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I'm curious to see the effect of the baby boomers moving through the age pipeline. You have this massive cohort of people with the majority of their wealth in their home, all about to hit the exit door at the same time. Are house prices going to correct in a massive way at the same time interest rates are rising? Is all of that paper wealth going to get wiped out? Interesting times!

They'll probably leave their homes to their children.

Especially in California, where IIRC transferring a home from parent to child doesn't trigger a tax re-assessment under prop 13.

Ha.

I work in the financial sector and reverse mortgages are becoming a big thing: essentially an annuity secured against the house. You get a nice lifestyle and the kids get zip.

>Renters can get the same benefit if they save up a lot of money or invest smartly, but that takes more discipline than just making mortgage payments each month. I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets.

I'd be interested to hear what Americans think of a policy we have in Australia called mandatory superannuation. It essentially forces people to put around 12% of their income into pension funds (they can choose which fund, or possibly even self-manage it in some cases) that they can't touch until they're retired, meaning that people who rent their whole lives and save nothing can still have hundreds of thousands in savings to support them when they retire.

Try searching for: "privatised social security"

We have the same concept in Europe, or at least the country I'm from (Slovenia). You are mandated by law to put a percentage of your monthly income into pension. If you miss a payment, you are in debt to the state and they will hunt you down for it. They take these things very seriously.

Everyone under 40-ish agrees that we are never going to see that money. We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.

>We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension.

Australia's system is slightly different, in that the pension funds are privately owned and the government (currently) has no way to take money out of them or use it for anything else. People here'd be pretty pissed off if the government started dipping into their super.

To be fair, I don't think our government is dipping into anything. They're just using the funds to pay out current pensions because there isn't enough money in the system.

Why there isn't enough money in the system I don't know. There are likely to be multiple factors ranging from the fact that the country is just 25 years old, that there's been population decline or stagnation, or that those pension funds weren't growing enough.

Hard to say.

> Why there isn't enough money in the system I don't know.

If it's anything like most countries, because the generation currently drawing a pension never paid in remotely enough in taxes to cover it.

The sad thing is, that they probably paid enough, when considering purchase-power-parity over the decades. It is just the inflation that destroyed the savings. It does not matter, whether the government is running the fund or whether it is privately owned, the result will be the same.

>To be fair, I don't think our government is dipping into anything. They're just using the funds to pay out current pensions because there isn't enough money in the system.

That's what I meant by dipping in: they're using the funds. In the Australian system each person's funds are in their own account and the government can't use it for anything else, nor can the super fund, so it's impossible for someone to be paid out of someone else's account.

Oh, there are ways to get at the money via fiddling with tax status: http://www.thisismoney.co.uk/money/pensions/article-1692321/...

> We're essentially paying out of pocket for the current retirees and by the time we retire there will be nobody to pay our pension. Or at least there will not be enough somebodies.

This comes up again and again (not just in Slovenia, but in any country that has an inter-generational pension system).

There are two points to make here:

One is that as long as a country produces enough goods and services, money is "just" a tool for allocating these goods and services. How money is being saved and spent has already changed massively; countries have a different tax structure, require people to spend vastly more on health insurance than a century ago, families are smaller compared to a century ago and parents are less dependent on their children in old age (and thus the way our retirement works now is already vastly different from back then). There's little reason to think that the system cannot adapt. This is not to say that it "will" (because, well, predictions are hard, especially about the future), but it would also be unrealistic to assume that what we are going to have 30-50 years from now will be like what we have now. Heck, we don't even know if the "lump of labor fallacy" will still be a fallacy in a future of rising automation or whether part-time work will become the norm. At which point all bets are off, anyway.

As a simple example, we could just implement a basic level of pensions through taxes (in lieu of existing pension schemes) that people could increase through private pension schemes. This is essentially basic income minus the moral hazard (because you don't have to worry about creating a disincentive to work for people outside the labor force).

The second point is that investing privately in your retirement does not fundamentally change anything. When a society ages and has a disproportionate amount of young people, these young people still need to generate enough economic output, regardless of whether the income for those too old to contribute comes out of interest payments, an inter-generational scheme, taxes, or something else.

This idea is usually promoted as a pretext for privatizing the public pension system. Ironically, that really will ensure that your pension gets raided.

The idea is ridiculous of course. People are not going to stop existing when you retire, and judging by the last hundred years of progress, they'll be richer and more productive, if less numerous.

I'm a US Citizen living in Australia.

I find the mandatory superannuation very refreshing and surprised the US doesn't implement something. I feel if everyone saves 10% of their income for the rest of their working life, it leaves you with something around retirement.

The closest in the US is the company you work for can match upto 4%.

So financial advice in USA is put away maximum into 401k/Superannuation that your company will match because if not, you are losing that free money.

As a current renter, the mandatory superannuation law allows me to make a rational choice to rent when it suits me. Renting allows me the flexibility and freedom to go where the work is. At least have the option to go where the work is. If I owned a home, I wouldn't feel as free.

I plan on buying when it makes sense, but right now, I do not see any benefit of tying up most of my wealth into home ownership.

I look at renting as a utility of life. I need to live somewhere and it costs me x dollars. In retirement, I plan to have x dollars in retirement money to pay for my rent then too.

On the other hand, I'm in IT. I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :)

>> I don't ever plan to retire. Because when I retire, I'll be doing the same thing...coding at home. Might as well get paid for it. :)

You can still retire and get a pension,and still make money by coding.

The best thing about it is that it is an account that the saver has actual visibility on. It encourages retirement savings. It's a good base for employer and/or government contribution match schemes. It has obvious and fair inheritance implications (if you die at 64, who gets your pension?). It's far safer, with much less risk that the money will be gone when you retire. The systemic risk aspect is much better too.

The alternative is pension schemes, alarmingly similar to pyramid schemes. The company (or however it is centralized) pays out of current income, IE current employees or tax payers pay for old pension obligations. This works until it doesn't. If people start living longer, the company/tax base shrinks or no one bothered to do the sums 30 years ago, it collapses.

The reason pension schemes are so common is because it's easier to start a pension scheme and very hard to move from the pension scheme to a superannuation scheme.

When you start a pension shceme, the costs are very low at first while the number of retirees is low. You can pay out pensioners starting now. Superannuation only hits full speed once people have contributed to it for a lifetime start to retire. Way way longer then the horizon of CEOs, politicians or union bosses.

If you try to move from pensions to superannuations, you are in a problem. Your current crop of workers need to pay for their parents/grandparent generation of pensioners while saving for their own retirement as well.

Australia is lucky to have the system it does.

Most existing pension plans were designed when interest rates and birth rates were both much higher than they are now. So they made more sense back then. Even a Ponzi scheme can be sustainable given high interest rates and a steady stream of new customers!

> The closest in the US is the company you work for can match up to 4%.

Is there actual regulation that limits how much a company can match? This [1] refers to 6% as a common practice, not a limit imposed on employers.

At two universities where I've worked, the university's contribution to a 403b (401k for non-profits) didn't require any contribution by the employee. At one the university's contribution was 6.25%, at the other it was 5% for employees under 40 and 10% for those 40 and older.

[1] https://en.wikipedia.org/wiki/Employer_Matching_Program

this is bogus, the company I work for has put 10% into my 401k for 10 years now. I'm effectively saving 15% of my income every year.

There is no regulation.

Different companies contribute different amounts, all part of their benefits package. Ex: Company A might pay a high salary but low match. Company B might pay a lower salary but contribute x% to 401k.

Most companies only want to do a safe harbor match (roughly 3%-6%, depending on how it's set up) on their 401(k) plans...otherwise the auditing (annual testing requirements) requirements are a real pain.

http://www.guidestoneretirement.org/ToolsandEducation/safeha...

> surprised the US doesn't implement something.

It was tried over 10 years ago...it bombed politically.

http://money.cnn.com/2003/02/03/retirement/bushplan/

It skews the market, of course. Currently, I stay in South Africa. Here they don't have a similar mandate, but a de-facto one by virtue of giving a large tax-benefit to individuals who put up to 25%(I think) of their annual income into a Retirement Annuity. This is a private thing (except for government employees), but withdrawal from it is regulated by government among other rules.

You lose an immeasurable amount of opportunity cost by putting away so much of your earnings there. Not to mention that most of these retirement products are heavily linked to equities, meaning you are very likely to lose a lot if the market down-turns. Short of going on a huge rant on the topic, I'll just settle to saying it's a huge scam that makes people indebted/vested into keeping the market system chugging along, no matter what.

And then we are being told that "rich people" are causing inequality. Right.

>I wonder how many renters are actually aware of this difference, versus just spending their extra disposable income on fancy clothes, booze, and gadgets.

Where I live (London), rent is more expensive than mortgage repayments.

Does that take into consideration the amount of down payment necessary to get a mortgage? If you pay 20,000 pounds to get a mortgage that saves you 200 pounds a month; you're looking at a bit of time before that starts paying a return. Unless the value is increasing and you're able to cash out equity through a refinance.

Compared to the interest only part, the savings are significant. Way more than 200 per month.

The capital repayments are not money lost in the same way that rent would be (assuming your house price doesnt plummet and you are forced to sell at that time).

So in the UK (outside London at least) at the moment there is little argument for renting, assuming you can afford the down payment.

London is a slightly different beast mind as prices have skyrocketed and down payments can be huge

The time value of expected rent (minus future maintenance costs, minus the value of expected vacancy periods) has to cover at least current sales price . Otherwise, it would make no sense to rent your property instead of selling it.

So, if it makes economic sense to rent it, someone is making money on it. After all, the flexibility of renting has to have a price tag too.

renters are actually aware of this difference, versus just spending their extra disposable income

In the UK, being a homeowner is usually significantly cheaper month-to-month than renting. And we're still expecting home values to go up forever.

http://monevator.com/historical-uk-house-prices/ especially http://monevator.monevator.netdna-cdn.com/wp-content/uploads...

Even in the US, the equation varies by region. It also varies by the type and size of living space you want. Suburban homes with a pool and two garages are completely different from urban condos.

But I was thinking more in terms of increased mobility -> better bargaining position -> better chance of finding a job that pays $12K more than your current job -> other things being equal, $1K extra disposable income per month.

$12k extra income does not mean $1k extra disposable income per month, because you have to pay tax on it. And then you have to account for increased rent in high-earning areas for the same amount of space.

Someone I know recently told of moving in and out of London over a five-year period. They were very fortunate in being able to buy their house there, because the house price rise was greater than their total salary income over that period. They earned more by being a homeowner (ie leveraged property investor) than by working. And in the UK you don't have to pay capital gains tax on your primary residence.

> versus just spending their extra disposable income on fancy clothes, booze, and gadgets.

investment in the short term is still investment.

I found your reply confusing. Are you suggesting looking at "fancy clothes, booze, and gadgets" as an investment of some sort?

Yes, short term benefits. Clothes can open doors, gadgets can be productive or increase learning/happiness/entertainment. Booze... well, a bit of a stretch, but booze can assist in unwinding and/or celebrating which has benefits.

Neglecting the short term is very risky personal business.

Fancy clothes, booze and gadgets is consumption, not investment. You will never have positive cash flow out of it.

Gadgets can return productivity, learning, and entertainment now and into the future. Clothes can open doors as early as the day you buy them, or weeks later.

Booze is consumed but it's an important part of many social interactions, without it things can get boring. Boredom closes doors.

A colleague once gave up coffee when he calculated the annual spend as something like a grand. Okay, congrats on the extra grand you'll have in the bank at Christmas. But sucks to be you because you miss out on coffee every single day of the year.

Wise investment advice can hurt your short term life - which does actually run out. You don't stay in your twenties forever. You don't stay in your 30s forever.