Sunday, May 31, 2009

Tomorrow Won't Take Care of Itself

Mention long term planning to someone in their 20s and they look at you strangely. They've got enough on their plates, thank you very much. Besides (if they are lucky) they have a 401K at work and they get a match from the company. Talk to someone in their 30s about long term planning and they immediately mention children and tuition. Talk to someone in their 40s about long term planning and they, too, mention children and tuition and weddings. So, just when is it that talking about long term planning is appropriate? With someone in their 50s and 60s? Too late, way too late.

Why do long term life planning? For one thing "long" means just that--many years of life. With people living on average into their late 80s, there is going to need to be a means of support for those people. You know, money. And services.

I frequently get told that it costs a lot less to live when you are older than when you are younger; after all, there are no yeshiva tuition to pay any more, and most simcha expenses have already been given out. It's not like older people are paying the expenses for a family of 5-8 any more; it's only two people.

Here's the simple answer to those statements: they are wrong.

"How much will you personally need in order to finance your life in retirement? Depending on your age and economic circumstances, your "number" could be 15% -- the percentage of earnings young workers should be socking away. Or 80% -- the amount of pre-retirement income you should aim to replace when you leave your job. Or $1 million (or more) -- the size of the nest egg needed to generate that much income." [My note: If $1 million is supposed to generate 80% of pre-retirement income, those retiring soon who had relatively large incomes are in deep trouble. At today's interest rates that $1 million might be getting you 5% if you are really lucky, and that's pre-tax income. To replace $80-100K of income right now would take $2 million plus in savings. Note also: that 80% figure assumes no extraordinary health related expenses. The longer you live, the more likely that you will incur those extraordinary expenses.]


Yussi said...

First school we had our kids in told us straight up that if we could afford to put away 15% towards retirement then we could afford to pay full tuition. Only way we really could afford it then was to not put away the 15%. When I told this to the administrator he sort of shrugged and said 'so?'

Then he told us not so jokingly that by the time we get to retirement it's going to be 75 not 65 so we'll have plenty of time to save up what we'll need. Then he told us that those high figures of what you'll need are inflated by investment people who want you to spend with them.

Everybody wants theirs and they don't care if we get ours.

Anonymous said...

You mean "Gott von helfen" doesn't work?

Yussi - Everybody wants theirs and they don't care if we get ours.[]

What do the hilcos tzedaka say about saving for retirement while accepting tzedaka (i.e. tuition assistance)?

My opinion is that saving for retirement is preventing the taking of tzedaka later in life, however the halacot of tzedaka always strike me as "here and now" rather than taking the future into account. I think maybe because the future has always been so uncertain for us Jews, the halacha ended up being molded that way.

Then he told us that those high figures of what you'll need are inflated by investment people who want you to spend with them. []

This is nonsense, many of the figures are, if anything, way too low.

ProfK, a sustainable withdrawal rate (inflation adjusted) for retirement income is no greater than about 4% for those with about a 25-30 year retirement ahead of them. 5% is too high and there is a significant risk of running out of money in the bad economic cases. That means that $1M gets you a $40k inflation adjusted income, $2M gets you an $80k inflation adjusted income, etc.


Kalman said...

Sorry prof but those figures are off. If you are retiring now to ten years from now, then maybe the 1-2 million will work. For someone in their 20s retiring in 40-45 years from now that amount will be too little. You have to count on inflation and you also have to count that there will be another 3-4 economic downturns if the market follows its usual pattern.

You also can't assume that social security will necessarily be around or around in the form it is today in another 40-45 years.

Not a pretty picture if you're young and frum now. 15% isn't manageable for a lot of those couples now. How would they manage 20-25% in savings?

Larry said...

I never see this mentioned when people are talking about putting away money for retirement. Isn't there some assumption that there will be some kind of inherited wealth from the previous generation?

I hope my parents live every day that God will give them, but they own a house and furnishings and they have savings accounts and are living off the interest from them. My parents are pretty much typical for their group. Whatever they have will some day come to my brothers and I. I guess it's a hard subject to talk about when your parents are still living but shouldn't there be some mention of inheritance?

Allen said...

Unless parents have gone to a skilled professional and set up their present holdings in a specialized trust then inheritance is a 'nice' thing but don't count on too much. Death taxes for unprotected estates eat up a huge portion. And then it gets divided up among the siblings and possibly the grandchildren.

You are also assuming that capital will remain steady over the later years of someone's life. The lucky ones are those who can live off of interest income. The rest are chipping away at capital as they grow older. They count on that money for living expenses. If they do there won't be a whole lot left to give away.

Unless you have a Bronfman in the family you shouldn't be counting on inheritance to see you through your own retirement.

Anonymous said...

Larry: A few years or more of ilness requiring round the clock care at home or years in a nursing home can wipe out hundreds and hundreds of thousands of dollars in savings that parents hope to leave as an inheritance. No one can ar should count on an inheritance. (BTW: for all of you saying that you would never put your parents in a nursing home, what happens when the person can't walk and every move from a bed to wheelchair, etc. requires two strong people, what if there are feeding tubes, catheters, etc. to care for. You can't count on not ending up in a nursing home or sadly, seeing your parents in one.)

Anonymous said...

Yussi: It sounds like this administrator does not understand compounding. Its much better to put away less money each year and start young, then try to catch up later because all those years of compounding are lost. It's also crazy to not put enought into a 401(k) to maximize the employer's matching contribution if you are fortunate enought to work for someone that provides a matching contribution. Doing otherwise is like throwing money away.

I understand the school has pressing needs now, but lack of long-term planning will hit the community like a ton of bricks.

BTW- Parents are not doing their children a favor if they are spending money that should be going into a retirement acount on excessive tuition, fancy simchas, etc. Your child will appreciate it if when you get older you can maintain your financial independence.

Trudy said...

We're never going to have a sensible discussion of the problems we face unless we admit that we have more then one. Tuition is not the only thing we need to be worrying about. Saving for the future is just as important but nevber gets the focus it should. Too many people say I can only do one of the two--I can pay tuition or I can save for later.

Yeshivas are going to have to take a realistic look at just what people can do with limited money. In that Yussi is right. Yeshivas can't just say we want ours and forget about anything else.

Interesting point that Mark raises about tzedaka. Do you take it now so you don't have to take it later? Or do you not take it now knowing you will have to take it later? Only problem with the latter is that where will it be coming from later? With all the emphasis on schooling now is anyone really thinking about how we will care for our older people if they can't care for themselves?

Anonymously said...

It's natural that people of one age group should be thinking mostly about what concerns them right now. But thinking that way forgets that you move from age group to age group. Getting older isn't optional--it will hopefully happen to everyone.

Agree with Trudy that you can't say either/or about tuition or helping the elderly. It's going to have to be both.

Also agree that Mark has a good point. Is tzedaka supposed to be a bandaid to cover an immediate problem or should it be more like a course of antibiotics that you take over time to get better? If we suddenly had to split our tzedaka dollars between the concerns of the young and the concerns of the elderly would either group get what they need?

Some tough decisions that are going to have to be made.