My brother and I were talking about our retirement savings over the past weekend and we decided that we probably won’t have enough to retire on when we reach the maximum age of 70. That is because we cannot agree on how much growth you should expect from your investments on a year-over-year basis. Should you project 8%? 10%? 2%?
I favor the 2% estimate because in many years you will do better than that and you won’t be counting on that extra growth. If you plan for only 2% growth in your investments (after your withdrawals) then you should be okay. Hence, if you need $50,000 a year in retirement income then you will have to have at least $2.5 million in investments.
Now that sounds crazy on the surface but when you stop to think that more people are going to retire every year and live longer, the workforce needed to support them (through an economy that generates wealth) is not growing fast enough. Even with immigration the United States’population is growing older. Maybe our only hope is to build an economy run by robots that support the living people but what will it take to produce that?
There are tools you can use to calculate how much money you need to save for the future but it is doubtful they are helping anyone. If anything they may depress you. Fidelity Investments makes some recommendations that are probably out of reach for many people. Look at how many people lost their savings in the late 1990s and in the mid-2000s with two bad recessions. If you cannot protect your investments through multiple recessions then your lifelong savings effort will seem pointless.
And investment options are so complicated that most people will never understand when they should shift their money from one type of investment to another. In fact, if we all did agree on when to change our investments that would change how investments work. Everything would probably fail if people all changed their investment strategies the same ways at the same time. What makes the stock market grow is the fact there are always winners and losers. Some economists and investment specialists buck the trend and argue that stock market growth depends on money supply and spending.
When there is more money in the economy and people are spending more then there is more investment in the stock market. But this means that the stock market depends on inflation and inflation is the one thing that destroys the value in your savings and investments more consistently than anything else. The best investments can lose value over time because of inflation. One way that we create money is through the “on paper” effect. This is also sometimes called “float”. Basically, you sell something and spend that money before all accounts are settled. While the banks are busy transferring funds from account to account there are brief periods where the money seems to exist in two accounts at once.
If a shrewd investor like Warren Buffett can create float for a long enough period of time, he can borrow money interest-free and use it to buy and sell assets at a profit. Buffett relies on the float created by insurance premiums (held before they are paid out in claims) to build up his company’s investments.
There are some fascinating articles explaining “float” and how to use it. If you’re falling behind in your retirement savings plan you may be able to catch up a little bit if you have some legal float options. I would not consider doing anything illegal because the government will put you in jail regardless of your age. There are also some great articles that talk about how much growth you can expect in your investments. If you take the time to do the math you’ll see that most people are not going to save enough money for retirement. That means we will continue to depend on government retirement plans (Social Security and Medicaid for most of us). Unfortunately, until there is a serious change in the economy, that is just the way it will always be.