The Financial Riddler 5-15-24
The 2nd question provides the key to deciding when to retire.
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What share of workers aren’t saving enough to maintain their living standards in retirement?
a. 75 percent
b. 50 percent
c. 25 percent
d. 15 percent
And the answer is …
The answer, provided in a 2022 Federal Reserve study, is 75 percent. This study, like many others on this issue, relies on a goodly number of imputations. It’s also focused on those with retirement plans — households that should, by rights, be far better prepared for retirement. Other studies claim that a far larger share of retirees are able to maintain their living standards per household member from that experienced in their working years. Yet other studies show that half of the elderly die broke — with no or precariously low financial assets.
Maggie is single, age 50, lives on a farm in Virginia, which she’ll never sell, earns $100K annually, will retire at age 62 and immediately take her $30K anual Social Security benefit. The farm’s worth $750K and has chickens, goats, and dogs. She has yet to shoot any of them. No mortgage, but her taxes, insurance, and maintenance total $15K a year. Maggie’s maximum age of life is 100. Maggie and her employer both contribute 4 percent of her pay to a 401(k), which has a $500K balance.
Maggie’s investing in a ladder of TIPS, which she intends to hold till maturity, reinvesting the coupons, as they arrive in TIPS. She assumes, given current TIPS yields (see zvibodie.com) that she’ll earn 2 percent real on her assets over time. Maggie isn’t saving outside her 401(k), which will increase by $18K this year due to the 2 percent return and the additional contributions. As Maggie puts it,
That’s $18K in saving. With my 401(k) plus Social Security, I don’t need to save more.
Is Maggie right? What’s Maggie’s annual sustainable discretionary spending (her living standard), measured in today’s dollars, through the rest of her life? This spending is above and beyond her taxes and housing costs.
a. $71,211
b. $69,043
c. $39,208
d. $29,356
And how much does Maggie need to save this year, outside of her 401(k) plan, to maintain her highest affordable living standard?
a. $16,892
b. $13,377
c. $9,006
d. $572
And the answers are …
Both answers are remarkable. Maggie can only spend $39,208 if she wants to maintain her living standard. This entails saving a whopping $16,892 this year with similar large amounts year after year through retirement. When Maggie learns this answer, which my company’s software — MaxiFi Planner — calculates in a half second, she’s incredulous.
Maggie, like so many people, is relying on two big brothers to handle her retirement — Uncle Sam and her employer. But neither properly measured, let alone told her, how much to save on her own.
Since Maggie’s saving nothing outside her retirement account, her current spending isn’t $39,208 but $56,100 — $39,208 plus the $16,892 she’s not socking away. Thus saving the $16,892 means cutting her living standard by 30 percent.
If she fails to do this, she’ll face an even larger reduction in her living standard in the future.
If Maggie goes to her cousin the financial planner with a shiny RIA certificate, he’ll surely promise to rescue her retirement by putting her in the stock market with its far higher average annual returns. But the difference between the average real yield on stocks, over the last century, namely 7.4 percent, and the current roughly 2 percent yield on short-term TIPS reflects the risk premium — the higher return investors demand for the risk that they won’t earn 7.4 percent real, but instead, will lose their shirts. The stock market, after all, is a casino with great odds, but massive risks, especially over the long term.
What if Maggie retires at 67 and starts Social Security then — her full Social Security retirement age. How much does this year’s required $16,892 in saving decline? It drops to $5,801. And her annual sustainable discretionary spending rises to $50,299. That’s 28 percent higher. This, then, is Maggie’s cost of retiring early — forgoing a 28 percent higher living standard for the rest of her life.
If you are like Maggie and are flying blind into retirement, do yourself an enormous favor — run MaxiFi Planner at MaxiFi.com. If you are using an advisor, ask them to run Maggie’s case for you. Just give them the facts. Don’t tell them what real return to assume. They will surely say:
Maggie doesn’t need to save more. With smart investing, she’ll earn 6 percent real and be fine.
There’s a name for this: Snake Oil. How much of it are you drinking?
Is California currently able to general enough clean energy on good days to cover all or most of its electrical needs?
a. Yes
b. No
And the answer is …
The answer, in this NY Times article, is yes! The trick, in part, is using mega batteries to store clean energy from wind, solar, and hydro. As the Time’s figure below shows, clean energy plus nuclear covered over half of California’s electricity needs in April.
Source: https://www.nytimes.com/interactive/2024/05/07/climate/battery-electricity-solar-california-texas.html
Over the past half century has the average annual nominal return on gold exceeded that on stock?
a. No
b. Yes
And the answer is …
The answer is no. The annual return on the S&P 500 averaged 10.4 percent versus 7.7 percent on gold.
What fraction of workers retire before age 65?
a. 30 percent
b. 40 percent
c. 50 percent
d. 60 percent
e. 70 percent
f. 80 percent
And the answer is …
The answer is 70 percent. Among these, the median retirement age is 62.
How large is Social Security’s unfunded liability? This is the difference between a) the present value of its projected future outlays and b) the sum of its trust fund plus the present value of its projected future receipts.
a. $63 trillion
b. $29 trillion
c. $17 trillion
d. $14 billion
And the answer is …
The answer, hidden in Appendix table VIF1, of the just-released Social Security Trustees Report is $63 trillion! That’s 2.25 years of U.S. GDP. Eliminating this red ink requires an need an immediate and permanent 4.5 percentage point increase in Social Security’s FICA 12.4 percent payroll tax rate. Hence, the system is 36 (4.5/12.4) percent underfunded! Short-term fixes that keep the system just ahead of a cash-flow crisis only deepen the long-term hole we’re digging. My solution? The Personal Security System — a modern, fully-funded, progressive, non-sexist version of Social Security in which Wall Street plays no role.