The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: BTDretire on November 06, 2019, 07:11:24 AM
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I've seen this article pop up several times, and if you search it, there seems to be nothing new, just articles repeating this one. (lots of times)
What is the scenario that make the author predicts such low returns over the next 40 years? (maybe I stretched it, but millennials have 40 years to 65)
Such as this line,
"investment returns on retirement plans could be as little as 3 percent"
https://www.cnbc.com/2019/10/23/millennials-need-to-save-an-huge-percent-of-paycheck-to-retire-at-65.html
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There is no link to the actual math (I found one to the profile of the person they are saying made the prediction and another to her employer) or assumptions, but I wonder if part of the reason why the projections for what "millennials" need to save are getting more and more dire is that millennials are getting older. The oldest millennials were born in 1983 (or thereabouts depending on which definition you use) and are creeping up on 40.
Since the article mentions that one assumption of their calculation is retiring at 65, saving 40% of income* isn't that unreasonable. Just going off of the Shockingly Simple Math blog post, it'd take 22 years to hire FIRE at a 40% savings rate starting from zero. That takes the oldest millennials from age 36 to age 58. To hit FIRE right at 65, a 30% savings rate would do the trick (without having to bring in doomsday predictions about future investment returns).
*The almost half that is recommended in the article.
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I'm always confused when someone says that returns will "only" be 3%.
If I knew the market would consistently return 3% every year for the rest of my life, I'd be ecstatic!
The problems with returns are either:
- High inflation with low return
- High volatility
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The nice thing about the internet these days is how easy it is to look up what people said a decade ago.
For example, the article mentions that "Boston-based asset management firm GMO, which expects real returns of -3.6% for U.S. large-cap stocks and -1% for small-cap stocks" and with a few clicks I can find out what they were predicting back in 2010 (https://web.archive.org/web/20100723045333/http://www.gmo.com/America/). If you don't want to check the link, the punch line is that back in 2010 they were predicting U.S. Large Cap equities would have a real rate of return of 2.9% over the next 7-years. The real inflation adjusted return for that period turned out to be over 12% for large cap equities (https://dqydj.com/dow-jones-return-calculator/).
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Well, one--this is obviously a clickbait article and references only the next 10 years in a prediction from Vanguard when really millennials have much longer.
Two, from the Vanguard study, they are predicting that returns for the next 10 years will be:
Equities
Global equities ex-U.S. (unhedged) 6.5%–8.5%
U.S. equities 3.5%–5.5%
U.S. real estate investment trusts 2.5%–4.5%
With my awful napkin math (I know this is off a bit), that means the average 20 year avg return ending 2029 for US equities using 13.10% from VTI for the trailing 10 years would be:
(13.10% + 3.5%)/2 = 8.3% [low end]
(13.10% + 5.5%)/2 = 9.3% [high end]
I'd say...well yeah...this is pretty expected based on the history of around 10% returns on average. But, what do years 2030-2040 look like? 2040-2050??
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These articles are just more recycled pro-financial planning propaganda
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A lot of us millennials (the oldest end of the cohort) have less than 30 years until we are 65.
Due to the recession, etc. I know a ton of people who are just getting their first jobs with retirement accounts in their mid-late 30s (Including my husband, my brother, and one of my best friends). Like maizeman, I suspect the 40% number is due to the age and greater structural issues of the last decade+.
Also, we are among the only people we know who look like we are on track for a traditional retirement and we have been saving 40% for the last several years. This doesn't sound nuts to me.
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[Reads article looking for their angle.] Ah-ha, there it is, buried way below the fold...
Beyond simply planning to work longer, Mitchell says more Americans may need to consider purchasing an annuity as they get older. Mitchell has researched and written extensively on annuities, both independently and through collaborations with the Pension Research Council at the Wharton School, which is supported, in part, by the Mutual of America Life Insurance Company and through member contributions from financial firms and insurance companies.
This is classic marketing dressed up as "news." All good marketing begins with creating a problem in the mind of the consumer. Negative emotions are the name of the game, and what's more motivating to a millenial than the thought of never being able to retire. Saving 40% is supposed to be seen as impossible because you can't really enjoy life unless you're spending most of your income (though we here at MMM know better) and, after all, YOLO. So, how to deal with this huge "problem?" Ah! Here's a product that will fix it for you! Annuities...you can feel good while being screwed!
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If the government (representing currently old people) would not be so shameless as to take, on average, 45% of my income, or 52% of each extra EURO I make, and add 20% for my employer on top, which makes the real taxation 65% to 72% for an engineer with a proper degree in this shithole country of socialist Germany, I could stop doing the rat race at 45 instead of 55. I save 40% of my meager after tax pay, but I will never see a "state pension" that deserves the name, and I am forced to pay for it regardless. Politics and society took that away by ignoring the low birth rate for 50(!!!) years while suffocating science and entrepreneurship over here. We are ruled by shameless idiots and the majority likes it.
I have the things I need and little of what I could imagine 20 years earlier. Travel is fine, the rest sucks.
So little ambition and that much entitlement by society.
Humankind could be on Mars by now, and energy could be clean, but here we sit unable to build a house combining my income with my SO's income. Meaning we will have fewer children because well, I would like to life in financial security which is hard to attain in Europe, and would like to keep that security by moving to the States possibly some time in the future. Just that it all takes much longer.
That makes me so angry.
I mean, look at the world in 2019. Is that REALLY the best world that could have been? Is it close? That I doubt very much. Not only angry, but also dissappointed.
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The nice thing about the internet these days is how easy it is to look up what people said a decade ago.
For example, the article mentions that "Boston-based asset management firm GMO, which expects real returns of -3.6% for U.S. large-cap stocks and -1% for small-cap stocks" and with a few clicks I can find out what they were predicting back in 2010 (https://web.archive.org/web/20100723045333/http://www.gmo.com/America/). If you don't want to check the link, the punch line is that back in 2010 they were predicting U.S. Large Cap equities would have a real rate of return of 2.9% over the next 7-years. The real inflation adjusted return for that period turned out to be over 12% for large cap equities (https://dqydj.com/dow-jones-return-calculator/).
The only source of economic forecasts is people's own sphincters.
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If the government (representing currently old people) would not be so shameless as to take, on average, 45% of my income, or 52% of each extra EURO I make, and add 20% for my employer on top, which makes the real taxation 65% to 72% for an engineer with a proper degree in this shithole country of socialist Germany, I could stop doing the rat race at 45 instead of 55. I save 40% of my meager after tax pay, but I will never see a "state pension" that deserves the name, and I am forced to pay for it regardless. Politics and society took that away by ignoring the low birth rate for 50(!!!) years while suffocating science and entrepreneurship over here. We are ruled by shameless idiots and the majority likes it.
That rings a bell with me as an ex-Kraut.
Many folks stateside chant about free healthcare, free university, paid maternity leave, and guaranteed vacation time in Scandinavian countries as well as Germany, Austria, and Switzerland. What they don't grasp is that the "free" part is an illusion. The money for the "free stuff" comes from the taxpayers. If I told you my marginal income tax rate after the standard deduction of $24,000 and tax-deferred deductions in retirement accounts (IRAs, 401K, HSA), you'd think that this is insane, so low is it.
Now tell an American worker that he'll get "free school" and some other free stuff, but he'll have to pay $8.00 for a gallon of gas and close to half of his paycheck would go to income taxes, followed up by a 24% sales tax (Mehrwertsteuer/VAT) and you'd have the second American Revolution!
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Humankind could be on Mars by now, and energy could be clean, but here we sit unable to build a house combining my income with my SO's income. Meaning we will have fewer children because well, I would like to life in financial security which is hard to attain in Europe, and would like to keep that security by moving to the States possibly some time in the future. Just that it all takes much longer.
That makes me so angry.
I mean, look at the world in 2019. Is that REALLY the best world that could have been? Is it close? That I doubt very much. Not only angry, but also disappointed.
I understand your sentiment, and sympathize.
But I suggest you take a minute and be happy that things aren't worse, you could have been born to work a field in China, or some impoverished area of Africa.
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And yet just yesterday I read an article about how millennials are poised to be the recipients of the biggest inter generational wealth transfer ever as the boomers start to die off and leave us their riches. So maybe that will make up for the crappy economy and job market many of us were handed after graduating from college
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I'm always confused when someone says that returns will "only" be 3%
I'm also confused but not in the same way that you are. Can people really predict the future returns of various asset markets ? I don't really understand how they can do this.
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I understand your sentiment, and sympathize.
But I suggest you take a minute and be happy that things aren't worse, you could have been born to work a field in China, or some impoverished area of Africa.
Much appreciated, and right you are :-) I am still commited to making the best of it.
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Wait a sec.... this must be something to go inline with the twitter of "Millennials never going to retire", and "Millenmials going to be the richest generation ever"..........
I have a feeling that those Millennial fools are going to end up just like everyone else.... some ok but retired, some not ok but working till 90, and everyone else somewhere in between. That or well... they will all just start shouting Ok Boomer!
(Full disclosure: I am one of those Millennial fools)
(Full Full disclosure: Ignore this crap. Both sides are just throwing rotten tomatoes and wondering why the other side stinks of rotten tomatoes)
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That or well... they will all just start shouting Ok Boomer!
(Full disclosure: I am one of those Millennial fools)
As another of those millennial fools I'm pretty sure "Ok, Boomer" is a Gen Z innovation.
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That or well... they will all just start shouting Ok Boomer!
(Full disclosure: I am one of those Millennial fools)
As another of those millennial fools I'm pretty sure "Ok, Boomer" is a Gen Z innovation.
It is and it applies to all "old" people. When you're 18, that means anyone over the age of 30.
"Young people are just smarter." -- Mark Zuckerburg, when he was younger
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And yet just yesterday I read an article about how millennials are poised to be the recipients of the biggest inter generational wealth transfer ever as the boomers start to die off and leave us their riches. So maybe that will make up for the crappy economy and job market many of us were handed after graduating from college
Naah. We plan to spend it all before we keel over. 😆
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Nobody ever writes pseudo-journalistic clickbait about generation X.
Or maybe I'm just being cynical.
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I'm always confused when someone says that returns will "only" be 3%
I'm also confused but not in the same way that you are. Can people really predict the future returns of various asset markets ? I don't really understand how they can do this.
Was it Bogle or Buffet that predicted much lower returns going forward?
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I wonder, if the generational labels are mostly culturally defined, what the years and labels would be if we looked at it financially. That is, if we consider a person financially viable at age 18; a person born 1996 is a different 'cultural' generation than someone born in 1993 but may be in the same 'financial' generation considering both being able to buy real estate, stocks, etc etc in the period of 2009-2012. Obviously there would be many more groups for people to argue the parameters of but it certainly entertains the mind.
Edit: Grammar
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If the government (representing currently old people) would not be so shameless as to take, on average, 45% of my income, or 52% of each extra EURO I make, and add 20% for my employer on top, which makes the real taxation 65% to 72% for an engineer with a proper degree in this shithole country of socialist Germany, I could stop doing the rat race at 45 instead of 55. I save 40% of my meager after tax pay, but I will never see a "state pension" that deserves the name, and I am forced to pay for it regardless. Politics and society took that away by ignoring the low birth rate for 50(!!!) years while suffocating science and entrepreneurship over here. We are ruled by shameless idiots and the majority likes it.
That rings a bell with me as an ex-Kraut.
Many folks stateside chant about free healthcare, free university, paid maternity leave, and guaranteed vacation time in Scandinavian countries as well as Germany, Austria, and Switzerland. What they don't grasp is that the "free" part is an illusion. The money for the "free stuff" comes from the taxpayers. If I told you my marginal income tax rate after the standard deduction of $24,000 and tax-deferred deductions in retirement accounts (IRAs, 401K, HSA), you'd think that this is insane, so low is it.
Now tell an American worker that he'll get "free school" and some other free stuff, but he'll have to pay $8.00 for a gallon of gas and close to half of his paycheck would go to income taxes, followed up by a 24% sales tax (Mehrwertsteuer/VAT) and you'd have the second American Revolution!
I don’t understand the American system though. Diabetics die because they can’t afford insulin... I mean that is just crazy for a developed, extremely wealthy country. That is just one of many examples.
I admit that I do find the taxes I pay in the U.K. painful at times. We have tax rates of 60 - 100% income tax at various cliffs between 100 - 200 k. But I think society should redistribute a lot of wealth to the poor. Only problem is that people don’t appreciate what they don’t pay for and develop an entitlement complex
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That rings a bell with me as an ex-Kraut.
Many folks stateside chant about free healthcare, free university, paid maternity leave, and guaranteed vacation time in Scandinavian countries as well as Germany, Austria, and Switzerland. What they don't grasp is that the "free" part is an illusion. The money for the "free stuff" comes from the taxpayers. If I told you my marginal income tax rate after the standard deduction of $24,000 and tax-deferred deductions in retirement accounts (IRAs, 401K, HSA), you'd think that this is insane, so low is it.
Now tell an American worker that he'll get "free school" and some other free stuff, but he'll have to pay $8.00 for a gallon of gas and close to half of his paycheck would go to income taxes, followed up by a 24% sales tax (Mehrwertsteuer/VAT) and you'd have the second American Revolution!
How this or that system plays out in the long run also varies with long-term life plans. As you point out none of this stuff is "free" as it's paid via the tax bill, VAT and various other tariffs and taxes on stuff. So for a high-income person in most European countries the tax burden is likely to be significantly higher than for someone in the US even after factoring in health care etc.
I haven't really done the math on it, but if your working career is much shorter than the norm - say you work for 20 years instead of the 40-45 a normal career lasts you can reap great benefits from it. You get access to all the "free" public services, but you don't really pay that much for them anymore as you don't have taxable income. And most other taxes are a direct function of consumption, so if you don't really buy stuff you don't pay that much taxes through those channels.
Finally the long-term stash planning looks different if you have a significant social security pension kicking at at age 67 which pays out a pretty handsome inflation-adjusted amount until you die.
It's also hard to compare tax regimes across countries as the systems differ a lot. After joining this forum I'm really surprised how high property taxes can be in the US - I didn't know that. Then you also have to factor in various direct benefits you get which can differ a lot. We have 2 kids for which we get a government handout for about 3000 bucks / year tax-free. We also get a tax benefit worth about 1000 dollars / year. For kindergarden we pay about 300 dollars / child / month. And so on and so on. On the downside we have wealth tax which makes the 4% rule more the 3.4% rule.
What comes out cheaper or more expensive in the end is highly individual and highly dependent on family situation and various choices made in life and what happens or not happens to you. Income taxes is just one part of a big equation.
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I'm always confused when someone says that returns will "only" be 3%
I'm also confused but not in the same way that you are. Can people really predict the future returns of various asset markets ? I don't really understand how they can do this.
Was it Bogle or Buffet that predicted much lower returns going forward?
People have been saying that since 2013.
Eventually, they will be right. If you predict 3% returns for the next decade every year for long enough, you have a high chance of being right eventually.
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I'm always confused when someone says that returns will "only" be 3%
I'm also confused but not in the same way that you are. Can people really predict the future returns of various asset markets ? I don't really understand how they can do this.
Was it Bogle or Buffet that predicted much lower returns going forward?
People have been saying that since 2013.
Eventually, they will be right. If you predict 3% returns for the next decade every year for long enough, you have a high chance of being right eventually.
And a certainty of getting paid something for the clicks.
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If you look at the ishares etf for Germany EWG, it has returned just over 5% since 1996. If you assume 2 % per year inflation that's just over 3% a year for the last 23 years.
I think 3% is a reasonable lower bound. I plan with returns In a range of 2 to 5 %.
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During times when returns were 8% Globally inflation was 4%. Future global returns are expected at 6% with inflation at 2% ether way. So, Either way, returns are around 4% inflation adjusted. Also you can not look at the US market, as it is too unreliable. Its recent bull run is anomalous.
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Nobody ever writes pseudo-journalistic clickbait about generation X.
Or maybe I'm just being cynical.
Aren’t we all? (Asks a fellow X.)
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Nobody ever writes pseudo-journalistic clickbait about generation X.
Or maybe I'm just being cynical.
I see what you did there. /highfive
Eh! It's hard to talk to young Millennials about retirement. Older ones seem more enthusiastic to tackle it but view it as less plausible to give up the Land Rover. Then there's a very strong fear about the modern, unstable nature of employment vs what they were taught about jobs in their childhood years. You could title most Millennial clickbait "it's more epic and tragic than you thought!"
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If the government (representing currently old people) would not be so shameless as to take, on average, 45% of my income, or 52% of each extra EURO I make, and add 20% for my employer on top, which makes the real taxation 65% to 72% for an engineer with a proper degree in this shithole country of socialist Germany, I could stop doing the rat race at 45 instead of 55. I save 40% of my meager after tax pay, but I will never see a "state pension" that deserves the name, and I am forced to pay for it regardless. Politics and society took that away by ignoring the low birth rate for 50(!!!) years while suffocating science and entrepreneurship over here. We are ruled by shameless idiots and the majority likes it.
I have the things I need and little of what I could imagine 20 years earlier. Travel is fine, the rest sucks.
So little ambition and that much entitlement by society.
Humankind could be on Mars by now, and energy could be clean, but here we sit unable to build a house combining my income with my SO's income. Meaning we will have fewer children because well, I would like to life in financial security which is hard to attain in Europe, and would like to keep that security by moving to the States possibly some time in the future. Just that it all takes much longer.
That makes me so angry.
I mean, look at the world in 2019. Is that REALLY the best world that could have been? Is it close? That I doubt very much. Not only angry, but also dissappointed.
Ditto in Canada. My province is too busy buying votes with teachers pay increases to remove lead pipes and fixtures in schools. Literal lead levels higher than Flint Michigan. Pushing now almost 30 kids to a classroom, you look to Montessori and other non-public options. Given the tax levels, you limit your family size to what you can keep as far away from the melee as possible.
I am in your boat. Cold comfort, such that it is.
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funny people in America often talk about wanting the European system. guess the grass is always greener. Anyway, as a debt-free Millenial that saving 30% for retirement and 20% for a car/house. Life is good. And the world is awesome. Yay capitalism!
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"Could be as little as 3%".
I disagree, they could be 0 or negative. It's quite possible.
However, statistically, we get 7% on average after inflation. So that's the number I continue to use for my calculations because it's much better to rely on the best information available. It's just good risk management. It's a waste of time and energy to dream up worst case-scenarios that are incredibly improbably and fear them.