Author Topic: Early Retirement via Investment Income in Light of Low Future Returns?  (Read 9440 times)

WageSlave

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I get the feeling that there is an increasing sentiment that future returns for Boglehead-sytle, equity-biased portfolios will be considerably lower than they have in the past.  Wade Pfau assumes a 2% real real return on his investments.  Larry Swedroe started a discussion on the Bogleheads forum that more or less parallels Wade Pfau's.

My feel for many in the early retirement camp is that they are banking on considerably bigger real returns.  For example, in this post, MMM says, that early retirement is easy if you assume "you can earn 5% investment returns after inflation during your saving years".  (After inflation of course means the same thing as real returns.)

In my planning spreadsheets, I always assumed 3% real returns from my investments, and I thought that was overly-conservative.  Now I've bumped it down to 2%!  (Can't let anyone "out-conservative" me.)

There's a huge difference between 2% and 5% returns.  To double your money, it's the difference between 15 years and 36 years if my math is correct.  Sure, the math is still easy, but the goal itself may be much harder to reach than suggested; or, at least it may take substantially longer. William Bernstein seemed to have the same worries as far back as 2003!.

Furthermore, if one plans to early retire and truly live off investments alone, these low returns suggest that the SWR must similarly be adjusted downwards.  In my personal, informal planning, I think that for any retirement period greater than 30 years, your SWR should never exceed the real rate of return---i.e. deliberately try for indefinite maintenance of capital as a safety net.  Far too many unknowns in the next 20 years, let alone 30+ (major paradigm shifts, war, politics, currency issues, technology, healthcare).

I believe the MMM retort to this lies in optimism and entrepreneurship.  Nothing wrong with optimism, but not everyone has it in them to be an entrepreneur.  I don't know whether I do or not.  I'd like to think I could pull off being able to generate income on an as-needed basis if my investment returns took a sudden drop.  But until I leave full-time traditional employment, I don't have the time to try my hand at it.

I guess my biggest worry in FIRE planning is getting into a situation where I retire happy for years, then suddenly find I need to get a decent job (e.g. major portfolio drop).  At which point I'll be older, unused to the daily grind, and have a resume that will immediately turn off a lot of potential employers ("can you explain this 10 year gap?").  If I can pull off a "hobby job" like MMM has, where I effectively make a living wage by "playing", well, no worries!  But what if my play doesn't pay?  What if I lack any kind of entrepreneurial talent?

Thoughts?

Is there anyone out there who is under 40, married with young children, and living exclusively off of investment income?  MMM doesn't count because he has a job (a hobby-job, yes, but still doesn't touch his investment income).

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I think your assumptions are reasonable, given the loss of competitive edge by the North American and European economies.  Generating real returns of 5 percent on paper assets may involve more risk and skill in the future than it has in the past.  In addition, the decline in real returns may impair the government's ability to pay out promised Social Security and pension benefits.  Private pensions will also be impaired if the required returns cannot be achieved. 

As an older person, I benefitted from past growth.  However, I am also heavily invested in real estate.  Between the tax benefits and the income stream, I expect to generate better cash on cash returns than what I will likely get from paper assets.  My tenants pay off all of my mortgages, including mine, increasing my equity by a substantial amount every year.  In the future, as the personal economies of folks living in the US weaken, there will be more tenants and fewer owners.  That's good for us landlords, although not good for the overall economy.

Active real estate investing is not for everyone, but in my view, it's a great way to hedge declining real returns from paper assets.

Bakari

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deliberately try for indefinite maintenance of capital as a safety net.  Far too many unknowns in the next 20 years, let alone 30+ (major paradigm shifts, war, politics, currency issues, technology, healthcare).
If we experience the type of hyper-inflation that some nations have in the past, or something more dramatic (outright revolution), then any amount of cash/stock savings may become close to worthless, so in the sense of having enough to have a "sure thing", its simply not going to happen.  About the best you can get in that direction would be "investing" in a bunker, dry and canned food, and ammunition. 
Otherwise you just have to make a personal choice about exactly how big a safety net you need, but unless you expect to live infinity years, there really is no legitimate reason to never touch your principal.

Yes, with lower returns you don't get as much free money, and you have to either work longer or save a higher percentage of money, but early retirement would still be possible with 0% real returns.
For example:
If you save 75% of your income, for every year you work, you can take 3 years off. 
So if you start working at age 20, and work for 15 years, saving 75% of your income, then you can retire at age 35 with zero investment returns (and no social security) and make it to age 80.  Any additional money from interest (even 0.5%), side jobs, SS, whatever, should be enough to push that out to the maximum human lifespan.


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But what if my play doesn't pay?  What if I lack any kind of entrepreneurial talent?

Its so much easier than it seems like it is going to be...

arebelspy

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I agree with AR that real estate is great, but I think paper assets are pretty darn good too.

There's a lot of doom and gloom right now, as you point out. 

There has been in the past as well.  "The Death of Equities" ring a bell?

I don't think it's different this time.  In other words, I don't think we'll see flat to no growth for the next 50 years of my ER (just as that never happened before, despite previous skies falling).  Think of all those companies out there making all these products.  Offering services.  Providing value.

And those companies aren't going to show much real growth at all?

I'm skeptical of that.

If you're that worried about it, skew your AA a little more international.  Done.
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Tyler

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All SWRs are based on static analyses of unchanging systems that don't reflect how the dynamic real world works.  The one thing I can absolutely guarantee is that many of the assumptions baked into your retirement calculations will change over the course of 30 years.  FWIW, that also applies to assuming that you'll be able to continue working in the field and company of your choice until a "normal" retirement age.  SWRs are good baselines to aim for, but carry absolutely no warranty of success. 

So don't just invest in the stock market, but also in your own self-reliance.  Learn to garden, to do your own home repairs, to fix bikes for spending money, etc.   Your own personal resiliency is your biggest asset, and that's one of the things I like most about the Mustachian mindset. 

WageSlave

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In addition, the decline in real returns may impair the government's ability to pay out promised Social Security and pension benefits.

Which makes me worry about my portfolio's long-term tax risk (i.e. what the government creates a wealth tax).  Which, by the way, is something I haven't seen much mention of in my personal finance/investment readings.  Maybe nobody thinks it's worth worrying about?

Active real estate investing is not for everyone, but in my view, it's a great way to hedge declining real returns from paper assets.

I am increasingly thinking I may need to diversify into real estate.

If we experience the type of hyper-inflation that some nations have in the past, or something more dramatic (outright revolution), then any amount of cash/stock savings may become close to worthless, so in the sense of having enough to have a "sure thing", its simply not going to happen.  About the best you can get in that direction would be "investing" in a bunker, dry and canned food, and ammunition.

Agreed... I don't want to be "that guy".  :)  Thankfully I'm not so over-cautious as to be advocating any kind of "bunker portfolio".

But unless you expect to live infinity years, there really is no legitimate reason to never touch your principal.

I actually over-simplified my position in my original post (in the interest of keeping it reasonably short).  So to add now what I was originally thinking:
  • I don't really plan on never touching principal.  But I'd like to preserve it completely until my kids are grown and capable of supporting themselves.  One kid isn't born yet, so that's a solid 18 (or more) years of wanting to keep my principal intact.
  • On the other hand, what about "longevity risk"?  What if there's a medical breakthrough that, overnight, extends the median life expectancy to 150 years?
If you save 75% of your income, for every year you work, you can take 3 years off. 
So if you start working at age 20, and work for 15 years, saving 75% of your income, then you can retire at age 35 with zero investment returns (and no social security) and make it to age 80.  Any additional money from interest (even 0.5%), side jobs, SS, whatever, should be enough to push that out to the maximum human lifespan.

Agreed, although that scenario implies a 2.22% SWR.

So don't just invest in the stock market, but also in your own self-reliance.  Learn to garden, to do your own home repairs, to fix bikes for spending money, etc.   Your own personal resiliency is your biggest asset, and that's one of the things I like most about the Mustachian mindset. 

I certainly agree with this notion, I just struggle with the execution.  The problem is time, as with a 55-hour/week job, plus very young children, I don't really have the time to devote to building up my self-reliance "portfolio".

DoubleDown

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Another thing I've noticed in my forecasting scenarios is that adding an extra year or two or three of work/savings as a safety margin doesn't really add much. By definition, you've reached FI when your passive income equals/exceeds your expenses at your expected SWR.  But I'll bet that many of us have noticed that when you're getting close to that point, the gain in net worth each year already starts to rival or might even exceed your total take home pay, let alone expenses, even if you subtract the amount you personally are putting in (vs. just investment gains). Once investment gains alone are rivaling your paycheck, you find that eliminating the amount you are putting in via savings doesn't have much negative affect on the overall growth of the portfolio. Meaning, the value of your "work" in trying to build an ever-bigger portfolio gets more and more marginal.

Long story short: As others have said, you can't create a bullet proof, never-could-fail-in-any-scenario retirement plan. Not having done the math, I'd guess going from a 4% SWR to 3% or 2% SWR could add a decade or two of additional required savings. Might as well let go of the idea of The Perfect Plan, and enjoy the thing we definitely have a finite amount of: Time.

MooreBonds

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Myself and a few other posters have made other comments in the past agreeing with your thoughts on a more conservative approach than assuming a 4% SWR / 5% real return model....the biggest being that the SWR in most other countries has been considerably less than the 4% USA SWR commonly touted by people as gospel (and that's just for a 30 year period - much less a 40 or 50 year period).

Obviously, if you have a reliable skill to supplement your income/needs and can fall back on it, and retire at the right time (investment-return wise), things will be fine. The big thing is knowing in advance when that is, and whether the next 10 years will place you in one of those "fail" periods for a 30 or 40 year retirement.

Because I prefer the Negative Nancy Magic 8 ball, it keeps telling me to lower my expected returns, so I'm assuming a similar 2% real return, and aim to live off of my dividends from my portfolio (approximately 2.8% or thereabouts).

fiveoh

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Myself and a few other posters have made other comments in the past agreeing with your thoughts on a more conservative approach than assuming a 4% SWR / 5% real return model....the biggest being that the SWR in most other countries has been considerably less than the 4% USA SWR commonly touted by people as gospel (and that's just for a 30 year period - much less a 40 or 50 year period).

Obviously, if you have a reliable skill to supplement your income/needs and can fall back on it, and retire at the right time (investment-return wise), things will be fine. The big thing is knowing in advance when that is, and whether the next 10 years will place you in one of those "fail" periods for a 30 or 40 year retirement.

Because I prefer the Negative Nancy Magic 8 ball, it keeps telling me to lower my expected returns, so I'm assuming a similar 2% real return, and aim to live off of my dividends from my portfolio (approximately 2.8% or thereabouts).

I'm trying to live off dividends/rental income as well.  At least until/if SS kicks in, then I might dip into my principal some. 

John74

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I'm trying to live off dividends/rental income as well.  At least until/if SS kicks in, then I might dip into my principal some.

That's my plan too.

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #10 on: March 04, 2013, 08:53:36 PM »
There's a huge difference between 2% and 5% returns.  To double your money, it's the difference between 15 years and 36 years if my math is correct.  Sure, the math is still easy, but the goal itself may be much harder to reach than suggested; or, at least it may take substantially longer. William Bernstein seemed to have the same worries as far back as 2003!.
If you're going to quote that Bernstein post then it's worth reading the one before it:
http://www.efficientfrontier.com/ef/901/hell3.htm
including the quote "Thus, any estimate of long-term financial success greater than about 80% is meaningless."

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Let’s examine a small sampling of possible political, economic, and military failure modes:

The mildest scenario is that of catastrophic inflation, as experienced in Germany and Hungary in the 1920s or, more recently, in much of the developing world.

Political failures are slightly worse, since these threaten the basic human motivation to work and produce. The state, for whatever reason, can decide to confiscate your assets or, worse, society’s means of production. Anyone who judges this unlikely should turn on CNN during any G-8 or WTO conference.

Local military action. Probably the lowest-probability item on this list, but something to think about on other continents.

The Big One: Some deranged prime minister or colonel in central Russia, Pyongyang, or South Asia could let loose the four horsemen upon the planet.

So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).

MooreBonds

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #11 on: March 04, 2013, 10:22:57 PM »
So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

I'm not quite following his logic on the "97%" bit and a 1,200 year timeframe.

He states that a 97% success rate/3% failure rate is 40 years divided by .03 = 1,200 years.
Actually, a 3% failure rate means that out of 100 periods that are each 40 years long, you completely run out of money before Year 41 in 3 periods out of every 100 periods.

100 sets of 40 year retirements is NOT 1,200 years!
2013-1973 = data set #1
2012-1972 = data set #2
2011-1971 = data set #3
(you get the picture)
So to get 100 data sets of 40 year retirements, you only need to go from the 40 year period ending today, back to the period of 1873-1913...in which case you would have 3 failures out of those 100 of 40 year periods of retirements, given a 97% success rate.

Also, I disagree with his claim that anything more than 80% "success" is meaningless.

The US has had a (somewhat) unique role among developing/first-world nations in the 1900s in terms of political stability and lack of large-scale direct war devastation. Yet, despite this, 20% of the time a portfolio has failed to last 30 years! (if your chosen withdrawal rate has an 80% success). And those 20% failures weren't caused by the POTUS confiscating your assets, or from Mexico carpet bombing 90% of our manufacturing infrastructure or from hyperinflation (i.e. the really crazy shit that happens in the world that no one can predict)

If anything, IMO this should serve as a wakeup call, rather than an excuse to throw caution to the wind.

People have free will to take risks they choose to take, with whatever calculated risk level they are comfortable with at that time. However, remember that even with a 20% 'failure' for an 80% success rate, among those 80% 'successes', there are several where the portfolio was sliding down to a very low level and destined for certain failure with just a few more years. Imagine having one of those "80% successes" that is dwindling down, watching that portfolio drop in your gray and golden years, then looking back at the calendar, then back at the portfolio, then back at the calendar...waiting and wondering which will win the race to hit the bottom first: your portfolio, or your casket being laid in the ground?

Again - everyone must take risks every day with various choices...but I'd rather sleep soundly and endure a few more years of toiling at work for more emotional freedom later, rather than take emotional freedom now, and a 20%-40% chance of far more stress later (not only running out of money, but also the 'successes' that are past the point of no return and WILL fail in just a few more years). Go around to people in their 70s and 80s and 90s today who are in financial difficulties because they started retirement in one of those "20% failure" periods. Ask them how they feel about life's "impossible to predict uncertainties", or the fact that they couldn't have predicted an almost nuclear war in 1962 so they should take comfort in knowing that they can't predict the next war, so that decimated portfolio that's just 10% of what they retired with is simply out of their control and they should just deal with it....before handing them their walker and a lightbulb to go change for your neighbor for $25/hr. ;)


And don't forget - the modern day retirement is mainly a modern day invention. People didn't 'retire' en masse at 50 or 55 or even 60 (much less 35 or 45) back in the 1800s and a good part of the 1900s with a leisurely lifestyle: they often simply worked until they died, or had a handful of years when they were physically unable to work before they died. Having the ability to consider even a 30 year retirement is an historical anomaly for most of society and most of the modern era. (my point being: I don't feel bad wanting to make it a very secure 40 year phase, since I'm tickled pink that I'm fortunate enough to even have this ability. It's not like everyone before me has enjoyed 50 year retirements and my paranoia is pushing me to do just a 30 year retirement)

One last thing - the "success" rates, while taking into account your portfolio returns, says nothing of the standard of living index. Would someone retiring in 1903 with a 4% SWR WANT to have the same inflation-adjusted budget 20 years later in 1923, after things like cars and washing machines and other inventions were rolled out to the masses? Same for someone retiring in 1941 and living till 1981 - was their standard of living and budget merely inflated by inflation, or were there things added to their budgets (healthcare, technology, utilities, mobility of travel, etc.)

tooqk4u22

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #12 on: March 05, 2013, 09:47:51 AM »
One last thing - the "success" rates, while taking into account your portfolio returns, says nothing of the standard of living index. Would someone retiring in 1903 with a 4% SWR WANT to have the same inflation-adjusted budget 20 years later in 1923, after things like cars and washing machines and other inventions were rolled out to the masses? Same for someone retiring in 1941 and living till 1981 - was their standard of living and budget merely inflated by inflation, or were there things added to their budgets (healthcare, technology, utilities, mobility of travel, etc.)

I am in the lower SWR camp as well for various reasons and I agree with most of what you say here except the standard of living element - technology improved productivity and lowered the relative cost of most things and resulted in improved standard of living at lower cost - this is one of the things that I don't think can be replicated.

WageSlave

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #13 on: March 05, 2013, 10:38:07 AM »
And don't forget - the modern day retirement is mainly a modern day invention. People didn't 'retire' en masse at 50 or 55 or even 60 (much less 35 or 45) back in the 1800s and a good part of the 1900s with a leisurely lifestyle: they often simply worked until they died, or had a handful of years when they were physically unable to work before they died. Having the ability to consider even a 30 year retirement is an historical anomaly for most of society and most of the modern era. (my point being: I don't feel bad wanting to make it a very secure 40 year phase, since I'm tickled pink that I'm fortunate enough to even have this ability. It's not like everyone before me has enjoyed 50 year retirements and my paranoia is pushing me to do just a 30 year retirement)

I've often thought along these lines as well.  It's been mentioned in this or a similar thread that over the years, all the efficiency and productivity gains haven't enabled us all to work less.  Instead, we all work the same (or more) and simply increase consumption.  Us MMM-types are presumably part of a small minority that would rather see the opposite trend: everyone works less, consumes less, and lives more.

Anyway---not to make any kind of point, just out of curiosity---I wonder what the typical "working time" or "career length" has been over the course of human history?  As you said, only a few generations ago, people basically worked until they died or at least were physically unable to work any more.  What about before the Industrial Revolution?  What about ancient cultures?

I'm also curious about primitive man.  How did he spend most of his time?  Did he have any "leisure" time, so to speak?


mm31

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #14 on: March 05, 2013, 10:48:55 AM »
I've often thought along these lines as well.  It's been mentioned in this or a similar thread that over the years, all the efficiency and productivity gains haven't enabled us all to work less.  Instead, we all work the same (or more) and simply increase consumption.  Us MMM-types are presumably part of a small minority that would rather see the opposite trend: everyone works less, consumes less, and lives more.

Even worse, all the efficiency and productivity gains  haven't meant higher salaries for the average worker.

tooqk4u22

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #15 on: March 05, 2013, 10:56:14 AM »
Anyway---not to make any kind of point, just out of curiosity---I wonder what the typical "working time" or "career length" has been over the course of human history?  As you said, only a few generations ago, people basically worked until they died or at least were physically unable to work any more.  What about before the Industrial Revolution?  What about ancient cultures?

I'm also curious about primitive man.  How did he spend most of his time?  Did he have any "leisure" time, so to speak?

As for during the industrial age, I beleive the working life has largely been the same but over time life expectancy increased, which resulted in the notion of retirement as that gap widened - you don't have to look any further than than the social security system  - the gap between the qualified age vs. life expectancy is greater than ever and widening when compared to when SSI was created. 

Primitive man is different as you needed to hunt, gather, defend during those times and therefore needed physical and mental capacity or you died.

smalllife

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #16 on: March 05, 2013, 11:05:21 AM »

Primitive man is different as you needed to hunt, gather, defend during those times and therefore needed physical and mental capacity or you died.

Actually, primitive man worked around 20-30ish hours a week depending on which study you look at.  5 hours a day on hunting and gathering, and the rest for "leisure". There is a good article on Wikipedia and some scholarly articles to this effect.

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #17 on: March 05, 2013, 11:24:52 AM »
Anyway---not to make any kind of point, just out of curiosity---I wonder what the typical "working time" or "career length" has been over the course of human history?  As you said, only a few generations ago, people basically worked until they died or at least were physically unable to work any more.  What about before the Industrial Revolution?  What about ancient cultures?

I'm also curious about primitive man.  How did he spend most of his time?  Did he have any "leisure" time, so to speak?

Before the industrial revolution, the majority of humans were subsistence farmers.
Before agriculture, most "primitive" people had more leisure time than does (most of) modern peoples.

Even worse, all the efficiency and productivity gains haven't meant higher salaries for the average worker.

That's because all efficiency and productivity gains go to the top.  If a new robot is invented that triples widget production, the factory owner fires 2/3s of the workforce, lowers the price just enough to price out small business that can't afford to invest in robots, and increases profit margin by the cost of those 2/3 workforce salaries.  The increased unemployment depresses average wages (by making job openings more competitive).  This is what has driven the massive increase in wealth for the upper half of the notorious "1%"
Changing this would require, first and foremost, a philosophical shift in the mindset of Americans as a whole, whereby overall benefit to society was considered more valuable than profit at all costs

Another Reader

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #18 on: March 05, 2013, 11:28:35 AM »
Escept that a lot of us own stock in the company that operates the factory and benefit from the productivity gains....

mm31

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #19 on: March 05, 2013, 11:42:25 AM »
Escept that a lot of us own stock in the company that operates the factory and benefit from the productivity gains....

Are these the same? In one case, I'm spending money, in the other case, I'm getting paid.

That's because all efficiency and productivity gains go to the top.  If a new robot is invented that triples widget production, the factory owner fires 2/3s of the workforce, lowers the price just enough to price out small business that can't afford to invest in robots, and increases profit margin by the cost of those 2/3 workforce salaries.  The increased unemployment depresses average wages (by making job openings more competitive).  This is what has driven the massive increase in wealth for the upper half of the notorious "1%"
Changing this would require, first and foremost, a philosophical shift in the mindset of Americans as a whole, whereby overall benefit to society was considered more valuable than profit at all costs

Well said, thanks you.

tooqk4u22

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #20 on: March 05, 2013, 12:53:14 PM »

Primitive man is different as you needed to hunt, gather, defend during those times and therefore needed physical and mental capacity or you died.

Actually, primitive man worked around 20-30ish hours a week depending on which study you look at.  5 hours a day on hunting and gathering, and the rest for "leisure". There is a good article on Wikipedia and some scholarly articles to this effect.

I don't know that I would consider it leisure time. Instead it is conservation of energy time - much like animals in the wild do. Energy needed to be conserved as food may not be available the next day and to be sure there was enough energy for self defense/escape (fight or flight).  I would not consider this leisure in the modern sense as it really is not by choice, it is by necessity and efficiency.


WageSlave

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #21 on: March 05, 2013, 01:15:26 PM »
Changing this would require, first and foremost, a philosophical shift in the mindset of Americans as a whole, whereby overall benefit to society was considered more valuable than profit at all costs

Agreed.  Do you think this is likely to happen in our lifetime?  In the next 100 years?  Ever?

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #22 on: March 05, 2013, 01:46:02 PM »
What stops me retiring is a viewpoint that positive real returns will become increasingly hard to achieve on any sustainable basis. It seems to me that reducing your cost of living will be far more effective than hoping to generate substantial real returns.

The expansion of the financial sector has accounted for an increasing share of global GDP growth since Bretton Woods in the early 70s. This has masked the fact that real economic growth was slowing at least in the developed world. Despite the global financial crisis of 2008 and talk of "global deleveraging", it seems highly plausible to me that the superabundance of capital that exists today (and made worse by central bank policies) will continue exert a dominant influence on investment, at least for the next decade and possibly much longer.

Between 2010 and 2020 its estimated by the IMF and OECD that global GDP will rise by around $30 trillion (from $60 to $90 trillion) but financial assets will grow by $300 trillion (from $600 to $900 trillion). So capital will remain about 10 times larger than total output of good and service and 3 times larger the base of nonfinancial assets than help expand global GDP. About 40% of that increase in capital will derive from the emerging economies. China's capital could increase from about $40 trillion to almost $130 trillion over this decade, a threefold increase in its share.

Investors are going to be competing ever harder to find a sufficient supply of attractively valued assets to absorb their capital and meet the high hurdle rates on their liabilities (defined benefit pensions for example). Given the huge spare capacity globally for prodution, rather than this generating core price inflation, it seems much more likely that asset bubbles will inflate and collapse at an increasingly rapid pace. With correlations between assets classes having risen by a factor of 3 over the last 20 years, it will be harder to construct a balanced portfolio as the benefits of diversification become harder to realize. The end result will be lower real returns but with higher risk.



Bakari

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #23 on: March 05, 2013, 11:37:12 PM »
Escept that a lot of us own stock in the company that operates the factory and benefit from the productivity gains....

True.  Living frugally means that its very possible to become part of the 1% on an upper middle class salary.  If Mustachianism caught on enough in mainstream middle America, the "1%" would make up more than 1% of the population very quickly, and OWS would have to come up with a new slogan :P

But in the world of today, the very rich hold a disproportionate amount of stock (top 1% has 35%) so what I said before still holds

Actually, primitive man worked around 20-30ish hours a week depending on which study you look at.  5 hours a day on hunting and gathering, and the rest for "leisure". There is a good article on Wikipedia and some scholarly articles to this effect.
I don't know that I would consider it leisure time. Instead it is conservation of energy time - much like animals in the wild do. Energy needed to be conserved as food may not be available the next day and to be sure there was enough energy for self defense/escape (fight or flight).  I would not consider this leisure in the modern sense as it really is not by choice, it is by necessity and efficiency.

Maybe.  I think even if my cat didn't need to conserve energy, he would still lounge about all day and sleep.  American's don't need to conserve energy by watching TV instead of working out, they do it by choice.  Whose to say that primitive man doesn't prefer what ever he does with time not spent hunting and gathering?

Changing this would require, first and foremost, a philosophical shift in the mindset of Americans as a whole, whereby overall benefit to society was considered more valuable than profit at all costs

Agreed.  Do you think this is likely to happen in our lifetime?  In the next 100 years?  Ever?

No idea.  Its possible.  There is precedent for it, both in many other cultures (like, just about every revolution ever), and in ours (labor movement, New Deal), and there was that whole OWS/99% thing recently...
But it wouldn't surprise me if it didn't happen in my lifetime either.

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #24 on: March 06, 2013, 06:06:30 AM »
Primitive man is different as you needed to hunt, gather, defend during those times and therefore needed physical and mental capacity or you died.
Actually, primitive man worked around 20-30ish hours a week depending on which study you look at.  5 hours a day on hunting and gathering, and the rest for "leisure". There is a good article on Wikipedia and some scholarly articles to this effect.
I don't know that I would consider it leisure time. Instead it is conservation of energy time - much like animals in the wild do. Energy needed to be conserved as food may not be available the next day and to be sure there was enough energy for self defense/escape (fight or flight).  I would not consider this leisure in the modern sense as it really is not by choice, it is by necessity and efficiency.
I understand what you're trying to say here, but you're wrong. The advent of farming brought an increase in violence between groups, an increase in allostatic load, and an increase in disease. If you were to stereotype hunter-gatherers, the peaceful stereotype would be much closer to the truth --especially compared to their farming descendants.

tooqk4u22

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Re: Early Retirement via Investment Income in Light of Low Future Returns?
« Reply #25 on: March 06, 2013, 07:56:21 AM »
I understand what you're trying to say here, but you're wrong. The advent of farming brought an increase in violence between groups, an increase in allostatic load, and an increase in disease. If you were to stereotype hunter-gatherers, the peaceful stereotype would be much closer to the truth --especially compared to their farming descendants.

The self-defense I was referring to was more against the wild than against violence (war) - coming across a bear or lion and maybe to an extent other men, which at that time weren't much more than animals anyway.

Regardless, the point is that comparing primative man to modern day (200 years, 2000 years, 5000 years?) is not valid.