"The Debate Over Nest Egg Math"

[Nords]

I don't usually link Business Week articles because of their occasional subscription restriction, but this one may be accessible to non-subscribers. If it's not accessible to non-subscribers then it's still worth the onerous effort of finding a library copy. (Try your library website's online magazine index if BW's website won't provide. No graphics is not an issue here.)

"The Debate Over Nest Egg Math" reports that U of Wisconsin economist John Karl Scholz claims that "at least 80% of Americans are squirreling away enough to reach optimal retirement targets."

His target annual income is twice the poverty level, which is presumed to allow for a decent (but not lavish) standard of living. It also assumes equivalent SS & Medicare benefits, which may or may not be the case several decades from today. He uses the actual earnings histories from 6,300 households tracked by the University of Michigan's Health & Retirement Survey. Part of this includes home equity, and that also apparently is somewhat controversial among estimates of retirement savings.

In this case home equity makes a big difference. Another very public study found that if retirement savings should provide 75% of pre-retirement income, then only 48% of households aged 47-64 will make it. So Scholz's 80% result won't sit well with the Chicken Little economists. But many people plan to cash out or to use reverse mortgages for their retirement income.

Maybe this post should go in the Young Dreamers section. The real lesson of this article is that economists don't really know how many people are saving enough. And so they warn of the huge uncertainties that everyone faces about retirement savings and end-of-life expenses. If you're trying to plug your own numbers into FIRECalc, then you need to appreciate the issues brought up by these widely different assumptions.

 

[unclemick]

Obviously this guy ??did something totally dumb?? - used actual numbers from real retiree's

Isn't that novel? HE WILL BE PUNISHED!!!

Trust me.

Heh, heh, heh

 

[Cut-Throat]

He uses the actual earnings histories from 6,300 households tracked by the University of Michigan's Health & Retirement Survey.

One thing that is obvious to me is that the sample of 6300 is probably very skewed. The 6300 folks that took the survery, no doubt were pondering retirmement. If they were thinking about retiring, they were also saving. Hardly a random sample!

 

[cute fuzzy bunny]

One thing that is obvious to me is that the sample of 6300 is probably very skewed. The 6300 folks that took the survery, no doubt were pondering retirmement. If they were thinking about retiring, they were also saving. Hardly a random sample!

Now we're learnin'!

Actually, its a sample of 6300 people who agreed to participate in a survey/study (in other words, they are probably pleased with what they're doing about retirement), who gave their very best sunny version of how and what they've saved.

Other studies I've seen (that also stunk) projected that almost nobody is putting enough away to retire comfortably, yet most expect to enjoy a comfortable retirement.

Home equity does help in parts of the country...although its hurting some people I know...they've jacked out the extra equity with a heloc and bought crap with it. Should home valuations suffer a setback, they're effectively screwed.

 

[sgeeeee]

Thanks for the article link, Nords. The main thing I get from it is that you need a detailed plan specific for you and the lifestyle you want to live in retirement. You can't use some rule-of-thumb estimate for your retirement planning.

If you plan on sitting at home and visiting with friends and family during retirement, then you may be happy with an income level at 2x the poverty level. If you want to travel and explore the world first class, you need to save more money.

If selling your house and downsizing sounds like a good idea, then you can consider some of that home equity in your net worth. If you bought your home because it was your dream home you wanted to retire and spend the rest of your life in, then that doesn't make much sense.

Since each plan needs to be different, economists can't use a general rule-of-thumb retirement model and expect great accuracy in their predictions.

 

[Mr._johngalt]

I always count the home equity as part of the nest egg.
We carry no debt and even though we have already downsized, we could easily downsize some more.
OTOH, it would be very hard to come close to what we have
and still pull some cash out. I have thought about it,
but it now seems pretty likely we will stay here
indefinitely, at least for part of the year. Bottom line...........we have equity which can be accessed in a number of ways if need be. I don't understand people
who take the family home off the table when doing retirement planning.

JG

 

[haha]

I don't understand people
who take the family home off the table when doing retirement planning.JG

Good point, John.

REI sells some fabulous all weather tents on their website. And Coleman stoves are $25 at Wal-mart, with 2 burners!

Mikey

 

[yakers]

There is an article in The Economist April 9th issue "The Shift Away From Thrift" that reviews this study and others and does not come to the same conclusion based on the same facts. They point out that there are two "optomistic" assumptions in the study and that is 1) That Social Security will be available as currently structured and 2) the value of home ownership is treated as a regular asset (the Economist believes there may be a real estate bubble) Without house as an asset the number drops to 60%. It is good to know that under a priced to perfection system 80% of the people will make it, but I would like it to be a larger number. As much as it is an individual and family responsibility it still effects us if there is a large financially insolvent population.

 

[Mr._johngalt]

Hi Mikey (a little sarcasm there, eh?)

No, I was quite serious. First, not worried a bit about
any real estate "bubbles", rising interest rates,
mass unemployment, or much of anything else.
Our real estate ( 2 residences) is well located and in the middle of the pack (or lower) for nearby similar
properties. Thus, no matter what happens, selling or leasing either one should be easy. Combine this with our
willingness to live in small unassuming accomodations
(think cabin in the woods) and you can see why 50%
of our net worth is in the real estate and -0- in stocks.
I view the real estate as a can't miss slam-dunk.
Stocks have way too much risk for my time horizon.

JG

 

[laurence]

And then there is always a reverse mortgage if you can't bear to leave the home.

 

[farmerEd]

>>that "at least 80% of Americans are squirreling away enough to reach optimal retirement targets."


I don't get it....almost every article I read says that most americans are screwed, this guys says the opposite...guess we'll find out the truth in 40 years or so.

 

[Mr._johngalt]

I don't get it either.

JG

 

[cute fuzzy bunny]

Consider the source.

Is it a study paid for by mutual fund companies who would love more people to get nervous and invest more, is it sponsored by a federal govt agency that would like people to consider funding their own retirement before they finally screw up social security?

Hmm, not one of those...so who would benefit from people getting a false impression that "everythings a-ok"...?

 

[laurence]

Consider the source.
...so who would benefit from people getting a false impression that "everythings a-ok"...?

Anybody that's trying to sell me something?

 

[Cut-Throat]

Consider the source.

Is it a study paid for by mutual fund companies who would love more people to get nervous and invest more, is it sponsored by a federal govt agency that would like people to consider funding their own retirement before they finally screw up social security?

Hmm, not one of those...so who would benefit from people getting a false impression that "everythings a-ok"...?

OK, TH I give up! - Who do you think the source is?

 

[cute fuzzy bunny]

"The main financial support for the study comes from the National Institute on Aging at the National Institute of Health, and from the U.S. Department of Health and Human Services."

I see that these two, and AARP are among the primary 'grantors' to these programs.

I was a little more cynical/skeptical than usual on this one for a good reason. I'm probably going to tick off some alumni here, but when I was "doing my thing" the university of michigan was really the place to go if you wanted to stamp a universities name at the bottom of your bar chart. While many outfits made you work a bit to stuff your money in their pocket, when I first worked with UofM I felt a huge sucking sound from my wallet area, they asked me what results I wanted, we briefly discussed methodology, they asked if there would be future funding for more research if they got me what I wanted, and shazam...a highly scientific (albeit subjective) study that discovered exactly the end results I wanted.

They have a highly tuned and well greased set of processes for 'grants' and 'studies'. Which I certainly appreciated at the time.

So your tax dollars put to work, funnelled through the NIH's national institute on aging and through the health and human services department who wanted to tell people that everythings going to go well with their retirement...not to worry.

Why? Maybe because its the truth. Who knows

As an aside, I used these studies to tell, at least what I think, was the truth. Just a very hard truth to find and describe, but I think it was the truth a lot of recipients wanted to hear and support, they just didnt have any data other than a visceral feeling it was right. I dont think I ever put anything out that I thought was bullpuckey, complete foolery or just a way for me to make money off of people and not give them any benefit.

However, there is that saying about good intentions and paving... :-/

 

[ESRBob]

"The main financial support for the study comes from the National Institute on Aging at the National Institute of Health, and from the U.S. Department of Health and Human Services."

I see that these two, and AARP are among the primary 'grantors' to these programs.

:-/

TH -- very interesting post about the bendover factor at UM in the face of funding...

Having just returned from Washington and seeing the Smithsonian parroting various government party lines, I wonder if the NIH et al aren't trying to put out something to support tinkering with Social Security right about now? You know, get people saying everybody is in good shape, we can start messing with the safety net, since only 20% of the folks out there are really going to need it, and we'll take care of them. Anyway that might be your connect-the-dots.

I'm not wild about this, but I have begun treating everything hitting mainstream press and coming out of the federal govt as somehow meant to persuade me of something they want me to be thinking. Orwell? Chairman Mao? Maybe it was always this way here, but I used to think we were less machiavellian. I could always understand it from corporations -- you knew what they were trying to do and could forgive them for it -- (it was called marketing), but I always thought govt was somehow a little different.

 

[Mr._johngalt]

Hello ESRBob! The government is not "different", if
anything they are worse. Plus, with most businesses
you have the choice not to buy. The government is using your money to sell lies and you can't stop them.
How's that for a depressing thought first thing in the morning?

JG

 

[cute fuzzy bunny]

Its been my observation that marketing has almost always been employed to get candidates elected, but in the last 6-10 years we've been treated to a huge facefull of it with regards to public policy and overall management strategy by the government in general. Years ago a lot was done covertly and in the back rooms...today they tell us what they're doing to our face, but its spun so much and so loaded with half truths and misinformation that the average 95IQ guy working 50 hours a week simply cant do anything but take the worm and hope the hook isnt too bad.

I'm not subscribing to any conspiracy theories here, its just observation coupled with common sense.

How else do you explain how most republican voters think a rich white collar yalie from new england is a texas cowboy and at the time of the recent election, the majority of republican voters thought that we did in fact find WMD's in iraq and that hussein was the mastermind behind 9/11?

You look at that movie "wagging the dog" and then you look at real life...

ESRBob...I think you may have found the connection...I can see the NIH or health and human services folks getting charged to produce a study that gives them some nice charts that can be employed to show that most people are just fine without social security (which means if you dont have any money set aside, its just YOU and you're gonna keep quiet about it so nobody knows you're the one idiot that isnt doing it right). Hence your observation that this will ease peoples concerns about SS or at least keep them quiet and docile about it.

I guess we'll know for sure in a while...see if Bush or one of his gang pulls out a quote or a chart referencing this or other govt funded studies.

Or maybe none of this is the case and I'm just overly sensitized to it. Half of my life was spent trying to make people feel anywhere from vaguely to very uncomfortable with things they hadnt cared about, or feel a very strong and positive draw to the benefits of spending their money on or supporting something that on their own they probably wouldnt have thought about. :-/

 

[unclemick]

Marketing reminds of the stuff I pulled when I was young single and unattached.

 

[Nords]

Or maybe none of this is the case and I'm just overly sensitized to it.  Half of my life was spent trying to make people feel anywhere from vaguely to very uncomfortable with things they hadnt cared about, or feel a very strong and positive draw to the benefits of spending their money on or supporting something that on their own they probably wouldnt have thought about.  :-/

Th, I think you missed your calling as a campaign consultant... just think, you & Karl Rove as the deadly double-dealing duo...

 

[cute fuzzy bunny]

Ick. I dont think I ever marketed someone into something that wasnt good for them.

 

[Peter]

Ick. I dont think I ever marketed someone into something that wasnt good for them.

Karl Rove probably believes the same thing ...

Peter

 

[cute fuzzy bunny]

Which would make one of us correct