> Assumptions:
> - You can earn 5% investment returns after inflation during your saving years
> - You can earn 5% investment returns after inflation during your saving years
Google cache (his server seems not to take HNing well): http://webcache.googleusercontent.com/search?q=cache:UjYtrDk...
As I say every time I link it, read it carefully; it does not say what most people initially think it is saying when they first see it.
In this particular case I bring this up to show that the "standard" 7% over a long term can be optimistic. As it happens that corresponds to the first light green color, and that is not as pervasive as you may have been led to believe. Sub 3% over 20 years is a very realistic possibility.
Individual snapshots of that graph can be highly deceptive. The whole is quite interesting and difficult to summarize.
It illustrates the fundamental truth overlooked by most retirement planning schemes: the stock market doesn't just automatically grow in value over time. It grows in emphatically punctuated booms driven by technological advances.
The boom of the 1920s owed a lot to the telephone and automobile, linking businesses together in new ways. The boom of the 1960s was mainframe computerization, and the boom of the 1990s was personal computers and Internet connectivity. All these permitted entrepreneurs and established businesses to gain ever larger leveraged multipliers of turning effort into impact and value and wealth.
No breakthrough technology means no boom. We won't have another until another such technology arises. The Internet has largely plateaued in terms of business value. We don't have anything obvious on the horizon that will create a 10x productivity multiplier over email or Excel or StackOverflow, in the way that computers replaced adding machines and email replaced snail mail. Judging by the history of industrialized society, something will arise eventually to spark another boom (my best bet is neural-computer integration), but we can't say what or when. The next 20-year quadrupling of the stock market may begin in 2015 or in 2060.
If you want to make this argument, you have to use global stock market data.
Personally, I use 2% after inflation for my calculations, and consider that to be optimistic. There are lots of examples of stock markets returning less than inflation over long term periods.
While the US Gov't is doubling down on Keynesian spending (borrowing money, printing it, keeping interest rates near 0), there is no safe/guaranteed investment (CD) that comes close to 5%.
I've hedged myself by investing in "foreign" equities. But this is no where near a steady guaranteed 5%. It's super volatile.
Life is a risk. You pay your money and you take your chances.
And of course your nickname is "pragmatic".
: )
Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year.
The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55?
This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg
If the stock market performs on average or better than average, you lose by using a guaranteed annuity.
If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits.
If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything.
So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital.
This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets.
The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically).
I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.
No insurance company should assume that for their entire retirement portfolio they can produce inflation beating returns without risking significant capital loss and subsequent penury.
The reason I can flip the argument is because, ultimately, the value of your investment is irrelevant. If you are investing $10 billion and earn 10%, or you invest $1 mil and earn 10% - you are still earning 10% in both events.
It's just scare-mongering - you're saying to offload your risk and reward to someone else because they're so much better than you at it. However, there is very little proof that they really are better at it than just investing 50% in bonds and 50% in index funds. And, unfortunately, while you truly are offloading all of your reward, you are only offloading limited risk - and you are paying for the privilege.
The financial industry as a whole does a wonderful job preying on fears for their own profit, and yes, I've worked in the financial industry.
The insurance company are not attempting to make RPI + 4% - which is what the article recommends you must chase to live on. They are not attempting to retain the capital. The article is claiming that he can consistently make those returns ad infinitum - ignoring completely the risk of ruin. The insurance company simply assumes that overall their returns + the capital will cover the cost of the annuity over an average lifespan. They calculate this with a very low risk portfolio - because the capital costs of reserving against risky assets outweigh the benefits of chasing the returns.
Of course you pay them for the privilege, I am not contending that. However - for you to claim that it is equally risky is complete rubbish, and once again you fail to understand that they are offering a very different prospect with different risks and far higher levels of surety.