Retirees Might Run Out of Money 10 Years Before They Die | Hacker News Reader

Retirees Might Run Out of Money 10 Years Before They Die

bloomberg.com

53 pointswhack62 comments

This study is very poorly interpreted. It specifically excludes government and corporate pensions (including social security) from its calculation.

Consider:

1. Avg income (all ages) in the US is ~50k/yr

2. Avg social security is ~25k/yr (mostly untaxed)

So including social security in the calculation HALVES the annual burn rate, more than doubling your runway because of greater interest compounding on savings.

Additionally, many baby boomers retiring today have some kind of additional corporate pension from their early careers in the 70s and 80s and these are all government guaranteed, even if the issuing firm goes bankrupt. That probably adds another 5-10k/yr per person on avg.

And finally, most retirees today own houses that have massively appreciated since purchase. Given very favorable laws on cap gains from primary residence sales + low interest rates on borrowing against a home, most retirees probably have a nice additional cushion to draw from.

Overall, this article is FUD. Unless there's a massive economic recession/depression in the near future, most retirees will be absolutely fine. The poorest will struggle, but probably no more than they have since Reaganomics kicked in 40years ago.

> these are all government guaranteed, even if the issuing firm goes bankrupt. That probably adds another 5-10k/yr per person on avg.

I didn't realize the government guaranteed pensions, so I did some research. [0] indicates that companies can optionally participate in PBGC, which guarantees at least a portion of a worker's pension.

[0] https://www.thebalance.com/is-my-pension-safe-2388790

>This study is very poorly interpreted. It specifically excludes government and corporate pensions (including social security) from its calculation.

It excludes corporate defined benefits pensions. I suspect the people on corporate defined benefits is fairly low at this point.

Source of the social security number? I have a salary above average, and the SS web site estimates a $24K/year for me (today's dollars). Lower income folks should get less.

There’s still going to be quite a few people with them now. The accrued benefits don’t go away just because the company switches it’s policy.

Social security benefits are extremely non-linear using from 90% down to 15% of income in each range. It also only considers a limited set of your highest years earnings, which can mess with early estimates.

The minimum benefit for someone who worked 30 years making minimum wage is $872.50 per month, 10.5k/year The maximum benefit is $2,861 per month or 35k/year, for someone who made 140+k for 35 years.

The benefit is linear but the distribution of people getting it is not evenly distributed around the middle of the benefit range. Therefore the average benefit is not just the mean of the min and max SS benefits.

The existence of bend points in the formula means it’s non linear. https://www.ssa.gov/oact/cola/bendpoints.html

PIA formula For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2019, or who dies in 2019 before becoming eligible for benefits, his/her PIA will be the sum of: (a) 90 percent of the first $926 of his/her average indexed monthly earnings, plus (b) 32 percent of his/her average indexed monthly earnings over $926 and through $5,583, plus (c) 15 percent of his/her average indexed monthly earnings over $5,583.

Note the c is capped 11,075 US$ per month as income above that is not taxed.

Oh, I'm sorry. I misread your first claim. I thought you said the benefit WAS linear.

> 2. Avg social security is ~25k/yr (mostly untaxed)

Where are you getting that number?

One source I found said that the average SS benefit in January 2019 was $1461/month which works out to $17.5k/year. [0] This seems to agree with the SSA's snapshot from May. [1]

[0] https://money.usnews.com/money/retirement/social-security/ar...

[1] https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/

I believe situation for long-term investing like retierement is getting worse. After all quantitive easing and low level of interests rate, the capital gains on safe assets are minimal accounting for inflation. As an aftermatch capital gains on everything else are getting lower. Years of 10% gains over long-time are over, even 8% looks over-optimistic over long term for huge amount of people.

Maybe our capital system couldn’t effieciently store so much savings while keeping reasonsble economic growth with ageging population.

At this point AGI and universal basic income may be the best hope for the bottom 90% of population.

Pension funds assume 6-8% real returns in their actuarial calculations (and even then, most are painfully underfunded). If real returns come in much lower than that, then many of the State, local, and private pensions will be destabilized. Social security and Federal pensions should be fine no matter what.

What secures social security and state pensions against a long-term recession?

Feds control the currency and can print money. After watching QE, I don't believe printing a few trillion dollars would create meaningful inflation, especially while the USD remains the world's reserve currency.

Interestingly optimistic. I've been doing my recent retirement calculations with 5% nominal returns. I suppose it's because I'd rather be pleasantly surprised in retirement than starve.

30 year treasury bonds are currently yielding around 2.6%. Doesn't that mean that investors are pricing in a significant risk that they won't get a better return on other investments over the next 30 years? The world might be following Japan's lead here.

5% nominal returns, then ~2% inflation and income taxes on withdrawal. That's going to require a high savings rate.

Yes, unfortunately.

Hah, they already are destabilized. Look at all the cuts in government services and increase in taxes.

Cite, please. America went through a painful contraction in tax revenues during the giant recession but have bounced back since then. Taxes have not notably increased.

Look up your local governments budget history to see the portion of tax revenue going to pay for defined benefit pension and other post employment benefits (OPEB).

In the vast majority of cases, this is increasing, due to underfunding, bad or corrupt investments, and over promising to buy votes.

This is just for states:

https://www.federalreserve.gov/releases/z1/dataviz/pension/f...

2017 numbers:

https://www.bloomberg.com/graphics/2018-state-pension-fundin...

Note the numbers are based on rosy government assumptions, not real IFRA standards that private entities are subject to (for no other reason than politicians can vote themselves an exception).

If your city/state hasn’t been hit yet, just wait. The people of CT/IL/NJ/KY are finding out now, and it’s going to get worse. Further decreases in funding for colleges, infrastructure, selling government assets (e.g. Chicago selling parking fee revenue) that can be put off into future. Increases in taxes, toll roads, government college tuition price, property taxes, vehicle registration fees.

I have businesses in various states and locales, and all of them get various new taxes such as “elevator inspection fee” or something similar which was never itemized before, and of course they always go up.

This simply isn’t true. My tech portfolio which consists of investment in only 12 companies is up this year by 28% at the moment, and last year even with the downturn in October through December I ended with gains of 17% for the year, and I assure you I’m no stock market wizard, and in fact I’ve never had a year that ended below 10% since starting that portfolio.

You could just say that’s thanks to the tech industry, but what’s your point? Through history there’s always a hot industry making money, be there.

My index fund portfolio only sees gains of 7-8% on average, but the trade off obviously is that it is not at the risk level of holding individual stocks. I barely even check it, individual stocks are what get my attention.

The point is, the gains are out there... always have been. But you have to step up and not be willing to let your investments just cruise on autopilot. Because financial education is so poor in this country, people rarely do it.

edit: Not sure why the down votes. Don’t believe? Here’s the current returns of my portfolio. Mind you, all of these were purchased around the beginning of the year because I had sold off everything to limit losses around the end of last year.

ADBE 27.28% AMD 78.87% AMZN 15.96% BABA 20.84% FB 20.80% MSFT 38.23% MTCH 29.77% NFLX 33.23% SQ 14.41% TWLO 24.67% TWTR 27.23%

There is one company not listed that I normally am invested in but have not done so this year as I’m biding my time.

You're being downvoted because your portfolio's performance is almost certainly a matter of luck and a bull market, not your clever investment research. Not even Berkshire Hathaway makes consistent 30% annual returns, and they employ plenty of "stock market wizards".

Ask the value investors who chased strategies like Berkshire Hathaway the past 8 years how happy they are with their returns compared to those who invested in growth stocks.

>Not sure why the down votes. Don’t believe?

Sad no one has responded. Yes, we believe you.

Possible reason for the downvotes:

It is well known than on a 10+ year horizon, only about 10% of professionals engaging in active investing outperform the S&P500 index fund. The proportion gets worse when you expand the horizon. The fact that you did well in 2-3 years is simply noise. That you didn't address this indicates a lack of investment knowledge. Everyone has met people like you who do a lot better on some years than the market does.

(note you did not specify how long you've had your portfolio).

A 5 year window is noise. Even a 10 year window is mostly noise. See the plots here:

https://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-i...

So even if I meet someone who beat the market on a 10 year window, it's not particularly impressive.

I’ve been investing since 2010, not “2-3 years”.

IMO you could sit on the sidelines and make excuses about “noise”, or you can get in and try to make money.

OK - Can you tell us what your effective rate of return has been over this 10 year period? The S&P 500 index fund has increased 3x, which is about a 12% effective annual return.

You're completely missing the point

Tech was pretty hot in '99 too. If the next dotcom hits and your tech portfolio loses 90% of its value in the next two years, what will your real returns be?

With the risk increased by holding mostly software and 1 hardware company. It's basically putting all eggs in one basket.

Still higher than if I had invested in an index fund gaining 8% per year for the past decade.

To outperform 8% a year after a 90% drop, you would need to have made 35% for a decade. Are you actually earning that much?

Sp500 over the past decade has earned 14%. Would you stil be up? That means you earned 43% a year for a decade?

“Maybe our capital ststem couldn’t efficiently store so much savings while keeping reasonable economic growth with an aging population”.

This would only be true if the investments that the pension funds made were bad. If they invested in a stock index or vanguard fund, for instance, they would reap the benefits of the overall rise in markets. In essence, the more risky bets they make the less returns they can make. But the average drift of the markets has been up and to the right.

If we make bad investments on a huge scale, then we invite systemic risk. But as long as enough of the investments produce a return, the pension funds can invest in a mix of VC funds, market indices and so on and so in.

After all, money sitting around is simply lent out for some productive use. That’s the essence of fractional reserve banking. The bet is that most of those investments will generate far more returns than the bad loans and write-offs. As long as you diversify your risk, you should keep the same drift while keeping volatility down.

When the percentage of the population in the workforce decreases as the population ages, how does growth continue on track?

Automation and outsourcing

Assuming infinite growth in a finite system is wrong. Relying on a system that was invented and meant for societies where population is growing double digit is wrong when the population growth stops or when it is declining (Japan, Europe). The huge inertia of the classical pension system is killing it, "adapt or die" already put it into a coma.

“The forum assumed retirees would need enough income to cover 70% of their pre-retirement pay, and didn’t include Social Security or other government welfare payments in the total.”

The above caveat is pretty huge...

Exactly. If that number were arbitrarily changed to 60% and did include Social Security, well, there goes the news article.

So they're excluding what the government is doing, to argue that the government needs to do something.

I agree with the comments that the methodology is flawed and the conclusion overly alarmist. One of the things my grandfather would say was "You don't have to worry about running out of money if you're living off the interest." He had lived through the depression and would tell stories of people who were spending savings to "keep up appearances" and it cost them everything.

But one can't live off the interest any more because we've manipulated the system to close to zero interest rates. To be able to earn 20k, single person survival income, that individual needs $1M in savings.

Times from our grandparents times have changed. The problem is very clear. Higher interest rates boost savers, at the expense of risk takers (some good, some bad). Instead, we've goosed the economy for so long with low interest rates that savers got bit by inflation and speculation has become a way of life.

Apparently you need $715,000 in an SPX index fund in 2000 to reliably pull $24K/year ($2K/month) out of it. I made a toy model for that : https://docs.google.com/spreadsheets/d/1pBoa2mikeKQ4zPHOHu6L...

Financial education is a must.

Even workers who earn very little can easily be assured of a safe retirement if they save and invest prudently from a young age. (That's the key-- a young age.)

This is all very well proven. It should be taugnt from the earliest grades. Yet it isn't. Totally frustrating.

It's not that simple. It depends crucially on real rates.

When rates are close to zero, as now, you'd basically have to save half of your after-tax income. And that won't allow you to cover big medical bills or health insurance. Some government help is required.

Financial education alone is not enough.

"young workers" can't save if they have student loans.

Let's expand that further.

They spend their most productive years paying off student loans (while inflationary policies make them poorer). But OOPS all the terrible information about nutrition and a lack of physical activity incurs future medical costs that bite them in the kaboose.

It's kinda depressing if you think about it too long. Obesity being a new normal is an ever-ongoing disaster that technically is entirely preventable.

But man, it's hard to escape dietary culture imposed from youth.

That's a question of asset allocation. A well-diversified portfolio should have assets that produce income even when stock-trading isn't. (i.e. bonds, dividend-producing stocks.)

It's also crucial to understand that it takes time. Stocks are still doing well, were absolutely roaring for the past 10 years. This is a blip in a single investor's timeframe. You need to invest a percentage year in, year out. Through high markets and lows. Keep plowing that percentage in. Every great investor from Buffet to Bogle to Dalio will tell you this is a known formula for success. The 'current time' is irrelevant.

In every timeframe (even times of rising inflation, crashing stocks, etc.) there are assets that are appropriate. That's where education becomes important-- understanding what your levels of risk and comfort should play in allocating your assets.

Don't believe nobody will make money over any extended time period. Some people certainly will. Education can help you do well in many environments (including the current one. Many people are doing very well.)

First, your theory that 'current time' is irrelevant is predicated on the broad market still producing relatively high real returns. This is by no means certain, and "secular stagnation" asserts precisely that the high returns are over for now.

Second, how about some division of labour? Instead of every individual learning about the optimal allocation of assets and the CAPM and so on, how about everyone just pays into a central pot while working, and a few specialists invest it optimally.

(Different risk aversion can easily be incorporated in that framework.)

Just like you and I don't build our own cars, and don't need to know about how it works and how to repair it to use it.

That's how it should be done in the civilised world: you pay into a pension pot, and then when you retire you get a pension.

And there's another benefit: instead of everyone having to save to cover their maximal possible remaining lifetime (with expected waste being maximal possible total pension minus expected total pension) everyone only needs to save to cover their expected remaining lifetime (with expected waste being zero).

In short, because every-man-for-himself has a long history of great success. It simply works.

Ignore it at your peril.

In developing countries, the retirees' retirement is often their children. I think people need to keep in mind how important children can be in terms of securing your comfort in your old age.

> I think people need to keep in mind how important children can be in terms of securing your comfort in your old age.

As much as I see your point, that is unrealistic for many, many people. Especially in the US where that is not prominent societal norm.

My parents live thousands of miles away from any of their children. Most of my siblings don't have the money to save properly for their own retirement let alone support their parents. And housing situations often do not support two households living under one roof.

And this applies to families that still talk to each other.

I guess part of what I'm saying is that we have a seriously dangerous anti-natalist culture. When young people get married, people will frown upon it.

Maybe its not a social norm, because state provided pensions broke that norm. If people knew that they can't live alone in old age they would be more interested in having more children, staying on good terms with them and living in the same house.

If people begin starving in their retirement, social norms will probably change. The US social norm of children not supporting their parents exists because of retirement programs having been so successful in the 20th century. Before then, the US had more parents living with their children out of necessity (and, for people who didn’t have the social safety net of children, people starving...)

Then it is a wrong societal norm. My grandmother retired at about 95 years old and she lived with us (daughter's house and 2 grandchilds) until she died at 106. She had a tiny government pension (about $100 per month) that she had not to spend on anything because the family cared for all her needs. When you live with someone and the marginal cost is just one room and one seat at the table then this is not a burden for anyone. If you want your separate house and someone to help, that is not sustainable unless you saved big time.

> Then it is a wrong societal norm.

This is an underrated point, but I hope you can see how prevailing factors in both the business world (Amazon's two-day shipping springs to mind) and the culture are seriously stacked against these mores.

I believe this to be largely the exact opposite in US and in large parts of Western Europe. Parents are indeed using their retirement savings to support their kids as they grow older and older (be that education, housing, cars, weddings, ...).

Caveat emptor: quick googling didn’t come up with evidence one way or the other.

It's a bit late for the people about to retire to have more children.

They already have some or they wasted their lives (excluding cases with medical conditions that prevented having children). In a society that exists only as long as people have children and where care for the elders is provided by young people (direct care or tax funded), having children is a logical condition to get care.

There might be some trouble ahead, if the the improving technology means the current life expectancy figures are too pessimistic.

So far the growth seems to have been quite steady. Does anybody know how well the old predictions have hold up?

This is just another example of how our society is under pressure to change to giving basic support to all people in order to handle the chaotic realities of labor markets and financial vehicles.

Does anyone reading this know r/financialindependence ?

yes..?

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