Retirees Might Run Out of Money 10 Years Before They Die

https://www.bloomberg.com/news/articles/2019-06-13/world-s-retirees-risk-running-out-of-money-a-decade-before-death

by whack • 7 years ago

53 62 7 years ago

“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...

symplee• 7 years ago

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

DennisP• 7 years ago

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

jakozaur• 7 years ago

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.

nugget2• 7 years ago

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.

rebuilder3• 7 years ago

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

akeck2• 7 years ago

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.

lotsofpulp2• 7 years ago

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

xwdv4• 7 years ago

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.

fj39dkf• 7 years ago

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".

BeetleB3• 7 years ago

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.

icebraining• 7 years ago

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?

EGreg2• 7 years ago

“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.

rebuilder3• 7 years ago

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

AdrianB13• 7 years ago

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.

kache_2• 7 years ago

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.

allthecybers• 7 years ago

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.

kache_2• 7 years ago

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.

chr1• 7 years ago

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.

javagram• 7 years ago

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...)

AdrianB13• 7 years ago

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.

rixrax• 7 years ago

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.

rebuilder3• 7 years ago

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

AdrianB13• 7 years ago

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.

obblekk• 7 years ago

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.

xur17• 7 years 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

BeetleB3• 7 years ago

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.

b_tterc_p• 7 years ago

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.

Retric2• 7 years ago

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.

mbbutler3• 7 years ago

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/

ChuckMcM2• 7 years ago

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.

NTDF9• 7 years ago

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.

ChuckMcM2• 7 years ago

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...

seddin• 7 years ago

Does anyone reading this know r/financialindependence ?

dajohnson892• 7 years ago

yes..?

RickJWagner3• 7 years ago

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.

FabHK2• 7 years ago

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.

dajohnson892• 7 years ago

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

RickJWagner3• 7 years ago

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.)

jpalomaki• 7 years ago

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?

m0llusk• 7 years ago

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.

Retirees Might Run Out of Money 10 Years Before They Die

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