To be blunt, the entire US retirement system is a ponzi scheme. I'm not talking about social security or medicare (though, those are ponzi schemes as well), but the 401k's and IRA's that the government, the media, Hollywood, our employers, and our educators tell us we "just must" invest in. The reason why is very simple - we are relying on capital gains (ie - increasing prices) to fund our retirements and NOT increasing profits. This is why PE ratios are going up and dividend yields are going down because stock prices are increasing faster than the underlying profits corporations generate and the dividends they pay.
However, this got me thinking. Since the government more or less ordained the stock market as the primary vehicle by which we would retire, what kind of asset price increases would be required to adequately provide for the retirement of the Baby Boomer and Gen X generations? I know it's funny, and you're all laughing at me, but let's just say this crazy ponzi scheme works (or at least keeps working long enough for me to retire). How much would stocks have to go up by in order to provide enough money for each person in each generation to retire?
This mental and mathematical exercise of course requires some assumptions and simplifications, all of which will be proven wrong as time goes on. But just to see how feasible this whole "throw all your money into your 401k's" plan is, I just wanted to get some ballpark figures. Ergo, I assumed each generation retires separately and cycles over/sells their investment to the previous generation. I also assumed younger people accumulate mainly stocks and older people hold onto their bonds. I assumed every baby boomer is retiring today into today's market and that all Gen X'ers will retire 20 years from now. I assumed Americans can ONLY invest in US stocks/bonds. And I also assume a 2.5% annual rate of inflation. Again, none of these assumptions are true, but I'm just trying to do some back of napkin economics to get some ballpark figures.
The first thing I wanted to do is take a look at how much the stock and bond markets would have to be worth to effectively retire the entire baby boomer generation today. Right now there are 77 million baby boomers. Each of these boomers are going to require $800,000 in retirement funds to provide $40,000 per year in living expenses, as well as increased medical bills for the estimated 20 years of their life they'll be living. This means they need a total market capitalization of $61.6 trillion in order to retire. And thankfully the total market capitalization of US stock and bond markets are $23.4 trillion and $37 trillion respectively, for a total of $60.4 trillion, just a trillion shy of what's required.
Normally, this would be welcomed news as there's enough wealth in US stocks and bonds to retire the entire generation. However, there's a problem with the distribution of ownership of stocks and bonds. One, 30% of stocks and bonds are NOT owned by households, pensions, retirement programs, or mutual funds. They're held by other entities that are either institutional owners, brokers, traders, international investors, etc., that aren't likely going to be cashed out to pay for the baby boomers' retirement party anytime soon (bonds are even held by a smaller percent). Also, depending on which leftist rag you want to quote, "the rich" (whatever that means, and they fail to say) own anywhere between 50% and 80% of the stock and bond markets. Unless they're charitably going to "spread the wealth" you can expect the majority of boomers are going to have a shortfall. And then there's corporations like Apple that hold stock in other companies (in Apple's case I think it's up to $22 billion now) that they're not going to be selling (let alone, giving to baby boomers) anytime soon. So when you make the following adjustments/assumptions:
1. Lop off 10% of the baby boomers who are "rich" leaving the main 90% of boomers who "need" 401k's to retire
2. Subtract out the 30% of securities not earmarked for retirement
3. And subtract out the 50% ownership that goes away when you take out the richest 10%
you're left with 63.9 million boomers who need $55.4 trillion to retire, but only have....
$22.8 trillion in likely retirement accounts (and even this is a high number).
This results in a shortfall of $33.5 trillion meaning prices would have to double in both the stock and bond markets..umm....basically....RIGHT FREAKING NOW in order for baby boomers to fully retire. Alas, this is why today boomers are still working, relying on social security, and reverse mortgages. In other words, generation-wise, the 401k/IRA retirement system has failed the boomers.
The hypothetical retirement of Gen X, however, provides an even more interesting case in that we have to forecast inflation and infer what kind of growth rate would be required of the stock, bond (or both) markets to adequately provide for Gen X'ers. First there's 99 million Gen X'ers. Assuming they all retire in 20 years, and also need $40,000 a year in today's money to retire, we come up with $1,311,000 in required retirement funds per Gen X'er, which translates into $130 trillion in stock and bond market capitalizations. We of course have to whittle this down just like we did for the Baby Boomers, so we adjust for the 10% of the rich, 50% of their wealth, and 30% of securities not earmarked for retirement and the Gen X generation will need $117 trillion to retire, but will likely only have ...
$46 trillion in their names-a $71 trillion short fall (but hey, at least in 20 years they'll maybe have their student loans paid off!)
Therefore, to make that $46 trillion the $117 trillion NON-RICH Gen Xer's will need to retire, the entire stock and bond markets will have to grow to a combined market capitalization of $329 trillion. A 14 fold increase from today.
Now, is this possible?
If we erroneously assume that Gen X exclusively invests in stocks and they do not rely on bonds (as younger people aim for higher growth, not to mention bonds have no hope of providing the required returns), the stock market would have to grow by 14% per year for the next 20 years to make good on the 401k promise. This is VERY unlikely as it took the S&P 500 33 years to increase the required 14-fold since 1983 that must be done under 20 years starting today. And given the power of compounding, Gen X will be woefully short on retirement funds without those extra 13 years of growth (54% short if we use the S&P 500's historical growth and retroactively apply it).
We can also assume the scenario where both stocks AND bonds are purchased in full from the baby boomers which would change the required rate of growth of 8.9% per year. However, this is just outright laughable with those whopping 1% interest rates on treasuries, not to mention negative interest rates right around the corner.
In short, using these-certainly flawed, back of napkin calculations, this whole 401k, IRA retirement thing just isn't feasible. It constantly requires a "perma-Tulip Bulb bubble mentality" of relying on the religion of "because I can sell it more for latter" to work. It requires an ignorant population that doesn't read financial statements, can't compare prices of securities versus their underlying profits, and has a sheeple-ish mentality that is easily duped by the powers that be. Thankfully, (well, for Wall Street and the government anyway) they have precisely that. So over the past 40 years you've had millions of dupes flooding the market with trillions of dollars...paying trillions along the way in commissions, managerial fees, and taxes.
But sure enough like all bubbles it will burst (or perhaps be inflated away with QE infinity). I'm particularly curious what PE ratios and dividend yields are going to look like if we need 8.9% in annual price increases when the economy can only manage to fart out 2% per year in economic growth. It may even get so bad, like government bonds, the sheep will be paying businesses dividends and not the other way around! Regardless, I do believe it's time for Gen X and perhaps even Millennials to question the same generation that brought us
1. The Ozone Layer
2. "The kids in Africa are starving"
3. The Housing Bubble and
4. "EVERYBODY MUST GO TO COLLEGE!"
about why the hell should we be investing in the stock market for retirement? Because as far as I can tell, it's like all their other advice - not only worthless, but damaging, even life destroying.