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.
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15 comments:
Since I'm one of those Gen-Xers looking to retire in 20 years, I'm more than a little interested in this line of thought. You assumed all Gen-Xers retire and rely on their 401(k) for income. What's the participation rate in 401(k)s for our age bracket? I know it's not 100%, but is it closer to 90% or 10%? Won't that have a significant impact on the numbers?
I know there isn't enough money in the market for everyone to comfortably retire, but that's always been the case. Some make no plans and work 'til they die. Others do it the old fashioned way and move in with their kids. How many can the market support assuming a realistic growth rate?
All right, question.
I work for the US government, specifically the Navy. We have what's called the Thrift Savings Plan, roughly the equivalent of a 401K.
I can put 5% in, tax-free, which the Navy will match. I can put in the S&P 500 or US government bonds, the Dow Jones, or corporate or foreign bonds.
The matching makes it seem like a good investment, but then I don't know what to do with it...stick it in government bonds and wait for the next crash? There are no good options that I can see. I'm 30, btw
If you want to refer this one to Asshole consulting, just give me a quote
Hmm, let's see, what kinds of things can a person invest in? Stocks, bonds, precious metals, or other hard assets, namely real estate. There are of course other niches like microlending. For the readers that made it through Aaron's article, I'd suggest doing a little research on all of these types of investing as well as thinking about what the economy might be doing for the next 20 + years (hello Japan) and what impact that will have to each type of investment.
For me, that meant cashing out every penny in my 401k and putting everything into rental homes. To do that, I looked at a number of cities, all of which weren't in the state I was living in at the time. Being a landlord can be quite a bit of work, but I have had positive cash flow from day 1 as well as having the renters paying down the principal on the mortgages on the homes.
With the runup in the stock market the last few years, I could have made money if I left my investments as is. I've made more though through real estate in the same time frame however. Sure, it could all go bad, but for that to happen both the price of homes as well as the ability to rent them would have to tank. If they just fall back to 2010-2011 values/rents, I'll be fine. Inflation causes rents to go up, but the landlord's main cost - the mortgage, is fixed on a 30 year loan. Compounding interest works great for one side but not for the other...
Japan is a good case study for a stagnant stock market and a lot of people retiring
looks like they are gonna need a lot of money https://qzprod.files.wordpress.com/2013/05/screen-shot-2013-06-04-at-5-34-28-pm.png?w=1024&h=586
401Ks are a huge scam. I try to tell this to anyone who will listen. They never do. They always think I'm the idiot for not having one and missing out on the "matching" funds. "It's basically free money," they all say.
Meanwhile, their money is locked away in 'investment' instruments they likely know nothing about, and is anything but liquid. Try and pull "your" money out of a your 401K early. See what fucking happens. See how much they penalize you; in some cases up to 40% of the total amount. I strongly suspect that the vast majority of people who have a 401K will only see a fraction of the money they put into it ever returned, if any is returned at all.
Human stupidity is an endless natural resource. Can you really blame the predatory class from exploiting the stupid? Someone has to channel that stupidity into something productive and useful to someone. Otherwise, all of this rampant stupidity is just a massive net loss to humanity. At least someone is getting rich from it.
I don't agree with all your assumptions but as a back-of-envelope approach, you are spot on. Myself, I fully ointend to continue working. The only people I know who have retired and are comfortable are all on federal and provincial (state) government pensions, whee the outlays are met from public revenues, not savings.
The whole government slight-of-hand falls apart after an extended period of no growth (like now).
This essentially means that there's a killing to be made in helping Boomers and Gen X'ers with arbitraging their stuff and assets in the United States so they can buy their way into a life they can afford outside it.
USPS postage stamp purchase prices provide a real-world confirmation that the number you've come up with (a 14x multiple) is at least in the right range.
Going somewhere you can afford with what you can salvage from decades of debt and asset arbitrage is apparently the New American Way. (cf. Mark Nestmann and Nomad Capitalist for phases I and II of the arbitrage already in progress ...)
My personal "Brexit plan" does not involve hanging around debauched and degraded Anglos and First Worlders who can't adjust to their new realities, however.
"Leave and prosper" means you expect to do more (and to have less done to you), rather than "lighting up your Camels" and "sitting on your asses", believing you have escaped to some sort of Promised Land where you can "retire" by doing nothing.
So what's going to be the equivalent of "payday loans" and "lottery buy-outs" for the people who want to sell off, move onward, and run?
Most of this would be lost on your below average leftist. 'Publik skool' teachers have a limited mindset in that they are oblivious that their retirement plans also invest in these evil corporations that have to make a profit to be even able to pay a dividend.
A big part of this issue of ponzi schemes is what happens when you don't have a commodity backed currency preferably determined by the market. I had an older relative last century that worked a modest parts counter job and farmed the last few years and still raised a child and had a modest home and a decent car (we are talking about a person who was 70 or so in the early 70's).
The US stock market is now currently in lockstep with inflation ( Quantitative Easing ).
Which guarantees no real rate of return. Ever.
lordofthejelly:
If you are allowed to roll this thrift plan over, like a 401k into an IRA, after you are out of the Navy, then do so just enough to maximise the government contribution. If they don't allow that, then I would avoid it.
When you roll it over, put it into a trust-based IRA, and then have the trust buy stuff that won't crash, like income property or precious metal.
https://goldsilver.com/ira/
Gen X here (late 40s). As someone who has cashed out his Roth IRA after Obama was elected, I tend to believe most will be lucky to reach retirement and get their principal contributions back let alone any gains. I bought tangible assets that have appreciated and I would disuade anyone investing in the over inflated stock market and sure treasury bills might be safe, but you could be getting more out of your money with other avenues than the paltry interest you receive (does it even beat real inflation?).
My boomer uncle did something similiar what another poster already mentioned. He bought rental properties and collects the rents in cash. He will be fine as his house is long paid off and he has no debts and is covered by his wife's insurance plan. I know a few boomers who are not so fortunate.
Only advice I give people would be: Pay off your debts and invest some in the "3 Gs". Gold (precious metals), ground (property in a sound area) and guns... they will retain value no matter what comes. I hope it doesn't come to the "Aaron Clarey retirement plan", but that opption is always on the table. (You could always target rich democrats and relinquish them of their "fair share" instead though).
Anonymous @ 3:12 AM:
A point of order -- some of us will not be able to eat the rich because we have allergies to pork.
Otherwise, all of the relevant "Eating Raoul" references apply.
There is one important aspect of any retirement account (except for a Roth IRA) that is never mentioned. All of the money that is removed from a retirement account is taxed as earned income, regardless if it is dividends or capital gains, it's still ultimately taxed as earned income when you withdraw it. So if you invest all of your retirement in a 401K over 40 years, it will grow by 10 times what you originally put in but to get any of it out you will be taxed at earned income rates that top out at over 50%, federal and state combined.
Investments in stocks and bonds provide dividend, capital gain and interest income which is taxed at a lower rate than earned income. Some investment vehicles, like MLPs, provide royalty or ROI income that is not taxed at all. REITs are similarly blessed with low tax loads.
The bottom line is to know what you are doing. If your employer offers a MAP then take the maximum match but do not put in any more than that. Keep a separate individual investment account and put the lion's share in that. From this individual account you can live very nicely on dividends, capital gains and royalties paying little to no taxes. That's how the rich do it. If you are planning on retiring on less than $50K a year, it doesn't really matter.
Way back before the average American had access to "investment vehicles" and retirement portfolios, you were expected to save money. Lots of money. Not a pittance like the currently recommended 10%, but something on the order of 50%. No one in their right mind borrowed money from a bank. Everything was bought with cash. Everything.
A typical house was half the size of current new homes, and everyone shared one bathroom, one phone, antenna TV, one car (used), a few bedrooms. Dad repaired everything that ever broke and scrounged through other people's cast outs for neat stuff for the family and planted a vegetable garden every year to feed the family along with a flock of hens. Mom cooked and cleaned and sewed and canned and saved every possible penny from Dad's paychecks. Whatever couldn't be salvaged or repurposed was replaced with something purchased with cash. Eating out, unheard of. Movies, a rare occasion. Soda, a special treat.
We live in a spoiled, lazy society.
Wow! What a statistic.
http://wolfstreet.com/2016/08/04/acquisitions-share-buybacks-financial-engineering-fail-to-produce-organic-economic-growth/
“Shockingly, boards of directors encourage this,” Clifton wrote, adding:
Acquisitions is the current growth strategy of Forbes Global 2000 companies. As a result, the number of publicly listed companies traded on U.S. exchanges has been cut in half in the past 20 years – from about 7,300 to 3,700.
According to the World Bank, the number of listed companies on all global exchanges – currently 44,000 – has flatlined since 2006, with a recent two-year decline.
The herd is getting pretty small. At some point, this acquisition strategy hits a wall. It makes you wonder how long we’ll need the New York Stock Exchange and Nasdaq.
In a perfect, growing world, the market would have doubled the number of big public companies instead of halving it.
So there’d be about 15,000 US-listed companies by now, not 3,700. They’d be smaller and nimbler. There’d be more competition too, more innovation, more emphasis on investment in productive activities and people to achieve organic growth.
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