Update on Bernstein calculator

[arrete]

An update on Bernstein's Efficient Frontier site including an update of his retirement calculator from hell.

http://www.efficientfrontier.com/ef/103/index103.htm

He's pretty grumpy about everything.

arrete

 

[Michael]

I disagree with Bernstein's analysis of how modern capitalism works.  He seems to thinks that people who save money for their retirement are not producing anything useful.  They are actually providing the capital necessary to fund business expansion and upgrading, which later pays dividends in the form of increased business production with fewer workers (more machines to do the work).  This will be necessary when the boomers retire, as there will be fewer workers left to produce things.  We do not live on an island economy where everything has to be produced by hand, and goods cannot be stored for the future.  In the real world, we can actually do such things as produce a house now, and then live in the house when we retire, without the need for current workers to produce a new house for us every year.  We can also build a house next door, and then rent it out during our retirement years to current workers for income.  We are not storing up endless supplies of useless coconuts, but real buildings and productive machines.  A highly automated factory built today does not usually become useless one year later.  It usually produces useful items for many years into the future, with relatively fewer workers needed to tend the machines.

 

[arrete]

OK, Dory - when are going to let us rec posts!

MikeSchoren was right on target. We put our money into industry so it could work and expand. Does that make us bad guys?

Good post!

arrete

 

[dory36]

I agree with the great post!

I'll keep trying to figure out how to add recs and favorites. They were a good feature on TMF.

Dory36

 

[Ted]

Unfortunately for most future retirees, Bernstein is fundamentally right about the "crunch" that will come when the ratio of retirees to workers gets too great. I said the same thing in previous posts -- not as a criticism of individuals who choose to retire early, but as a warning that they had better do so with the assumption that their asset returns won't be anything like they have been historically. This further implies a willingness to work at least part time to supplement income.

I don't think that Bernstein or anyone who understands market economics is criticizing people who "save" during their working years by investing. If the investments are in "productive" enterprises, they indeed increase national productivity. That supports today's population -- including retirees -- and some of that wealth carries forward for use in the future. Unfortunately, it doesn't carry forward to the future to the extent that you imagine. "Depreciation" is not just a way of reducing taxes, but a real economic force that destroys wealth a lot faster than people realize when they are in their working years.

For example, you may build a house and continue to live in it when you are retired, but the food you eat, the electricity you use, the future dishwasher that you buy when the current one wears out, all have to be produced by future workers and transfrerred to you in exchange for the financial assets that you have accumulated during your working years. But those financial assets (including your social security credits) will lose real purchasing power if there are too many assets "chasing" to few real goods being produced in the future. Economics isn't called the "dismal science" for nothing!

Not everything is bleak, however. Certainly one of the best fundamental "investments" that we can and do make is in the education of our children, since that gives them the "tools" to support themselves and us in the future. And one major social change that is lessening the problem of supporting retirees is the greater participation of women in the workforce.

 

[Michael]

Ted's advice to allow for the possibility of lower than usual returns on investments when the boomers retire seems sensible to my conservative nature. Since the calculated Safe Withdrawal Rates from a properly constructed portfolio would have gotten people through a 50 year retirement that began near the start of the Great Depression, this may be the upper limit to consider when planning. Lower withdrawal rates would be even safer for those who can comfortably afford them. Withdrawals can always be increased later on if the market has a rosier outcome (Pay Out Period Reset Method).

I don't understand the fears of generalized inflation though. The Japanese are farther along in their retirement crunch than we are, with far worse demographics, and they actually have a deflation problem. Retirees usually cut down on expenditures, which reduces overall demand. With the median 40lk for the 60 to 64 age group currently having a balance of only $25,000; there seems little chance of the average US boomer retiree bucking this trend. Anything that can be imported will be produced cheaply in low wage countries, effectively creating a world wide labor pool for transportable goods. Only about 2% of the US population produces all of the nation's food, so there is little danger of a generalized labor shortage creating a US food shortage. The main inflation concern for the boomers will be medical care, which cannot currently be readily imported. Health care is indeed an issue that needs to be addressed, perhaps partly by investing in health care companies whose profits may benefit from the coming boomer needs. Health care inflation is the main threat to early retirement. Anyone who wants to retire early should probably take extremely good care of their health. Bad health habits could potentially make them uninsurable, thus making early retirement very difficult, if not impossible.

Mike

 

[Mr._johngalt]

Just briefly on the health insurance issue, although I
studied early retirement issues for years and tried to consider worst case scenarios, I kind of got blindsided
by the health insurance problem. It is my major ER
worry by far. My options are few and all expensive.

 

[Ted]

The problem that retirees face in financing their health care -- even after Medicare kicks in -- is a significant part of the underlying economic problem of the working population supporting the retired population. While it is generally true (and good for present-day workers) that retirees' consumption drops, the major exception is that retirees' consumption of health care services increases as they age.

From a financial standpoint, I expect that the burden on retirees will be reduced further in the future by including drug benefits in Medicare. But this will simply shift more of the cost to working people without really reducing the cost in real terms. The main hope for doing that, I think, is to reduce the costs of administering the entire healthcare system, much of which are associated with "paper shuffling" by private insurance companies.

I'm not under the illusion that private insurance companies are getting "rich" in this process at the expense of health care providers or consumers, but I'm inclined to believe that the best system would be to make Medicare universal and let the insurance companies stick to insuring people's lives and property.

If this sounds too "socialistic," I would also modify Medicare such that payments would be made to the patient on the basis of the illness (diagnosis). The patient would then be able to "shop" for treatment from health care providers, who would be free to charge what the market would bear. The operation of such a system would be greatly facilitated by a system of "rating" healthcare providers based on charges and outcomes, in a manner similar to what Consumer Reports publishes on consumer products.