Monday, February 27, 2012

Satan's Retirement Calculator

Here, late at night, are a few choice words about retirement savings (and how to withdraw from same) from Dr. William Bernstein:

Most of you have seen the nifty retirement software available from the likes of Vanguard and T. Rowe Price which provides the mathematical muscle to help you plan your retirement. Input your retirement age, expected lifespan, required annual income, rate of inflation and investment return, and hey presto, you find out that to avoid a golden years diet of Alpo you need the GDP of the average Central American republic. ...

Problem is, it may quite possibly be worse than that. These calculators all make the same erroneous assumption -- that your expected rate of return is the same each and every year. ... It turns out that if you have rotten returns in the first decade [of retirement] you will run out of money long before reversion to the mean saves your bacon in later years.

... If you can be ... flexible and spend a fixed percentage of your nest egg each year, then you can indeed keep your entire retirement stash in stocks and spend 5% annually. Just remember that your stipend will likely fluctuate wildly over the decades of your retirement. Keep a few cans of Alpo in the cupboard if you decide to go this route.

You're going to discover that to get into retirement in 21st century America, you're going to need a few things.

1) The cash flow (and iron discipline) to save 10-25% of each week's paycheck. (Always remembering to diversify, diversify, diversify.)

2) Luck that the markets start rocketing up as you near retirement. (Pray for a repeat of 1982-2000.)

3) The ability to moderate your life-style enough in your senior years to live on Social Security, annuities/pensions and your retirement stash until they plant you in the local cemetery.

These things sound like long-shots, but they're really not if you start planning and saving in your twenties and early thirties. When you have the luxury of time, building a cash hoard for the distant future is not super difficult. But if you start on your, say, fifty-fifth birthday, the challenge will be more difficult.

(Read both of Dr. Bernstein's articles on this subject, since he's got some simple but graphic charts that point out the dangers of withdrawing too much and putting away too little.)


Anonymous said...

Thank you for posting this. These essays provided my first insight into why investors don't bet everything on small value and emerging markets.

I especially liked this snippet from part II: "One of finance's ironies is that concentrating your portfolio is the best way to become very rich; it is also the best way to become poor. So an investor's first duty is to decide which of these two goals is paramount."

Thanks again. :)

Anonymous said...

All of this would be so much easier if we could actually depend on a job for more than 6months at a time. In our industry savings are mainly used when the job disappears and until you get the next one. Saving for retirement? What industry are you thinking about?

Anonymous said...

And in your 50's, statistically, your hours will drop dramatically. And something most people do not realize is that reaching your retirement goals depends more upon your last ten years of employment more than all of your other working years combined. If you are unable to put away during the most vulnerable period of your career, you will fall short. The lesson - HAVE A PLAN B. Hollywood will very likely let you down.

Anonymous said...

All of this would be so much easier if we could actually depend on a job for more than 6months at a time. In our industry savings are mainly used when the job disappears and until you get the next one. Saving for retirement? What industry are you thinking about?

I hear ya. I've worked in VFX since 1999. The first five years out here were tough. I could have qualified for Medicaid during some of those years, which is lucky for me because I could not afford my own health insurance back then. In those days I only contributed to my Roth IRA when Fidelity warned me that my account balance had fallen below their minimum and that my account would be closed if I did not contribute.

Things got better financially after 2004, so I started contributing the max to my Roth IRA every year starting in 2005. I read about retirement saving on this blog in 2007 and started getting serious about my retirement saving. I switched from Fidelity to Vanguard. I also opened up a Roth IRA for my spouse and started contributing the max to that in addition to my own Roth IRA.

I move from project to project and studio to studio. According to my Social Security statements, my personal average income since 2004 has been about $50,000/year. Sometimes I made a steady $1500/week for several months at a time, and sometimes I made $2500/week for six months out of the year. However, I still contributed the max to both my Roth IRA and my spouse's Roth IRA, which comes out to $10,000/year saved in after-tax money since 2008.

I have these things working in my favor:

--> I have no children, and I do not plan to have children.

--> I try to keep my cost of living as low as possible. I rent instead of owning a home, I have only one car shared between myself and my spouse, and I use a $0.10/minute+$5/month prepaid phone service instead of a monthly plan for my smartphone service. If I dropped my cable service, I could probably save even more money.

--> My spouse also works in VFX. When we're both working, our total household income exceeds $50,000/year, making it easier for me to save.

I don't know if I'll ever save enough to match an 839 IAP + defined benefit pension in my golden years, but I'm saving what I can.

Steve Hulett said...

All of this would be so much easier if we could actually depend on a job for more than 6 months at a time.

You're thinking, I'm afraid, of America in the fifties and sixties.

I started in the industry at Disney as a traffic boy. This was 1967, and I was a summer employee after graduation from high school.

What was the studio like then? Walt had recently died, but the place was still sleepy and paternalistic, with lots of employees who had worked on site for ten, twenty, thirty years.

Nobody made a lot of money, but the money was steady.

When I returned to the Mouse House in 1976, the place was much the same. And a lot of the same employees were still there.

This version of Hollywood employment (American employment!) is now pretty much kaput. You work a job for three months, maybe nine months if you're lucky, and then it's on to the next gig. I had a stretch where I had three to six diffent jobs every year. Not a lot of fun when you're trying to pay a mortgage and raise a family.

The people who are successful in animation and work most of the year are the ones with skill sets in high demand, and who keep those skills current. (These folks also network and know how to play well with others.)

There is never certainty that jobs in Tinsel Town will last. I've never had it, my spouse has never had it, even The Simpsons crew was nervous for years that their assignment would come to an end. (Some things are just beyond our control.)

The basketball of fate bounces in mysterious and unknown ways. The way to mitigate that is work hard and maximize your knowledge. With luck, the movie industry will be good to you. Without luck, you'll end your productive life in another field.

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