My family's economic history

I am the first in 4 generations of my family to not become a professional grade school teacher. My grandfather is a veteran. My family fought in Vietnam, World War II, the Civil War, and the Revolutionary War. I work for a state college. You will never find someone with a longer family history of public service than me, which literally stretches back to the founding of our republic. I look at my great-grandmother who was a teacher in California, and when she died, there was nothing left for our family. She had a traditional pension. I look at my grandparents on the other side of my family who have IRAs, and they are quite comfortable in their retirement. Not because of higher wages, but because their retirement has a balance which upon their death instead of going to the billionaires who manage their money will go to their children, grandchildren, and if me, my brother, or cousins have children before they pass, their great-grandchildren. The money they earned will stay in our family for the first time in 250 years, instead of going to the billionaires like my great-grandmother's pension.

My family has served this country since its founding, and the creation of the IRA is what finally moved us out of poverty.

Bad investment advice

I was doing some reading this morning and was thinking about defined benefit vs. defined contribution plans and trying to find some actual numbers from a source which would know what they were talking about to show some real numbers behind which decision people should make.

The article I turned to first was from Forbes, which is in my view is a fairly reliable magazine for financial issues. The first yellow flag was a lack of charts plotting how fast someone's investment would grow, and not showing their work regarding inflation. As I read through I found a glaring error.

The article assumed that someone would only deposit 8% of their income from a match from the employer. But employer matching contributions only occur if you have already contributed that much from your salary. It is usually a dollar for dollar match to your contribution for your retirement.

Now, if you were only contributing 4% of your salary (accounting for inflation of course) then the numbers in the article were correct, and you would only end up with $22,000 of retirement income in 25 years (the short time frame this article was based on) which is clearly not enough. This is not what the article stated however, and only depositing 4% of your income in retirement is a terrible decision.

The golden rule of thumb for savings is simple. You should save for retirement as early as you can, diversify across many industries, and invest as much as you can every year. Contributing only 4% of your salary to your retirement plan is utterly foolish, especially if you have paid down your debt and have a Home Equity Line of Credit on your home.

Once we readjust their assumption that you are only depositing 8% of your income in total in your retirement plan, and account for inflation, continuing their 5% after inflation investment rate (which is approximately the 8% market rate of the S&P 500 times 2% inflation), you will end up with $749,529 in today's dollars, or $1.2 million without adjusting for inflation, which will provide you with $58,000 of income in today's dollars. This is almost double what you would receive from the annuity they are using as a comparison. This is also only after working for 25 years.

The article was written to make it look like a hard decision, but in reality, every defined benefit plan I have ever looked at has come in far short of a defined contribution plan, even before accounting for accidents which can occur, ending your life, making defined benefit plans disappear, unlike defined contribution plans which are inheritable upon your death. I have yet to find a traditional pension plan which performs well in comparison.

No matter what age you pass away, the plan with a balance will always win, whether you die at 70 or 100.

Be careful about the media you read, it can really mislead you if you don't read carefully. Even fairly well reputed magazines can sometimes make glaring errors.

Year	Salary	Deposit	Balance	Inflation	Real value	Interest
1	$80,000.00	$12,800.00	$12,800.00	1	$12,800.00
2	$82,400.00	$13,184.00	$27,008.00	0.98	$26,467.84
3	$84,872.00	$13,579.52	$42,748.16	0.9604	$41,055.33
4	$87,418.16	$13,986.91	$60,154.92	0.941192	$56,617.33
5	$90,040.70	$14,406.51	$79,373.82	0.92236816	$73,211.89
6	$92,741.93	$14,838.71	$100,562.44	0.9039207968	$90,900.48
7	$95,524.18	$15,283.87	$123,891.30	0.885842380864	$109,748.17
8	$98,389.91	$15,742.39	$149,544.99	0.86812553324672	$129,823.83
9	$101,341.61	$16,214.66	$177,723.25	0.850763022581785	$151,200.37
10	$104,381.85	$16,701.10	$208,642.21	0.83374776213015	$173,954.97
11	$107,513.31	$17,202.13	$242,535.71	0.817072806887547	$198,169.34
12	$110,738.71	$17,718.19	$279,656.76	0.800731350749796	$223,929.94
13	$114,060.87	$18,249.74	$320,279.04	0.7847167237348	$251,328.32
14	$117,482.70	$18,797.23	$364,698.60	0.769022389260104	$280,461.39
15	$121,007.18	$19,361.15	$413,235.63	0.753641941474902	$311,431.71
16	$124,637.39	$19,941.98	$466,236.47	0.738569102645404	$344,347.85
17	$128,376.52	$20,540.24	$524,075.63	0.723797720592496	$379,324.75
18	$132,227.81	$21,156.45	$587,158.13	0.709321766180646	$416,484.04
19	$136,194.64	$21,791.14	$655,921.92	0.695135330857033	$455,954.50
20	$140,280.48	$22,444.88	$730,840.55	0.681232624239892	$497,872.43
21	$144,488.90	$23,118.22	$812,426.02	0.667607971755094	$542,382.09
22	$148,823.57	$23,811.77	$901,231.87	0.654255812319992	$589,636.19
23	$153,288.27	$24,526.12	$997,856.55	0.641170696073592	$639,796.38
24	$157,886.92	$25,261.91	$1,102,946.98	0.628347282152121	$693,033.74
25	$162,623.53	$26,019.76	$1,217,202.50	0.615780336509078	$749,529.37	$58,763.10

The Solution to the Retirement Crisis

The New York Times ran an excellent article today talking about how teachers have been boondoggled into retirement plans which end up giving little to no gain. With easily over a million dollars in retirement savings stolen per teacher (if we account for the full opportunity cost) state governments and school districts have done a terrible service to teachers.

My home state of Washington is no exception. The Department of Retirement Systems has three types of plans which teachers can buy into. They are all defined benefit plans. Using this calculator I find that they require a certain amount of your paycheck to be donated to the pension plan in order to get any return. When I compare this to a very simple 8% return with the S&P 500 there is absolutely no situation where the defined benefit plan outperforms the index fund. It is always better to go with the defined contribution index fund plan than a defined benefit plan. If not just that, then because with the defined contribution plan you have a balance which on death you can pull the money out of and pass on to your children and grandchildren. With a defined benefit plan that money might go to your descendants or to the fat cats on Wall Street depending what your plan says. This is a no-brainer.

The solution to the retirement crisis for people currently enrolled in these schemes is to outlaw fees which dissuade people from moving their money to a different type of plan. This will force Wall Street to provide better products. If the product is working well, there is no reason to change. This will give millions of teachers the ability to switch their money to plans which actually give them a return on their money and hopefully bankrupt these corrupt banksters. Done.

Sustainable Aging

Japan is the oldest country in the world, and 32000 people are going to turn 100 this year. I see long lives as a good thing. People can share their experience and knowledge with younger generations and help in material ways as well.

The issue with this starts with how we have managed how people get wealth in their latter years.  Historically of course this had meant that seniors get a pension from their company which pays them out of future profits until they die. This is the classic putting your all of your eggs in one basket. Fortunately the future of this is knocking to last forever the old pensions of your our dying as people have pensions die. In the future my of the generation born in the 1950s and 1960s is going to see billions of seniors across the world owning capital in corporations across the world this a going to be at least 1 billion people within a few decades as they are retiring. The difference of this is going to make is first of all the more distribution of wealth because many pensions are not inheritable upon someone's death and you can't really say I have Y amount of money in the pension the way you didn't say I have X amount amount of stock in Google or some other company. The reality is that the richest families of in the world have become rich because they own capital. And the middle class until the 1980s did not have inheritable assets beyond maybe their house, and even in the 2000s the cost of Housing did not go up as much as the stock market, and has not recovered at the same rate since the great recession. All of this means that in 30 years we won't have the same pensions coming up for seniors at the rate we are having today. This is caused because in the 1930s when these programs were made they didn't expect such a huge revolution in healthcare, which is due to things like antibiotics chemotherapy and countless other medical discoveries and inventions over the last 50 years. This has made it so that life expectancy has increased from 59 to 79. Programs were designed with the idea that less than half the population would retire, however today most people will retire yet our Public Safety nets have not evolved to face this massive change.

In the long run assuming that we continue to have technological growth this problem will go away because of this change in retirement plans. The question today is how do we survived with this existing system over the next 30 years as people born between 1920 and 1950 are in retirement. I do not know how we are going to survive as pensions stop being paid out to people. It is going to be a very difficult time for developed countries with such systems. If we chose to front load the pension plans in capital which will grow in value until they die we will be pulling money out of current Investments into the younger generation. This will have gigantic long term costs as we have less money for education or be pulling money out of the economy today for people who are not currently working for creating any real value. That is the problem as I see it. It is not that's we cannot afford to pay pension retirees but more that we are pulling money out of current economic growth to support people who have never consulted a financial advisor or Economist in their lives. This reduction in investment is why pensions reduce our GDP growth. At least with modern retirement plans that's money is being used by the private sector to invest in the future which is why it is fundamentally different from pensions and why 401k plans are sustainable while pensions are not.

In most of my posts I and with an uplifting note of a solution to the problem. The solution has been found and it is that retirement is now based on capital, but in this case I do not know how we can take care of the promises made by my great great great grandparents generation without massive costs to my generation and my children and grandchildren's generations. The private sector already solve the problem as best as is possible today (as I see it) without breaking the promise and leaving seniors out on the street without what they were promised by their grandparents.

http://www.independent.co.uk/news/world/asia/32000-people-in-japan-turned-100-this-year-and-the-economy-cant-keep-up-a7315001.html?cmpid=facebook-post