Forget RE or FI, Stanford Prof says it's Impossible

[BTDretire]

I just ran across this Presentation on Bogleheads.
http://gflec.org/wp-content/uploads/2015/03/a738b9_cf0065e923304998ae918c0aa2376d5a.pdf
 He makes it very clear.
"YOU CAN’T FINANCE 30 YEAR RETIREMENTS
WITH 40 YEAR CAREERS!"
  I thought for a second maybe he means you can do it with a 20 year career,
but no, he says you need to work longer.
I think thems fightin words!
 Anyway, thought I'd post this and see how the comments flow, if it is a worthwhile
compilation, I will email him a link to help and educate the Stanford Professor.
 I think a facepunch is in order.

Just wanted to add, note the picture of the 4-65 yr old people, very interesting.

[Jrr85]

Everything but that statement is pretty good though.

I will say that curiosity made me want to run the numbers, and to save for 40 years and replace 92.5% of your income (basically pre-tax except for Social security and medicare taxes) with a 4% withdrawal rate requires a savings rate of right at 15% if you assume 6% real returns.  Obviously you don't need to fully replace your income, but I would have thought you would do more than that after saving 15% for 40 years.  Building in some safety margin and assuming only 30 years of working, and you wouldn't even be able to replace half your income with a 15% savings rate, so still well below spending after accounting for a reduction in taxes and no longer needing to save.  I didn't realize that a 15% savings rate is really the bare minimum people should be shooting for, even assuming working until 62, if they really want a high likelihood of having a secure retirement without relying on SS. 

[fattest_foot]

Mortality rates for infants and in children explains our increased life expectancy (you have to remember life expectancy is based on a population, just as mortality rates are; individuals aren't living much longer, but populations are). We don't have people living to substantially higher ages, it's just that we have more that are able to make it that far because they would have normally died as an infant or child. Getting over that hump is a pretty big part of making it to adulthood, which is then clear sailing until you die.

The whole thing is set up by a fallacy.

I also remember reading recently that the elderly to worker ratio is going to start swinging the other way again, as the Millennial generation is about on par with the Boomers.

It's also disingenuous to compare his four 65 year olds, where the two that are more recent are much more likely to have had plastic surgery (due to their careers, and that plastic surgery is actually a thing now).

The rest of it isn't even worth discussing (Social Security and Medicare changes) because it's based on a bad foundation. I'd expect a Stanford professor of economics of all things to have a better understanding of statistics.

Edit: I guess it was in reference to voting, but here's the link Millennials overtake Baby Boomers as America’s largest generation

Also, an article about life expectancy for those interested: Human Lifespans Nearly Constant for 2,000 Years

Relevant portion:

Discussions about life expectancy often involve how it has improved over time. According to the National Center for Health Statistics, life expectancy for men in 1907 was 45.6 years; by 1957 it rose to 66.4; in 2007 it reached 75.5. Unlike the most recent increase in life expectancy (which was attributable largely to a decline in half of the leading causes of death including heart disease, homicide, and influenza), the increase in life expectancy between 1907 and 2007 was largely due to a decreasing infant mortality rate, which was 9.99 percent in 1907; 2.63 percent in 1957; and 0.68 percent in 2007.

But the inclusion of infant mortality rates in calculating life expectancy creates the mistaken impression that earlier generations died at a young age; Americans were not dying en masse at the age of 46 in 1907. The fact is that the maximum human lifespan — a concept often confused with "life expectancy" — has remained more or less the same for thousands of years. The idea that our ancestors routinely died young (say, at age 40) has no basis in scientific fact.

...

The problem is that giving an "average age" at which people died tells us almost nothing about the age at which an individual person living at the time might expect to die.

Again, the high infant mortality rate skews the "life expectancy" dramatically downward. If a couple has two children and one of them dies in childbirth while the other lives to be 90, stating that on average the couple's children lived to be 45 is statistically accurate but meaningless. Claiming a low average age of death due to high infant mortality is not the same as claiming that the average person in that population will die at that age.

[mozar]

Very interested in reading that link about human life expectancy, but it didn't work for me. Do you have another one?

[cheapass]

haha, I like how the takeaway is "Work longer!", not "Don't buy so much shit and save a lot more money so you can invest it"

[sirdoug007]

Very interested in reading that link about human life expectancy, but it didn't work for me. Do you have another one?

Looks like a mistake in the link.  Here it is. 

http://www.livescience.com/10569-human-lifespans-constant-2-000-years.html

[sirdoug007]

Mortality rates for infants and in children explains our increased life expectancy (you have to remember life expectancy is based on a population, just as mortality rates are; individuals aren't living much longer, but populations are). We don't have people living to substantially higher ages, it's just that we have more that are able to make it that far because they would have normally died as an infant or child. Getting over that hump is a pretty big part of making it to adulthood, which is then clear sailing until you die.

The whole thing is set up by a fallacy.

I also remember reading recently that the elderly to worker ratio is going to start swinging the other way again, as the Millennial generation is about on par with the Boomers.

It's also disingenuous to compare his four 65 year olds, where the two that are more recent are much more likely to have had plastic surgery (due to their careers, and that plastic surgery is actually a thing now).

The rest of it isn't even worth discussing (Social Security and Medicare changes) because it's based on a bad foundation. I'd expect a Stanford professor of economics of all things to have a better understanding of statistics.

Edit: I guess it was in reference to voting, but here's the link Millennials overtake Baby Boomers as America’s largest generation

Also, an article about life expectancy for those interested: Human Lifespans Nearly Constant for 2,000 Years

Relevant portion:

Discussions about life expectancy often involve how it has improved over time. According to the National Center for Health Statistics, life expectancy for men in 1907 was 45.6 years; by 1957 it rose to 66.4; in 2007 it reached 75.5. Unlike the most recent increase in life expectancy (which was attributable largely to a decline in half of the leading causes of death including heart disease, homicide, and influenza), the increase in life expectancy between 1907 and 2007 was largely due to a decreasing infant mortality rate, which was 9.99 percent in 1907; 2.63 percent in 1957; and 0.68 percent in 2007.

But the inclusion of infant mortality rates in calculating life expectancy creates the mistaken impression that earlier generations died at a young age; Americans were not dying en masse at the age of 46 in 1907. The fact is that the maximum human lifespan — a concept often confused with "life expectancy" — has remained more or less the same for thousands of years. The idea that our ancestors routinely died young (say, at age 40) has no basis in scientific fact.

...

The problem is that giving an "average age" at which people died tells us almost nothing about the age at which an individual person living at the time might expect to die.

Again, the high infant mortality rate skews the "life expectancy" dramatically downward. If a couple has two children and one of them dies in childbirth while the other lives to be 90, stating that on average the couple's children lived to be 45 is statistically accurate but meaningless. Claiming a low average age of death due to high infant mortality is not the same as claiming that the average person in that population will die at that age.

This presentation correctly uses life expectancy from a certain age such as 65.  Infant mortality does not affect these numbers.

There was a 50% chance of a 65 year old male living to 77.5 in 1955.  In 2014 there was a 50% chance of a 65 year old male living to 85.  That is a 7.5 year increase.  Since only 65 year old males are considered, infant deaths have absolutely zero effect.

[FINate]

Mortality rates for infants and in children explains our increased life expectancy (you have to remember life expectancy is based on a population, just as mortality rates are; individuals aren't living much longer, but populations are). We don't have people living to substantially higher ages, it's just that we have more that are able to make it that far because they would have normally died as an infant or child. Getting over that hump is a pretty big part of making it to adulthood, which is then clear sailing until you die.

The whole thing is set up by a fallacy.

The inverse cumulative distribution function on slide 4 proves this is not true. The slope of the functions for 1955 vs. 2014 are different, so those who live to 65 in 2014 are more likely to live to an older age.

[FINate]

The real issue our government and policy wonks are concerned about is outlined on slide 10:

• Vastly underfunded state and local pension funds
• Social Security Trust Fund becomes exhausted in 2033, followed by a roughly 25% cut in benefits
• Fewer workers relative to retirees
• Lower standard of living for retired workers

Clearly there are people who manage to fund 30, 40, 50+ year retirements. I expect they (government) will look for ways to squeeze early retirees - they need you to keep running on that hedonic treadmill. The slides about "Hidden Early Retirement Incentives Need to be Eliminated" speak to this. The proposed reward for wasting the best years of your life in job you don't really like? More consumption, 'cause that makes it all worthwhile!

Many retiring couples could enjoy an extra $100 - $200K of lifetime consumption simply by efficiently using their 401(k) assets and deferring the claiming of Social Security

[sirdoug007]

Everything but that statement is pretty good though.

I will say that curiosity made me want to run the numbers, and to save for 40 years and replace 92.5% of your income (basically pre-tax except for Social security and medicare taxes) with a 4% withdrawal rate requires a savings rate of right at 15% if you assume 6% real returns.  Obviously you don't need to fully replace your income, but I would have thought you would do more than that after saving 15% for 40 years.  Building in some safety margin and assuming only 30 years of working, and you wouldn't even be able to replace half your income with a 15% savings rate, so still well below spending after accounting for a reduction in taxes and no longer needing to save.  I didn't realize that a 15% savings rate is really the bare minimum people should be shooting for, even assuming working until 62, if they really want a high likelihood of having a secure retirement without relying on SS.

The thing that saves most people is that SS is basically forced savings of 12.4% over your entire career and is the one thing you can't sell off in any way.

[Jrr85]

Everything but that statement is pretty good though.

I will say that curiosity made me want to run the numbers, and to save for 40 years and replace 92.5% of your income (basically pre-tax except for Social security and medicare taxes) with a 4% withdrawal rate requires a savings rate of right at 15% if you assume 6% real returns.  Obviously you don't need to fully replace your income, but I would have thought you would do more than that after saving 15% for 40 years.  Building in some safety margin and assuming only 30 years of working, and you wouldn't even be able to replace half your income with a 15% savings rate, so still well below spending after accounting for a reduction in taxes and no longer needing to save.  I didn't realize that a 15% savings rate is really the bare minimum people should be shooting for, even assuming working until 62, if they really want a high likelihood of having a secure retirement without relying on SS.

The thing that saves most people is that SS is basically forced savings of 12.4% over your entire career and is the one thing you can't sell off in any way.

SS definitely saves most people, but I wouldn't call it forced saving.  There is no savings, there is just tax and transfer, which is going to be a lot more painful when the baby boomers are fully retired.

[arebelspy]

lol.  You sure can.

Heck, I plan to finance a 50+ year ER from 8 years of working.  ;)

But here's the thing that immediately answers his "you can't fund 30 year retirement from 40 years of working"--what if I save 50%?  That means, for 40 years, I save enough to live for another 40 years off of that, assuming flat (0%) real returns.  Why wouldn't that fund 30 years of ER?  You expect negative real returns for a timeframe of 70 years (40 working, 30 retired)?  That's absurd.

Here's the thing though...his whole argument is not based on the idea of one funding their OWN retirement, but of having it done for them.

Here's his "reasons" why it can't work:

• Vastly underfunded state and local pension funds
• Social Security Trust Fund becomes exhausted in
2033, followed by a roughly 25% cut in benefits
• Fewer workers relative to retirees
• Lower standard of living for retired workers

Items 1, 2, and 3 are all irrelevant to the person who hits FI on their own, and item 4 isn't either, as you determine your own standard of living based on how much you end up saving.

Sure, we may hit difficulties as a society funding people's retirements via social security and pensions as they live older and older.  That's his whole point.  And I actually mostly agree with it.

The part he's missing though, the huge part all of us realize, is that those are not the only source of retirement funds.  The best source, your own personal savings and investments, sure CAN get you retired, and quickly, and then you don't even need to worry about his concerns.

He says the solution is to work longer.. I'd say it's to save more (via spending less).  Save more, rather than working longer, and you can fund your own ER, and just supplement it with SS/pension/etc.

[ender]

Sure, we may hit difficulties as a society funding people's retirements via social security and pensions as they live older and older.  That's his whole point.  And I actually mostly agree with it.

+1

[RosieTR]

I can understand where some people might reasonably expect a pension to fund a certain lifestyle (since they usually have some sort of set point proportional to one's income). But Social Security was never supposed to fund an upper middle class lifestyle for the retiree with no other saving, such as replacing most of a $95,000/yr income. It was supposed to prevent abject poverty and encourage old people to leave the workforce, as it was enacted during the Depression as a means to address both of those issues. The age 65 was chosen based on actuarial tables then, so that the system really wouldn't pay that much out. Unfortunately (from an economic standpoint) we have much longer lives now and smaller younger generations than the retirees. But I have no idea why people would expect SS to replace most of their income if they haven't bothered to save anything additionally, and do not have a pension. Even the pension is sort of suspect, IMO, so I would not totally trust that either.

[NorCal]

I don't think most people read the slides.

"Retirement" in these parts means something very different than the context used in the presentation.

Can people retire with significantly less than 40 year careers?  Absolutely.

Will people be able to enjoy a long retirement if their plan is based on Social Security plus a few percent of salary in a 401K? Absolutely not.  Particularly not if spending is assumed to be similar post-retirement.

The demographics info and Social Security slides were interesting.

[Metric Mouse]

lol.  You sure can.

Heck, I plan to finance a 50+ year ER from 8 years of working.  ;)

Right? I'm planning for 60+ years of Retirement. But even though I trust the math, I'd love to have a larger sample size of people who have actually done this.

This model also seems to assume that no additional income is earned during retirement, which us ER's who have been retired for more than a couple of years know is quite absurd.

[Yaeger]

I also remember reading recently that the elderly to worker ratio is going to start swinging the other way again, as the Millennial generation is about on par with the Boomers.

I don't think so, at least it's not projected to swing that way in our lifetime. This is an excerpt from the CBO's 2015 Social Security Policy Options paper:

The ratio of covered workers to beneficiaries would decline significantly over the next quarter century—from under 3 to 1 now to nearly 2 to 1 in 2040—and then continue to drift downward.

https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51011-SSOptions_OneCol.pdf

Also, an article about life expectancy for those interested: Human Lifespans Nearly Constant for 2,000 Years

The SSA has a nice chart where it discusses this by looking at probabilities for males and females age 21-65 to reach age 65. From 1940, the probability of an average 21 year old has increased from 53.9% to 72.3% in 1990. Also, the remaining life expectancy for that same grouping has increased from 12.7 years to 15.3 year after the age of 65.

https://www.ssa.gov/history/lifeexpect.html

Some of his ideas are very good: Raising the retirement age (yes). Eliminating ER incentives (yes). I like the desire to reduce the hefty 15.3% tax on workers at some point in their career, but I don't like his plan without finding a way to reduce total benefits somehow. I disagree with him categorizing SS as a pure tax on workers after 35-40 years though, it's the most expensive social insurance plan the world has ever seen and in no way similar to a savings account or retirement investment.

[faramund]

Very interested in reading that link about human life expectancy, but it didn't work for me. Do you have another one?

Looks like a mistake in the link.  Here it is. 

http://www.livescience.com/10569-human-lifespans-constant-2-000-years.html

Mathematically, this article is very dodgy. Its almost like they don't understand averages. It tries to make arguments like, Socrates died at 70 which is older than when some people die nowadays so .... actually its hard to tell what they're trying to argue - it seems like they're trying to use that as an argument that lifespans haven't increased.

Their argument seems to be, the oldest that we know anyone lived in the ancient world was 70, so human lifespan won't have increased until everyone lives longer than 70. This seems bizarre.

[redbird]

I don't think most people read the slides.

"Retirement" in these parts means something very different than the context used in the presentation.

Can people retire with significantly less than 40 year careers?  Absolutely.

Will people be able to enjoy a long retirement if their plan is based on Social Security plus a few percent of salary in a 401K? Absolutely not.  Particularly not if spending is assumed to be similar post-retirement.

The demographics info and Social Security slides were interesting.

Agreed. That was my takeaway after reading the slides too. And I agree. If you put very little in your 401K and plan to rely on just that and SS, you most likely WILL have problems.

A lot of financial articles seem to recommend people save 10%. Honestly, I think people should be trying to save much more than that.

[mm1970]

That was interesting with some very good points.  And I plan to go back and re-read it.

The problem with planning to work until 70...I have a number of friends and coworkers who can't:
- Engineers and PhDs whose brain function starts to decline rapidly
- People who get ill (major diseases, cancer)
- Family members who work in  manual labor jobs, and their bodies are wrecked.

I'd wager that only about half of the people I know can work successfully until 70, and the quality/quantitiy of work declines.

[Bajadoc]

lol.  You sure can.

Heck, I plan to finance a 50+ year ER from 8 years of working.  ;)

But here's the thing that immediately answers his "you can't fund 30 year retirement from 40 years of working"--what if I save 50%?  That means, for 40 years, I save enough to live for another 40 years off of that, assuming flat (0%) real returns.  Why wouldn't that fund 30 years of ER?  You expect negative real returns for a timeframe of 70 years (40 working, 30 retired)?  That's absurd.

Here's the thing though...his whole argument is not based on the idea of one funding their OWN retirement, but of having it done for them.



Here's his "reasons" why it can't work:

• Vastly underfunded state and local pension funds
• Social Security Trust Fund becomes exhausted in
2033, followed by a roughly 25% cut in benefits
• Fewer workers relative to retirees
• Lower standard of living for retired workers

Items 1, 2, and 3 are all irrelevant to the person who hits FI on their own, and item 4 isn't either, as you determine your own standard of living based on how much you end up saving.

Sure, we may hit difficulties as a society funding people's retirements via social security and pensions as they live older and older.  That's his whole point.  And I actually mostly agree with it.

The part he's missing though, the huge part all of us realize, is that those are not the only source of retirement funds.  The best source, your own personal savings and investments, sure CAN get you retired, and quickly, and then you don't even need to worry about his concerns.

He says the solution is to work longer.. I'd say it's to save more (via spending less).  Save more, rather than working longer, and you can fund your own ER, and just supplement it with SS/pension/etc.

Well said. The "Stanford Professor" is stuck in the same weak thinking that allows people to give away what they earn in exchange for junk.

[Jrr85]

That was interesting with some very good points.  And I plan to go back and re-read it.

The problem with planning to work until 70...I have a number of friends and coworkers who can't:
- Engineers and PhDs whose brain function starts to decline rapidly
- People who get ill (major diseases, cancer)
- Family members who work in  manual labor jobs, and their bodies are wrecked.

I'd wager that only about half of the people I know can work successfully until 70, and the quality/quantitiy of work declines.

Making 70 the retirement age for the purposes of a welfare program is not the same thing as expecting people to work until 70.  To me, you shouldn't take money from young people and transfer it to people that are capable of working simply because they're old.  But if you are going to do that, certainly the older somebody has to be to start receiving payments, the better.  If you can't work past 65 (or 67), hopefully you have a combination of savings and disability insurance to allow you to not work, but just because some people aren't able to work past 62 or 65 or 67 or whatever, it's no reason to start paying welfare to everybody that hits that age. 

[mm1970]

That was interesting with some very good points.  And I plan to go back and re-read it.

The problem with planning to work until 70...I have a number of friends and coworkers who can't:
- Engineers and PhDs whose brain function starts to decline rapidly
- People who get ill (major diseases, cancer)
- Family members who work in  manual labor jobs, and their bodies are wrecked.

I'd wager that only about half of the people I know can work successfully until 70, and the quality/quantitiy of work declines.

Making 70 the retirement age for the purposes of a welfare program is not the same thing as expecting people to work until 70.  To me, you shouldn't take money from young people and transfer it to people that are capable of working simply because they're old.  But if you are going to do that, certainly the older somebody has to be to start receiving payments, the better.  If you can't work past 65 (or 67), hopefully you have a combination of savings and disability insurance to allow you to not work, but just because some people aren't able to work past 62 or 65 or 67 or whatever, it's no reason to start paying welfare to everybody that hits that age.

The fundamental problem TO ME is the assumption that everyone can work until that age.  They can't.

[Jrr85]

That was interesting with some very good points.  And I plan to go back and re-read it.

The problem with planning to work until 70...I have a number of friends and coworkers who can't:
- Engineers and PhDs whose brain function starts to decline rapidly
- People who get ill (major diseases, cancer)
- Family members who work in  manual labor jobs, and their bodies are wrecked.

I'd wager that only about half of the people I know can work successfully until 70, and the quality/quantitiy of work declines.

Making 70 the retirement age for the purposes of a welfare program is not the same thing as expecting people to work until 70.  To me, you shouldn't take money from young people and transfer it to people that are capable of working simply because they're old.  But if you are going to do that, certainly the older somebody has to be to start receiving payments, the better.  If you can't work past 65 (or 67), hopefully you have a combination of savings and disability insurance to allow you to not work, but just because some people aren't able to work past 62 or 65 or 67 or whatever, it's no reason to start paying welfare to everybody that hits that age.

The fundamental problem TO ME is the assumption that everyone can work until that age.  They can't.

Nobody is making that assumption. Making a person eligible for a welfare program at age 70 is in no way assuming that everyone will be able to work until 70, especially when you consider the welfare program in question also contains an option for people to get paid before 70 (or earlier under today's law) if they are too disabled to work.

[Metric Mouse]

I see what you're saying JRR85 - an 'average' person could work until 70; hence that's the age money kicked in. If someone cant', they'd be considered disabled, and thus receive money from other programs.

If someone didn't want to work until 70, they'd have to save enough money to bridge the gap between when they want to retire and when ssi would kick in.