That Retirement Calculator May Be Lying to You

[Walt34]

The only way to get the consumer out of the hole they are in is some form of debt forgiveness/bondholder haircut.

I don't suppose anyone would consider perhaps that maybe people should pay back what they borrowed before they borrowed even more?

Nah. Too simple.

 

[LARS]

I'd rather see consumers dig their own way out of whatever hole they have dug themselves into and, if they can't do that, bankruptcy is a better solution than a free ride on the backs of lenders and bondholders - bearing in mind that the biggest non-government holders of bonds are pension plans. At the risk of overly simplifying the issue, a haircut for bondholders = a haircut for pensions.

Mind you I'm not for bailing out bad financial decisions as I am a firm believer in "moral hazard", but reading your comment I have to wonder did you feel the same way in 2008/2009 when bondholders, preferred and common equity investors were bailed out by public monies thus avoiding bankruptcy/haircuts?

 

[Gone4Good]

Relevant - Will my future real returns be as bad or worse than the worst 30 year periods in history?

In May 2011 equity PE-10's were near their top decile, dividend yields beneath their botom decile, and 10-year bonds were yielding in the bottom quintile. We've never had a period where valuations for both asset classes were so bad at the same time. It's not only plausible, but seemingly likely, that future 30 year returns for an equity and bond portfolio will be worse than anything currently in the historic record.

 

[pb4uski]

The only way to get the consumer out of the hole they are in is some form of debt forgiveness/bondholder haircut.

I wonder why the banks with problem mortgages don't do workouts with borrowers who are still employed. If a borrower has sufficient income to meet current underwriting based on 90% of the home's current value let them stay there, write down their principal balance to 90% of current value and reset their monthly payment. However, if the home is later sold for more than the value at the time the mortgage was restructured, 50% or the excess goes to the borrower and the other 50% to the bank. So the bank takes a loss currently (which they will likely ultimately do anyway) but has some potential upside to recover if things work out. The borrower gets to stay in their home as long as they continue to make the revised payments, but shares 1/2 of any future gain with the bank to compensate them for their concessions.

Just an idea.

 

[Independent]

When you start seeing this magazine cover everywhere:

+1

I'm old enough to remember that article.

 

[Independent]

Could very well be, but I think we can be much smarter and targeted with the spending though. Not just throwing money at it.

I was at a Town Hall meeting recently, and one guy I talked with suggested that instead of extending unemployment, the govt could pay a portion of the salary for X months for any company creating jobs. I'm don't know if that is a good or bad idea, and it wouldn't solve problems on its own, but it struck me as a much better way to look at the problem. Pros/Cons:


-ERD50

Have you looked at the German program?

Germany, for instance, has a program called “Kurzarbeit,” or short work. Big employers cut workers’ hours, rather than making layoffs. If the company’s workers suffer a 10 percent reduction in hours or wages, the government helps make up the difference.

When the economy was falling, they paid companies to retain workers rather than fire them.

Job-Sharing in Germany, Unemployment Checks in the U.S. | The Washington Independent

 

[traineeinvestor]

Mind you I'm not for bailing out bad financial decisions as I am a firm believer in "moral hazard", but reading your comment I have to wonder did you feel the same way in 2008/2009 when bondholders, preferred and common equity investors were bailed out by public monies thus avoiding bankruptcy/haircuts?

In part - if the banks hadn't been bailed out, a lot of other people would have been hurt as a result. It's also worth remembering that shareholders in many banks took significant losses (in some cases 100%) and many bond holders did take a haircut as the market value of the bonds went down. In some cases we, the tax payers, actually got our money back with some kind of return.

What really gets me upset are:

1. The discount window which gives the banks a free ride at the expense of the tax payers
2. The stupid regulations that were, over and above the greed and stupidity of many bankers, IMHO the primary cause of the mess
3. The total failure of our political leaders to get past "write a cheque and bash the banks" and produce some simple and effective legislation that will stop this from happening again.

For the latter, Hong Kong is a good example: during the Asian crisis when property prices fell by about 70% and a lot of other bad things were happening, there were zero bank failures and one bank needed support (at no cost to the taxpayer). Honestly, it's not that hard.

Sometimes I lose sight of the fact that we need a strong effective banking system in order to have a strong economy (The Ascent of Money is a good read on the topic).

 

[chinaco]

Important? Yes.

However it's not the primary artifact for investment decisions IMHO as those on other forums would try to make you believe...

I was not implying otherwise.

Mutual Fund expenses are most often highlighted when they are coupled with a discussion about lack luster long-term performance of many mutual funds on average (i.e., not beating their tracking index over the long term). At least... that is what I have seen most often.

 

[2B]

Ah yes, government intervention is needed. Since the last and current "stimulus" supposedly cost over $200,000 per job, why not have the government hold a raffle with the winner receiving $200,000 (tax free) on the condition they spend the money within 2 years. I don't remember the exact number but I think the proposed stimulus is around $500 billion. We could have 2 1/2 million happy Americans with all the stimulus going directly into the economy.

As for the accuracy of financial calculators (the original question), my opinion is that this too shall pass. We will eventually get the ship back on course and "normal," if it ever existed, will seem to return. I think our biggest risk is a decade of inflation following this period of low equity returns. We had the market collapse of the late 60's early 70's followed by the inflation of the 70's. I believe FireCalc's worst time to retire is 1967.

 

[2B]

Mind you I'm not for bailing out bad financial decisions as I am a firm believer in "moral hazard", but reading your comment I have to wonder did you feel the same way in 2008/2009 when bondholders, preferred and common equity investors were bailed out by public monies thus avoiding bankruptcy/haircuts?

Some were bailed out and some were not. Government involvement into private financial matters usually involves a "moral hazard" and typically goes wrong. Freddie and Fannie share holders and preferreds were wiped out. AIG investors were seriously diluted but bonds and, more significantly, the CDOs were covered. The auto company bond holders were deprived of their full rights to recover assets in bankruptcy by government intervention.

The biggest question this raises about investing is "What are the rules?" The old "rule of law" approach has broken down. If you have GNMA bonds, can you be sure you won't have the government tell you that to help homeowners your bond (previously backed by the government) is now worth 75% of its face value?

 

[rescueme]

I don't suppose anyone would consider perhaps that maybe people should pay back what they borrowed before they borrowed even more?

Nah. Too simple.

I was reading an article in the morning newspaper about folks trying to get note/mortgage help for their past due accounts.

One of the subjects was in his early 60's and was facing foreclosure due to losing his job and not being able to make his $2,800/mo. payment.

Funny thing is that he purchased the home in 1970 (41 years ago) and still had not paid it off. I'll assume he's one of the one's that used it as a credit card/piggy bank for many years.

Sorry, but for a case like that, I have little sympathy. There was no further info why he still owed money (emergency/health/etc.) other than the only reason he could not pay it was due to job loss.

 

[2B]

Another thought on calculators.....

Back in the late 90s, I knew someone that worked in IT. He was a tech-company daytrader. He ended up quiting his job and told me that he was making over 30% on his money. He didn't see any reason to keep working. Why, he said, even if he only made 20% on his money he would still have plenty of income to live on. When the market turned, he kept "doubling down" all they way into broke and then way into debt. Bankruptcy was his final step.

The purpose of that tale is to bring up the tendency of people to put too much emphasis on recent events. We need to keep our eyes on the long term. Yes, it may be different this time but the history of the markets is our best guide to the future.

Now if you really want to worry, the US has one of the few modern markets that have not been effectively wiped out by a total collapse. Have any of those good old bonds the Czar sold you? How about what you were holding when the Kaiser fell after WWI?

 

[obgyn65]

I like trying different retirement calculators. Some of these are useful to people like me who are not financially savvy. Trying some of these calculators has helped me understand the concept of NPV of pensions, impact of annuities, etc. I assume many participants on this website think some of the calculators are too "basic" however IMHO they help those who plan but do not know much about finance. I use a 3.3% SWR until age 95.

I do wonder about projections of future returns. Even when they may be well founded and based on sound methodology, they do not account for volatility.

 

[Independent]

In part - if the banks hadn't been bailed out, a lot of other people would have been hurt as a result. It's also worth remembering that shareholders in many banks took significant losses (in some cases 100%) and many bond holders did take a haircut as the market value of the bonds went down. In some cases we, the tax payers, actually got our money back with some kind of return.

.

I suppose we have different definitions of "haircut".

I'd thinking that in almost all cases the gov't stepped in to assure that bondholders in otherwise bankrupt companies got their interest and principal payments on schedule. That's everything the original borrower had promised them.

Maybe I'm overweighting some headline cases - Fannie & Freddie, AIG - but the only significant bondholder losses I can think of were at Lehman, and the gov't reversed course immediately after that happened.

 

[jdw_fire]

Ah yes, government intervention is needed. Since the last and current "stimulus" supposedly cost over $200,000 per job, why not have the government hold a raffle with the winner receiving $200,000 (tax free) on the condition they spend the money within 2 years. I don't remember the exact number but I think the proposed stimulus is around $500 billion. We could have 2 1/2 million happy Americans with all the stimulus going directly into the economy.

your lottery idea wouldnt create jobs any more effectively than the extension of unemployment benefits (something that was in the stimulus package) did. paying people to not work (whether it is done with welfare, unemployment benefits, or your lottery) is just subsidizing unemployment, and i have heard many many times that "anything the government subsidizes it gets more of" so subsidizing unemployment isnt the way to create jobs. better to spend the stimulus money rebuilding the US infrastructure which actually does subsidize employment/job creation. and, at least then, after spending all that money, we, the americian tax payers, would have something substantial (said infrastructure) to show for it.

this is not to say we shouldnt have unemployment benefits or even welfare but just saying those programs arent for creating jobs. they are there instead to help people in difficult circumstances.

 

[youbet]

I think our biggest risk is a decade of inflation following this period of low equity returns. We had the market collapse of the late 60's early 70's followed by the inflation of the 70's. I believe FireCalc's worst time to retire is 1967.

I agree that inflation (NOT hyper-inflation) will be a growing threat to FIRE portfolios during the next decade.

 

[2B]

I agree that inflation (NOT hyper-inflation) will be a growing threat to FIRE portfolios during the next decade.

I remember the 70's. I lost a bundle (at the time) in a long term bond fund when interest rates went from about 5% to over 15%. I've converted all of my fixed income to less than 3 years and in individual bonds. I think we'll see significant inflation in my life time. FireCalc has these episodes built in so you just have to go with the flow.

Yes Virginia. There is a very good chance of inflation in our future but there ain't no Santa Claus.

 

[youbet]

I remember the 70's. I lost a bundle (at the time) in a long term bond fund when interest rates went from about 5% to over 15%. I've converted all of my fixed income to less than 3 years and in individual bonds. I think we'll see significant inflation in my life time. FireCalc has these episodes built in so you just have to go with the flow.

Yes Virginia. There is a very good chance of inflation in our future but there ain't no Santa Claus.

I agree that holding bonds or bond funds with long durations might be painful during inflationary times.

But, my real intent in saying that inflation will likely be a challenge going forward is to point out that rising prices and corresponding increases in WR's can be devastating to a FIRE portfolio. If you wish to maintain your standard of living during a decade of moderate inflation, you might be increasing your withdrawal rate by 50% or more...... That's what killed FIRE portfolios in the 70's.

And unlike periods of crappy investment performance, the impact of inflation seldom corrects itself. Prices go up and eventually stabilize or at least reduce the rate of increase, but they very seldom "recover" to lower levels. This can be seen by looking at the BLS site and noting that there are near zero periods of deflation.

 

[ERD50]

Have you looked at the German program?

When the economy was falling, they paid companies to retain workers rather than fire them.

Job-Sharing in Germany, Unemployment Checks in the U.S. | The Washington Independent

Thanks for the link - it does seem to have some positives. There's got to be a better way than what we are doing.


-ERD50

 

[studbucket]

I've often wondered and suspected if all these retirement calculators I've been using are giving me numbers that are a bit rosier than I should expect, in terms of accumulation. If I actually hit my target #, Firecalc shows good things, but getting there by the time I hit 45 is the big question for me, and was for others when I posted more about my plan.

Have you looked at the German program?

When the economy was falling, they paid companies to retain workers rather than fire them.

Job-Sharing in Germany, Unemployment Checks in the U.S. | The Washington Independent

NPR's Planet money had a nice podcast on the concept of German mini-jobs and how they reformed unemployment, you may be interested: The Friday Podcast: Germany's Painful Solution To High Unemployment : Planet Money : NPR

 

[Nords]

NPR's Planet money had a nice podcast on the concept of German mini-jobs and how they reformed unemployment, you may be interested: The Friday Podcast: Germany's Painful Solution To High Unemployment : Planet Money : NPR

I don't envy them for having to integrate East Germany into their economy, and I'm wondering if they're still recovering from that hangover.

Imagine if the U.S. had to cover Mexico's debts with large injections of govt subsidies, and then find jobs for their workers. Hey, waitaminnit...

 

[mickeyd]

she was not aware of Firecalc

Wonder how she qualified as a financial writer?

 

[Nords]

+1
I'm old enough to remember that article.

I was a USNA midshipman, and I remember discussing that article with another mid who was investing his "portfolio" in unset diamonds & gold bullion. At the time I was very impressed that he could have his own broker.

Today? Well... I think he's still working.