit of which is increasing your spending on pace with increased in income. Okay maybe not the dumbest as it's even dumber when they increase it faster than income (ex: new job => new car with higher monthly payment v.s. difference in salary).
> What you mean to be saying is "accept the fact that without a radical change in how we view the purpose of employment and retirement, most people cannot . . ."
> Basically, what's the goal? The goal right now is for each entity in the system to hold onto as much money as it possibly can.
Why is the company holding onto anything? If you're working as an employee and want to retire one day, demand to be paid for the services you're providing now, save them up, invest them, and then it's yours to spend. Why have the company guess at how to manage that? It's putting an awfully lot of eggs in one basket as well as if the company goes under, your pension will take a hit as well (since no company actually has a fully paid for sinking fund).
> It's a company-first view of the problem, and therefore not one that really addresses the main point: People shouldn't be expected to work into their old age.
Why not? What else are they going to do anyway and why should they be granted N years of do nothingness just because they're old? Sure sounds like a ponzi scheme to me ...
It's also why megacorporations and a very small percentage of people have such immense amounts of money and give essentially nothing back for it.
> Why not? What else are they going to do anyway and why should they be granted N years of do nothingness just because they're old? Sure sounds like a ponzi scheme to me...
What is so valuable about forcing everyone to work their whole lives? Who benefits?
Besides you sounding bitter and misinformed or changing the conversation to one about converting the USA to communism, I don't see how that's relevant to this.
> What is so valuable about forcing everyone to work their whole lives? Who benefits?
They benefit by providing for themselves and their families. They're not being forced to do anything (though food, shelter, and self preservation tend to be good motivators).
To flip your question around, why should they get a free ride because they past a certain age? I'm not saying people shouldn't retire, I'm saying that if they want to do it, they need to be realistic about what's financially involved and either save significantly more or realize they're going to be living off of rice and beans.
For the record, I don't think any country or society owes you anything. If you want something, you should be prepared to work for it. That includes a goal like "comfortable retirement".
But I'm sympathetic to expectations that every individual learn money management and investment skills that are on-par with professionals. Exposing individuals to risk via complex variables such as life expectancy, investment strategy, and diversification is a sure recipe for a winners and losers type of scenario.
We want a system where the maximum number of people have the best probability of reaching a non-working retirement with enough accumulated assets to be comfortable.
You only need look at what's happened in Detroit to see how perilous it is to trust politicians or parties with divergent interests from yours with your financial future.
> If you want something, you should be prepared to work for it.
This is the part I'm trying to get at. I agree with this statement, but with a caveat: There's a difference between "want" and "need." If you want some new jeans 'cause they look good, society doesn't owe them to you. If you need to buy basic clothing because you have none (or what you have is clearly insufficient, e. g., falling apart), it doesn't bother me to say society ought to provide that to you.
People see the idea that a sufficiently developed society ought to provide the very basics for all its members, and immediately assume that the only way to do this is some sort of draconian, single-party iron-wall communism. That just isn't true. In fact, there are already societies on the planet that get fairly close to doing this, and none of them are communist. (The "communist" ones tend to be some of the farthest away from this ideal.)
My question to you would be: How do you feel about making that distinction, and why?
What's often the case is that there is a real need underneath a want, but that deeper, more essential need is not expressed in the same way as the want.
To use the jeans example, "'cause they look good", the deeper need will be somewhere along the lines of, needing to belong; needing approval of others; needing to feel a certain way. It depends on the person. Some people have a very clear idea of what these underlying needs are ... many of us humans, don't. Getting those jeans might temporarily satisfy the want, but without addressing the underlying needs, a person will now seek out something else in hopes to satisfy that deeper need.
As a tangent: there is a way to probe even deeper needs underlying those needs too. When done iteratively and radically honestly (which means going deeper than survival needs) across many different wants, there is a surprising result: it generally converges on single basic need. However, since this is probing deeper than survival needs, it isn't something that a society, technology, or a system can provide. It certainly won't be something that one can easily "work for".
My point is: I agree, societies and communities should look at providing basic needs. However, there are some things that cannot be addressed with material goods, as long as there is mass confusion. Withholding those material things don't necessarily help either.
It's interesting that you use a metaphor of "going deeper." The way I came to the same conclusion (that, at some point, all of us share a common goal) was to view the problem not 'deeper' but more and more abstractly -- you can get to a point where you've abstracted away any specific rung of, for example, Maslow's Hierarchy of Needs.
And while, yes there is a limit to how far we'll get without wide-spread introspection of our own thought-processes (as opposed to our thought-content), we could afford people the space to do so.
By "going deeper", I mean that there is a directionality to using awareness that is best described as "deeper", as that is the experiential signature. The methods I used involved dissecting the experience and emotions with awareness, usually by modifying consciousness. I was introduced to it with shamanic practices, but my usual method was developed through mindfulness meditation (to develop sufficient clarity) and chanting a specific Sanskrit mantra.
So for the jeans example -- to make it more concrete and use a real example, at one point in my life, I bought tactical gear. A friend of mine's even called it, "tacticool". To probe this with the my awareness, I'd rest my awareness on the actual emotions associated with "tacticool". When I was less skilled at this, this took a long time to familiarize myself with the different experiences that might arise from this. There are physical sensations, for example, that comprise of particular emotions, which form the sum of the actual emotional state itself. These are patterns of tension, heat or cold, etc. Then there are the emotional states, which has its own movement, texture, and are clearly _not_ physical. I eventually was able to see how this maps to thoughts. Any given thought will have an emotional basis, although some concepts are so pure (or abstract) that they have a very light footprint. I learned to tune my awareness of a given emotional state from the physical, through the emotional, and to the various narratives/stories it might carry. So when I dissect the desire and attachment to "tacticool", there are very specific images and emotional flows that come through it. There are aggregations of different emotional states, which in turn might be linked to other parts of the psyche. Examples arising when I'm probing this as I write this right now: wanting to be seen as a badass, tough, resilient, etc.; eschewing normal gear to set oneself apart; deeper still, the need to stand out, the need to stand apart, the _fear_ of not being seen, the _fear_ of being alone. I'll stop there; any further will sound too woo.
Further, any given emotion can be given form, even sentience in which one can then interact with anthromorphically. That is, there are shamanic/tantric methods that lets a particular emotional flow take form into a person which you can then have a conversation with about wants and needs. One in particular, detailed in Tsultrim Allione's _Feeding Your Demons: Ancient Wisdom for Resolving Inner Conflict_, goes one step beyond "wants" and the underlying "need", by asking for "how will you feel when you get what you need" (a neat NLP trick, going directly to the result).
Getting back more on topic: I agree about giving people the space to do that. However, I also think that in our race to modernity, we broke and severed a lot of traditional wisdom that helps in this very thing. In more communally-oriented societies, giving a tribe member space is likely more to be a given. (Sure, it depends on the tribe and the culture).
The idea behind Georgism is that people should own 100% of the value they produce while economic rents derived from land should belong equally to all members of society:
https://en.wikipedia.org/wiki/Georgism
Curiously the idea of raising property taxes (e.g. rolling back prop 13) in order to shore up pensions is often met with stiff resistance on the basis that it's unfair, and that, presumably, society does owe some people economic rents.
Over the last hundred years, we've decided, as a nation, we want to do better than "let every individual fend for themselves". We weren't comfortable with the outcomes--old people eating pet food, dying for lack of heating in the winter, etc.
And there are certainly many low-paid workers who simply can't save anything substantial for any retirement, ever. Assuming everyone can sock away money to live on for when they're just too old to work is going to leave a lot of people out in the cold (possibly literally).
I guess what I'm trying to say is, your discussion about "let them all fend for themselves" doesn't really fit here at all, because we as a nation moved beyond that decades ago.
Whether to move back to pensions, or improve 401Ks, that's an interesting question and worth discussing.
I didn't say that. I think you're leaping to conclusions. What I'm trying to do, to be frank, is poke holes in the assumptions you're making in the first post about how things are and should be. I'm not a communist (it's never worked as envisioned, and likely can't), but I'm getting pretty sick of the notion that our system as-is is the best one for most people. I want to have a conversation about ways it could either be made better, or what it could be replaced with.
> They benefit by providing for themselves and their families. They're not being forced to do anything (though food, shelter, and self preservation tend to be good motivators).
Again, this is a false choice. It actually is a couple of false assumptions: First, the idea that food, shelter and self-preservation are things that people must earn, rather than have a right to. Second, that people who are in a "do it or die" situation have any real choice, given that almost nobody would choose the "die" part of that.
> To flip your question around, why should they get a free ride because they past a certain age? I'm not saying people shouldn't retire, I'm saying that if they want to do it, they need to be realistic about what's financially involved and either save significantly more or realize they're going to be living off of rice and beans.
So, first of all, I agree with the notion that in the system as it is, one has to be prudent and thoughtful, one has to save money, one has to plan for oneself. We're in agreement on all that: With the world the way it is, it's important for each individual to plan and put themselves first. I fully understand how to work within the system we have to keep oneself afloat, and I'm not suggesting people shouldn't.
Why shouldn't people get a free ride for food, health, shelter? Why are those things things which must somehow be earned? I'm talking philosophically here, not practically. I'm not saying everyone is entitled to caviar and vegan d3 supplements on private yachts, but I don't understand the assumption that, given a society which could technologically provide basics for everyone, people shouldn't have them.
To address some of the other comments in this thread: this idea that someone has to earn the right to live has not, historically, been the norm. Pre-modern societies tend to lean more towards values emphasizing community rather than values emphasizing individuals. There is a lot to say about this, philosophically, when you start looking at how modernity changed things.
One of the weirdest notions of modernity is this idea that humans are at the apex, with the implicit narrative that what is current will always be the best. Human brain achieved higher intelligence than any other living organism on earth, therefore humans are the apex predators. During the colonial era, the colonial powers considered themselves civilized ... and everyone else were savages, somehow lesser. Now, there are certain ideologies (democracy, free market, capitalism) that are considered as the apex.
There is something very broken about modernity. I'm not suggesting pre-modern notions are necessarily better. I do think this narrative of 'being the best' has blinded our modernist sensibilities, and we have yet to find a satisfactory answer beyond modernity.
At this point, I would say capitalism is eating both democracy and free markets.
No, not at all. People have a low savings rate because they're poor: their wages are low compared to the cost of living. This is a systemic, economy-wide problem for the entire bottom 90% of the population. You can't save when you're facing "heat or eat" each month or trying to make student-loan payments before Social Security kicks in.
I'm convinced so many people have fooled themselves into believing the government will cover their retirement shortfall. The problem is ultimately they are probably right but government doesn't have capital to cover the shortfall (not even actual social security obligations it seems)... so they are likely going to take it from the ones that have managed to save for their retirement, wait and see.
If we eliminated the cap on how much salary is taxable for Social Security payroll contributions, all projected obligations and shortfalls would be covered. Social Security is being choked to death for ideological reasons, not starving naturally.
Now, if some company engages in wage theft (raids its pension fund), that's fraud just as any Madoff-esque pyramid scheme.
Please don't make generalizations like this, especially of a community you choose to participate in. Your comment reads perfectly well if you omit everything up through but.
If I'm making $5k a month after taxes and saving 90% of that (so, living on just $500 a month), MMM's table says I can "retire" in under 3 years. However, that retirement is one in which I live on just $500 a month--not what everyone has in mind when they consider retirement. If I'm making $5000 a month and want to live on $2500 in a month in retirement, I will have to save for considerably longer than 3 years.
This is the most glaring at saving 100% of income. It doesn't really make sense that I can "retire" in 0 years by saving 100% of my income. The table is basically saying, "If you can afford to work and not spend any of the money you make, you can drop your income from $5000 to $0 and live without worry!" Never mind that people may have children, or get sick, or feel like traveling, or any other possible scenario in which an extra cost is incurred.
That's probably the best way to reliably predict how much you'll need to retire. It's a mistake to think of "saving" as a sprint to a pre-determined finish line. The point is you have to design a lifestyle that works for you, at a savings rate that'll see you home in a reasonable number of years.
> If I'm saving 50% of my income to retire in 17 years and then decide I can bump it up to 65% of my income (let's say by no longer dining out) all of a sudden my "retirement" happens 7 years earlier.
Going a bit further with the idea of lifestyle design, in this example you didn't make the decision to stop dining out as a means to spend less so that you can retire and then finally start eating out. You cut down on the eating out simply because cooking healthy meals at home for yourself is an important part of your life. You value the challenge of turning raw ingredients into delicious food, the knowledge you attain enriches your life, and you love the warm feeling of feeding friends and family with something you poured so much love and work into. And it's something you'd do for the rest of your life, even if money wasn't an issue. If that's not for you then you can't save more by eating out less. The "saving" doesn't work if you can't be happy with the lifestyle that you have as a result of the saving.
> If I'm making $5k a month after taxes and saving 90% of that (so, living on just $500 a month), MMM's table says I can "retire" in under 3 years. However, that retirement is one in which I live on just $500 a month--not what everyone has in mind when they consider retirement. If I'm making $5000 a month and want to live on $2500 in a month in retirement, I will have to save for considerably longer than 3 years.
Yes. That means you have to find a lifestyle that you can be happy with that only costs $500/month (not impossible, but not luxurious and definitely not first-world). Or earn a higher salary so that 90% savings rate gives you a $2k/month retirement (bit more doable). Or target a lower savings rate with the acceptance that your mandatory career will be longer than 3 years.
For me the value of the table is it puts into stark relief what I value or don't value. When making a decision to add some regular spending to my lifestyle I can always ask myself "Is this additional spending worth adding X years to my career?". If the answer is yes, then I know it really matters to me.
> Never mind that people may have children, or get sick, or feel like traveling, or any other possible scenario in which an extra cost is incurred.
The author does address this in the blog post (emphasis mine) "If you are spending 0% of your income (you live for free somehow), and can maintain this after retirement, you can retire right now. So your working career can be Zero." . He acknowledges that this is only possible if you somehow manage to get everything for free or paid for from sources of money that aren't your job (unrealistic but not impossible; eg. trust fund). 100% savings rate isn't useful as a practical example but is used to demonstrate the implications of the upper and lower bounds of savings rates, even if it's obvious.
Your retirement goal is 25 * 12 * x.
If you save 50% then each month you spend x and put x in the bank. At that rate, it will take you 25 * 12 months (25 years) to get to your goal. Counting 1/3 of 1% returns each month, it would take you 208 months (17 years is 204 months). So returns would shave 7-8 years or ~30% off your working life.
If you save 75% then each month you spend x and put 3x in the bank. At that rate, it will take you 25 * 4 months (8 years is 96 months) to get to your goal. Counting 1/3 of 1% returns each month, it would take you 87 months (7 years is 84 months). So returns would shave off ~1 year or 13%.
If I go eat an expensive meal and, when the check comes, say "sorry, these prices are unsustainable, and making money is not your sacred right" I would be arrested.
Nice strawman you got there. I doubt there's even one pension plan, public or private, in the U.S., Europe, or Asia which is as generous as your example.
The overtime thing is the most galling, since it's generally straight-up theft of government resources. There's no legitimate government purpose to the extra hours. The theft is culturally accepted by government employees because it costs more than garden-variety timecard fraud -- you don't just get to steal the marginal hour's pay, you get to steal X0% of that every year for the rest of your life, automatically. And it becomes culture in these institutions -- you cover for others because you expect someone to cover for you once it is your turn.
That's true in some extreme cases, though the more usual case is simply bias in which employees get assigned legitimate overtime, in which case there is a legitimate government purpose in the extra hours, it's just that the cost to the government of those extra hours is unnecessarily maximized.
Though in either case I wouldn't say either form of overtime spi king is the most galling form of spiking.
For example, the spiking that is mentioned in the thread (Vacation cash-outs, overtime, etc.) is not available in the State employee system.
A "last minute" raise has essentially no effect, since even before the recent move to a 36-month base, the pension base was the average of the highest 12 months.
"Spiking" isn't last-minute raises, it's a catch-all name for a wide variety of strategies (some of which are merely reasonable and legitimate tactics given the rules, and some of which are outright frauds on their own which have greater effect when combined with tactical timing with the retirement rules) for maximizing pension base by (under the 12-month rule) maximizing pay in the last 12 months. Among the strategies:
+ Securing a higher-base-pay for just that period (most abusively -- and also most rarely -- a collaboration with higher leadership to give an employee a highly paid position with paper duties to justify the high pay that the employee actually isn't expected to perform.)
+ Maximizing overtime, in positions eligible for overtime pay, during the last 12 months (again, with some notable abuses where the overtime work is work not really necessary to the agency mission or, in more extreme cases, outright fraudulent work-on-paper.)
+ Maximizing any non-base, non-overtime pay that figures into retirement base calculations.
Sounds like classic union cop out to screw over the young / new workers in favor of existing ones.
Government postings are even better.
The UN requires only five years of service before you're eligible for pension benefits, and you can still collect those on top of whatever pension your home country government gives you (which is common), or even while being employed in a different government posting.
It's not 100% of salary if you only stay 5 years, but it's pretty large - you can easily reach eligibility for a pension that's large enough to live on before you're 30, and then "double up" by taking other government postings whose pension eligibility is handled separately.
That's the minimum. It goes up from there depending on your position. Typically, you could expect to make a lot, lot more than that, even for very short tenure: http://www.un.org/Depts/OHRM/salaries_allowances/salary.htm
> which you can start collecting when you're 62 years old
...yes, but the point is that you only need to be employed for five years to be eligible for lifetime benefits. Work there for 5 years in your 20s and you're set.
...so?
This whole thread is in response to the claim that "I doubt there's even one pension plan, public or private, in the U.S., Europe, or Asia which [provides 100% of salary as a pension after working 25 years for eligiblity]".
So, having a pension which provides more than 100% of salary as pension after working only five years for eligibility is very relevant. That's far more generous even than what OP described.
Oh, and that income is tax-exempt in many places, to boot. It's an absurdly lavish benefit.
There are very good reasons that public safety employees get much better pension deals than other public sector employees, and they certainly aren't typical of the field.
> Technically it's 90% of peak salary but "spiking" is culturally accepted, so in practice you can have more than 100% of your final year salary in pension benefits.
Spiking is just strategically maximizing your final year salary; it doesn't increase the ratio of pension to salary. And, spiking in the future has been cut back since for several years new hires in moosr CA public employers (including public safety ones like CHP officers) have average salary of the highest 36 months rather than the highest year as the pension base.
But I'm still genuinely interested in finding an example like koolba mentioned.
[0]http://www.theatlantic.com/politics/archive/2011/06/in-calif...
How exactly does this translate into 25-30x annual expenses (assuming safe withdrawal rate of 3-4%) ? Let's say that taxes eat 25% and these "experts" assume no mortgage (so, what, another 15%? 20%? of gross salary). Eight times will still only cover annual spending of ~30% their gross salary. If these people are spending 50% their gross salary (not unlikely given the abysmal savings rates) they're still in for quite a shock.
low interest rates have diluted investment gains
This is also quite the non-sequitur given the consistent bull market of the 5+ years. Interest rates go down means bonds go down and money moves to stocks. Interest rates go up means bonds go up and money moves out of stocks. In neither case do investment gains get "diluted" by interest rates being either high or low.
If I go to ssa.gov's quick calculator and type information corresponding to a full retirement date this year, and a current salary of $80,000, then SSA estimates $2058 monthly benefits, or about $24,700 a year.
If this person's personal savings was 8 times $80,000, it would be $640,000. If the safe withdrawal rate were 4%, this would be a withdrawal rate of $25,600 a year.
Combining personal savings withdrawals and SSA would yield $50,300 a year, which is probably not far from what a person making $80,000 needs in retirement (62.8% of gross salary). Granted, 4% is maybe only a mostly-safe assumption, and SSA continuing at current levels is probably a mostly-unsafe assumption, but given these assumptions it seems reasonable. I myself would be more comfortable with 10-12x.
It doesn't, as far as I can tell. Any rule of thumb that answers the question "How much should I save?" but doesn't take into account how much you spend right now, is useless.
A single poor decision, such as panic selling during the 2008 recession, can irreversibly ruin peoples' retirement unless they are young and have time to catch back up.
Imagine how much worse the impact of the 2008 recession would have been if we had privatized social security and allowed savers to invest the money like they did in their 401ks.
On the other hand, I know someone who retired from United Airlines after decades of work as a mechanic, and lost all of his pension because of the financial and legal problems the company and the pension fund were going through. He had to go back to work at a retail store in his late 60s in order to pay the bills. I bet he would have rather had a 401k and some control over his own investments.
I hear this a lot, but does anyone have actual statistics on how often people try to micromanage their 401k or other retirement accounts? Everyone I've talked to just picks one of the target retirement date funds and leaves it on autopilot.
Framed another way, it's another form of progressive taxation. If you assume that people save for retirement in proportion to how much they earn, then setting a flat limit of how much of your retirement savings can be sheltered from taxes effectively means that less wealthy people can shelter all of it, and as you get richer you pay taxes on a higher percentage of it.
1. High fees - this is largely because as an employee you're stuck with whatever 401(k) provider your company signed a contract with and which funds are available to invest into. Instead of letting you invest up to the annual limit into the most competitive brokerage account (just like you would for an IRA) and taking a deduction on your taxes.
2. Contribution limits - I'm not actually sure why these exist (maybe someone could educate me). As long as you can't touch the money before age 59.5 (and maybe disallow or restrict borrowing), why is there any sort of limit at all? There's two possible ways uncapped 401(k) might play out -
a. people spend most of their money, put the rest into 401(k) - no different than what's happening right now, little different to income tax collected
b. people spend a judicious amount of money, put most of it into 401(k) - these people (for now, a minority) would pay significantly less in income taxes. But they'd continue working through to at least 59.5 and they'd be financially secure upon retirement and likely to need less government assistance
Also, this gem about pensions:
> Unlike defined-benefit pensions, which provide set payouts for life, 401(k) accounts rise and fall with financial markets.
I consider this a bug, not a feature. Pensions pay out the same amount of money to retirees regardless of market performance but the pension fund itself is still invested in the market. They're shielding current beneficiaries from market performance at the expense of future beneficiaries by (IIUC) raiding principal to pay out yields that haven't been realized. (correct me if I'm missing something here)
This is the scariest part of the article. Every time I am aware of, wherever price controls are imposed, then that leads to disruptions and shortages. That leads to Venezuela’s collapse, that leads to San Francisco’s housing state of emergency, that even leads to AT&T’s rent seeking approach to innovation.
It sucks to contemplate retiring without any guaranteed income, but it’s safer for society as a whole.
The numbers on how many have retirement accounts are quite scary. Who's going to be there to fill that shortfall, social security? Doubtful it'll be there for anyone under 50.
That's true. Interesting then that executive pay, golden parachutes etc keep climbing...
They don't have the willingness. They could fund them if they wanted to. Maybe some super generous pension plans would have to be cut back.
Just look at a lot of execs. They get life-long pensions.