Pictures of Pensions
calcwithdec.dev
calcwithdec.dev
This blog post is a 'narrative visualization' to show some nice savings incentives visualized in a chart.
I think these are important to have a good understanding about when they are relevant, but the bigger reason I made this is to explore the communication style applied to models and to get closer to the technical patterns to create them.
Since I make calculang [1], all the savings projection calculations are described using it [2] (including income tax calculations: here an example of composition in calculang models).
calculang transpiles into a pure functional JS module, and here I interact with it using reactive OJS and the closeread extension for Quarto [3], plus a reactive Vega visualization.
The programming logic mostly is: Vega signals and calculang parameters condition on a `progress` value that updates as the user scrolls.
It was nice to make: minus no fast reload I would say. I'm considering streamlining some tools with fast reload to facilitate building this type of output for calculang models - like I said I'm interested in the narrative style applied to models, and pure FP calculang and reactive FRP tools around it help a lot.
[2] https://calculang.dev/examples-viewer?id=pension-calculator <3 separation of concerns
Here in Ireland I think in order to get some flexibility with a reasonably sized pension you need to buy an annuity - a guaranteed income paid from some insurance company, up to some amount.
Some day I might settle on some scenario/s to model and take on the visualization challenge... For now hopefully people - especially those who provide the services, can assess if it can be helpful!
Health warning third bullet point is:
> Even when there is tax relief to save for a pension, this doesn’t mean that there aren’t taxes on pension income after retirement
and the footnote to it is:
> often there are taxes on pension income - so that it might be better to say that tax is deferred rather than relieved whenever we save↩
I'll consider bumping the footnote since it's important.
I might try to capture the more complete picture including post-retirement separately - a problem is that there are so many different configurations of this (e.g. in Ireland there are tax-free lump sums permitted at retirement, then there are a few specific options about the rest - and I'm probably still simplifying). But when I get comfortable about something relevant to describe, I might.
(No income tax on distributions, reduced tax on contributions)
There's no skill or activity involved, its purely: those with money get 6-10% more every year. And as this site shows, it stacks up quickly.
It just doesn't seem fair that someone who put in money earlier should have so much more than someone who started later, or was never able to
2025 is going to be one heck of a circus... =3
Here the 6% compound returns is an assumption. If that's good or bad to use depends on the purpose of the projection. For long projections in medium-risk funds this might be a reasonable value - but it can also be far off, especially in the short-term.
I made a separate post that surfaces results from an assumed distribution of outcomes rather than a single value, called Visualizing Risk: https://calcwithdec.dev/posts/viz-risk/ (basically a monte carlo simulation)
Also, in my pension calculator example on calculang.dev you can change all the assumptions: https://calculang.dev/examples-viewer?id=pension-calculator (excluding tax relief bits - it's just an example)
I do think we try very hard to keep it as guaranteed as possible, if something would happen to stocks as a whole the government is willing to pull a lot of stops
As a matter of policy, the government explicitly doesn't set policy in attempt to influence stock returns.
However, the government does try to prop the broader economy up. Rightfully so, because if that collapses you have people without jobs or rapid inflation. Neither of which are good for society.
It just so happens that stock returns are indirectly coupled to overall economic performance, so a healthy economy (generally) means a healthy stock market.
Now, my parents generation had truly guaranteed defined benefit pensions where their employer effectively backstopped their lifetime liabilities. That not being available today is "unfair" in my view.
The big advantage of a defined contribution plan is that you control your risk of loss. If you feel stocks are too risky then don't invest in stocks.
However, we can certainly push for a tax structure that curbs the power of old money and better rewards labor, if we choose to do so.
The only guaranteed returns are nominal government bonds (currently about 4.5%) and inflation adjusted government bonds (currently about 2.15%). Everything else has a risk component. And even the inflation adjusted one is under the assumption that you agree with and trust the government’s calculations for inflation.
The more general concept that you’re entitled to keep money you already have or that you’re entitled to the gains of money you already have (or the risks you took) is fundamental to capitalism. If you’re going to throw that concept away, you’ll be hard pressed to find a working long term example of success.
Nor would it be fair that someone who made sacrifices to save should have the same money as his neighbor who just spends it all because he wants to.
I'm guessing what you wrote is not what you meant, but of course those who save for a longer period will have more. Assume there are no investment gains. You're putting money in a 0% interest bank account. Are you suggesting it's unfair that the person who puts more money in ends up with ... more money?
Phrased it oddly, but index funds give me a weird feeling of getting something for nothing.
Index funds are still riskyz though everyone forgets that when the market keeps going up.
The odd thing to me, that I still havent been able to wrap my head around, is that it's no work at all. It's money that comes to you because you had it, not because you did anything.
The "work" is losing access to your money. You're foregoing the ability to buy nice material things today, in exchange for investing in a business so that they can use your funds to do something productive with it instead. Real work does actually happen at other end of the exchange.
On top of that, there's the risk that a business you invest in might fail, and you lose all of that money permanently. You earn a premium for accepting that risk.
After 10+ years (market downturns historically can last up to a decade, so you need to be prepared not to access your funds for a long while in the worst case) you can start getting that money back. That's the fruit from the tree.
The only thing that's different is that with an index fund is that you're investing in hundreds of companies, rather than individual ones. Which you should be doing anyway in order to mitigate the risk of any one company failing.
This is why spencerflem is correct, and why governments around the world are scrambling to figure out what to do about sub replacement rate total fertility rates and top heavy population histograms.
You can have all the investments and assets and money in the world, but if there are insufficient hands to perform the services and deliver the goods you want (automation notwithstanding), then there is nothing real underlying those numbers on the brokerage statement.
The political issue of a top heavy population is clear, the rent seekers, those who want income for doing nothing is directly at odds with the goals of the younger population, because the younger population knows they are going to get less.
"There's no skill or activity involved" is a gross simplification. When you save funds in a lower-risk security like bonds, you're being paid interest in exchange for the time-value of not using that money. The value-producing activity here is letting somebody else use your money instead of yourself.
When you invest in higher-risk securities (like the stock market), it's the same but with an added premium in exchange for the risk. The more risk you take on, the higher the return.
Make no mistake, the risk is very real. But if you properly diversify and work over a long enough time horizon (again, the implication here is that you might not be able to access your money without loss for a decade+ in a large downturn), it's possible to constrain that risk to within an acceptable envelope.
I'm not producing the value, I'm letting someone else do that and taking a cut.
It's really really not a skill, the steps are: 1. Buy a total market index fund 2. Wait
And I get free money for allowing other people to do work
I do this anyways ofc but it does feel odd
The more risk you take, you hopefully get more expected return, but of course with more risk taken. The risk must show up eventually or it wouldn't be a risk.
There is no guarantee of that return. There is risk with investing. Without risk, there can be no return.
You can diversify some of the risk by owning lots of companies, but that doesn't make all risks go away.
This is the hidden cost of the "worlds greatest generation" population bulge waning.
I learned one should check with your own personal _bonded_ fiduciary advisor, and not blindly trust most "investment" folks motives or advice... it is usually self-serving BS. Bag of popcorn ready for the 2025 market. =3
Do you mean if one invested in EE-Bonds alone and not in something that moves with inflation?
Disclaimer: This is not advice, so YMMV etc... note most financial "advisors" will quietly have >80% of their investments in boring index funds. Unbounded advisors at banks etc. generally do not "practice what one preaches" when there is no legal repercussions for lying to you.
Best of luck, =3
A) Low birth rate leads to a Population/Population disposable income total(not per capita) will decrease, and thus gross capitalization decreases reducing stock value. Decreasing the benefit of investing in index funds potentially catastrophically. B) Inflation will be/remain high(or above earning increases) for core expenses (housing, food, water, gas, transport)
Sometimes with the argument that B happening will cause A to happen (e.g. more expensive = less attractive for young immigrants, less attractive to have kids)
I agree with some of it (for example disposable income inequality and core inflation issues are indeed causing a cost of living crisis which is discouraging growth), but I advise NOT to go down the rabbit hole of these channels, as they can give you a lot of anxiety.
It is absurd, but sycophantic idealism starts to sound really funny when you dig into the numbers. =3
Have a wonderful day, =3