Generation-X' Journal

Where are you and where are you going?
Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

Thanks - I do have a wide window on purpose. Good explanation by the way.

This is interesting -
Note most ERE strategies aim at the same: meet your needs without a cash outlay.
It would be a real challenge to meet the needs for basic necessities without spending money. What would be some good practical examples?

ertyu
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Re: Generation-X' Journal

Post by ertyu »

The standard stuff. Instead of paying for a haircut, cut your own hair or have a friend do it in exchange for you waxing his hairy back*

(*) suspiciously specific I know...

Repair down't replace, ride a bike instead of paying for an uber. Borrow it instead of buying it. Etc. etc.

Maybe I was wrong, maybe it's imprecise to call them strategies but you get what I mean.

bigato
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Re: Generation-X' Journal

Post by bigato »

Living arrangements like Ego’s or Rob Greenfield’s. Growing your food and foraging. Walking instead of using a car. Attending free events instead of spending money to socialize. Furthermore, being paid is even better than spending zero on an activity: selling some food you grew too much of, getting paid to sit houses, teaching a martial art after the initial effort of learning it, etc

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

Should have been more specific to have asked for ERE strategies that provide for one's needs without the use of money AND without having to perform work, as a dividend or a pension would do for a person.

Borrowing instead of buying and attending free events are both excellent.

I would guess that bartering goods already in possession as a form of payment in lieu of money would be the next closest.

Though working for food is still work. I would much prefer for food to just roll in without having to get up from the rocking chair the way a dividend would. :D

ertyu
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Re: Generation-X' Journal

Post by ertyu »

Work isn't always bad. Hairy backs are a sadistic joy to wax :D :D

But I get you, I don't see myself growing my food or keeping hens even though it's rationally an awesome idea

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

The business of predicting the future


There is a lot of good information out there on retirement planning, especially by Society of Actuaries.

Retirement planning is not unlike making a wager in options in that they both try to glean at the future and construct a hedging strategy toward a desired outcome prior to placing the bet.

Suze Orman was right when she said 5 million dollars or more was needed to retire early.

What is probably implied here is that by retiring early, there is much larger window of time for things to go wrong and this is the brute force approach to absorb all the possible risks and to maybe make it out on the other side.

There are five most talked about risk variables in options - delta, gamma, theta, vega, rho. (SKIT-V) (Even then, rho is usually not considered unless it's LEAPs - which brings the list down to four)

These are the retirement risk variables as published by SOA:

Society of Actuaries Retirement Risks List

Longevity - The risk of outliving retirement resources
Inflation - Loss of purchasing power.
Interest Rates - Lower interest rates make retirement less affordable.
Market Risk - Loss of invested retirement savings.
Business Continuity - An annuity provider or pension plan goes out of business.
Employment - Loss of supplemental job income.
Public Policy - Loss of social program benefits or tax increases.
Unexpected Health Care Costs - A major cause of bankruptcy.
Lack of Access to Caregivers - Unavailability or unaffordability.
Loss of Independence - Accident, illness or chronic disease.
Change in Housing Needs - Housing that doesn't accommodate physical decline.
Death of Spouse - Can be a major financial setback.
Other Change in Marital Status - Divorce can be a major financial setback.
Family Member Needs - Family members outside the retired household need support.
Bad Advice, Fraud, Theft - Can result from declining mental acuity.

This by RICP:

RISK 1: LONGEVITY RISK *
RISK 2: INFLATION RISK *
RISK 3: EXCESS WITHDRAWAL RISK *
RISK 4: HEALTH EXPENSE RISK *
RISK 5: LONG-TERM CARE RISK
RISK 6: FRAILTY RISK *
RISK 7: FINANCIAL ELDER ABUSE RISK *
RISK 8: MARKET RISK *
RISK 9: INTEREST RATE RISK *
RISK 10: LIQUIDITY RISK *
RISK 11: SEQUENCE OF RETURNS RISK *
RISK 12: FORCED RETIREMENT RISK *
RISK 13: REEMPLOYMENT RISK *
RISK 14: EMPLOYER INSOLVENCY RISK *
RISK 15: LOSS OF SPOUSE RISK *
RISK 16: UNEXPECTED FINANCIAL RESPONSIBILITY *
RISK 17: TIMING RISK *
RISK 18: PUBLIC POLICY RISK *

Combining the two:

Longevity *
Inflation *
Interest rate *
Market / Sequence of returns / *
Liquidity / Excess withdrawal *
Business continuity / employer insolvency *
Unexpected financial responsibility / employment *
Public policy *
Health care *
Forced Retirement / Reemployment *
Divorce *
Lack of Access to caregivers / Independence / Frailty / Longterm care *
Change in housing needs / Death of spouse / Family member needs *
Bad Advice, Fraud, Theft / Financial Elder Abuse *


And the combined risks can be divided into five major groups:

1. Money
Longevity
Liquidity / Excess withdrawal / Market / Sequence of returns
Inflation
Interest rate
business continuity / employer insolvency

2. Healthcare

3. Unexpected financial responsibility
Employment
Forced Retirement
Reemployment
Family member needs

4. Aging
Lack of access to caregivers
Independence
Frailty
Longterm care
Bad advice, fraud, theft / Financial elder abuse

5. Public Policy
Social Security / Medicare

What are the ways to deal with these risks? Looking at the items one by one:

1. Money

Longevity
To reduce longevity risk, the obvious solution is to continue working and retire later. By continuing to save, this will also reduce liquidity and excess withdrawal risks. (3 for 1)

Liquidity / Excess withdrawal / Market / Sequence of returns
These are the risks associated with running out of money during retirement. Based on the research so far, I am planning to adopt the income floor approach.

There is a saying about investing in companies. There are two kinds of companies that one should invest in - ones that are fortunate and able and ones that are fortunate because they are able. I will be adopting the income floor approach, because I am the latter kind.

This approach advocates eliminating unpredictability of income in retirement by setting up an income source that provides a steady fixed monthly income which is not affected by the market in any way.

This income source can be a pension or an annuity. This is the floor upon which people can reliably stand on during retirement, covering the cost of basic necessities and living expenses.

Inflation
The rule of 72 says 3% inflation will cause prices of everything to double in 24 years. (72/3=24). Therefore, the type of income source in the income floor matters greatly.

The income floor should be comprised of inflation hedged income source as much as possible. Then semi-inflation hedged income source. Then with simply fixed income source without inflation hedge.

So this meant for me:
Social Security is the most precious of the income sources***. It is a low cost, fully inflation hedged annuity with low risk of insolvency. Based on open social security analysis (https://opensocialsecurity.com/) I will delay taking social security.

The calculation of SS benefits is very simple. Take 35 years of wages earned, with each year's wage multiplied by its own inflation index factor, then averaged for a monthly payout. The first $926 of the monthly payout is adjusted to 90%. Amount between $926-$5583 is adjusted to 32%. The remainder is then adjusted to 15%. The sum of the three is the SS monthly benefit at age 66 1/6. This is adjusted to 72.5% when taken early at 62. (https://www.ssa.gov/pubs/EN-05-10070.pdf)

The index factors and adjustment thresholds change year to year. I have noticed that the benefit amount at age 62 has been going down and the benefit amount at age 66 1/6 has been going up from prior years. (!)

Unfortunately, too many people have been reading off of bathroom stalls, because they believe that social security trust fund will "run out" after 2034. The fact is there is no social security trust fund now - it exists only as an IOU for government accounting purposes. The social security payments aren't as dire as the climbing interest payments of our national debt.

Pension, in my case, is going to be the largest income source for the income floor. It is only semi-inflation hedged. Inflation is only hedged up to 2% per year. In addition, there is a capped 75% purchasing power protection in an event of a runaway inflation. In an event of a catastrophic runaway inflation, the PPP cap will be reached and protection will be reduced or eliminated, depending on the severity of inflation.

I am of the opinion that few additional working years is probably worth the increase in monthly pension benefit to cover the costs of basic necessities during retirement.

I also examined the scenario of duplicating the pension using the market returns:

Pension vs. Lump Sum

A rather significant portion of the net worth will be invested in taking the pension route. Though I had hoped less so, the reality is that pension isn't free.

Using the "How long will the money last" calculator viewtopic.php?f=9&t=3599&start=200#p187207 a calculation was made to determine the interest rate that would generate a perpetual monthly income equivalent to the monthly pension, with the pension lump sum.

The results are as follows, marking the earliest retirement window as "Year 0"

Year 0:..... 15.6%
Year 0 + 1: 17.2%
Year 0 + 2: 18.6%
Year 0 + 3: 20.2%
Year 0 + 4: 21.3%
Year 0 + 5: 22.1%

Thus in taking the lump sum route, depending on when it is taken, the pension lump sum must generate at least 15.6% to 22.1% every year to match the pension equivalent.

Reducing the number of years that money lasts from perpetual to say, 30, 40 or even 50 years made very little difference in the required rate of return - less than half of a percent.

So the rate of return required to make money last 30, 40 or 50 years is pretty much the same as the rate of return required to make money last forever.

To generate the same cashflow, at a more reasonable rate of return between 8-10%, the following portions of the net worth will have to be put to risk in the market and stay illiquid vs. the pension.

Year 0:..... 56% (lump sum) vs. 40% (pension)
Year 0 + 1: 66% vs. 40%
Year 0 + 2: 69% vs. 40%
Year 0 + 3: 78% vs. 40%
Year 0 + 4: ...
Year 0 + 5: ...

The break-even point without considering the time value of money between lump sum vs pension is as follows:

Year 0:..... 11.9 vs. 7.4
Year 0 + 1: 12.3 vs. 6.8
Year 0 + 2: 12.3 vs. 6.4
Year 0 + 3: 12.2 vs. 6.0
Year 0 + 4: ... vs. 5.7
Year 0 + 5: ... vs. 5.5

Less capital is at risk and faster break-even is possible with the pension route. Also pension delivers a stable 15.6%-22.1% return year after year. With the market, standard of living will fluctuate between the good and the lean years.

The real problem, is the inflation. The purchasing power that is enough to cover all of the basic necessities today will be barely enough to cover just the food expenses decades from now.

The obvious problem with inflation risk is that social security is far way and the pension does not provide full inflation protection. So what is one to do?

One possibility is to hedge by purchasing an immediate inflation protected annuity from "too big to fail" companies such as fidelity or vanguard.
The issue here is that a relatively large sum will be permanently committed and it incurs a higher business continuity (insolvency) risk as compared to pension or social security.

To be continued.

*** IMO, it is a grave mistake to forego social security for retirement. To be eligible for social security retirement benefits, minimum 10 years (40 quarters) of gainful employment is needed. In 2019, at least $1,320 in a quarter must have been earned for it to count as a credit.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

Inflation (continued)

Even though the insolvency is relatively higher as compared to the pension or social security, an immediate inflation protected annuity is a good viable option for hedging the unknown future. This of course, presumes that the United States will stay intact as a nation and that the dollar will remain its currency in the next 50 years. (a *lot* could happen in 50 years)

Another option is purchasing inflation protected government bonds, such as TIPS or I-bonds, in some lump sum amount as a percentage of net worth. This is most likely the route that I will take.

There are some differences between I-bonds and TIPS. https://www.bogleheads.org/wiki/I_Bonds_vs_TIPS
I am leaning toward I-bonds as it offers protection for both the deflation and inflation. There is a 10k limit per person (15k by adding 5k via tax refund) purchase limit. This can be increased to 20k by using a living trust. (25k by adding 5k via tax refund). I will be adding I-bonds yearly until a certain percentage of net worth is reached. This will serve as the last resort lump sum cash should hyperinflation type scenario occur.
It will also serve as an inflation protected emergency fund, if it doesn't.

Next is holding physical precious metals as a percentage of net worth. Parents held precious metals as a hedge against stagflation in the 70's. It took several *decades* for the value to recover and it never paid any dividends. A small percentage will be held, but more as a real asset than as an inflation hedge.

I will be looking to acquire a small farm with its own water source as I retire. This is essentially a true protection, that is a real, tangible asset capable of providing a shelter and food decoupled from any sort of a financial "system". This is based on various research of the Great Depression, and how we were able to survive as a nation - hint: https://www.farmcollector.com/farm-life ... depression

"My memories of those years are sketchy as I was pretty young (born in 1933), but I remember having very little cash. We always had enough to eat because Mom and Dad raised a large garden and Mom canned a lot. We butchered a cow and a couple of hogs every year, and had chickens for meat and eggs. My sister and I wore patched clothes to school, but we were much better off than many of our fellow students. I guess we kids didn’t really feel poor at all. Most everyone else around us was just as bad off, or worse."

This will serve as the shelter during normal times and if need be, should also be able to provide water and food if times become truly dire. Coupled with the Mormon method of stockpiling at a sane level, this really is as good as it's going to get. The details here can probably be its own book but for right now, it's enough for it to be a draft sketch.

Interest
By adopting the income floor model, the risk of interest has been eliminated for the income needed to cover the living expense during retirement. To be precise, the risk of interest has been offset to the pension or annuity provider. As long as the pension or annuity provider is carefully chosen, the income cashflow will be maintained, immune to interest rate risk.

The interest risk remains however, for the remaining net worth - in terms of investment returns. Depending on the retirement window, I will be seeking investment returns for approximately 500k in net worth. The outlook is not very good, IMO. Based on historical market valuations, the expected return for the immediate future is negative. Value will be king in the coming years and I have been preparing for this.

To be continued.

ertyu
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Re: Generation-X' Journal

Post by ertyu »

I'm here for this write-up, thanks for sharing.

Re: the farm - I have also observed that in times of prolonged economic trouble the ability to put a floor under your lifestyle by relying on subsistence agriculture is a real help. I hear you on the own water source, too - but make sure the water source will not dry up with climate change (have been thinking about this lately).

Also, might wish to consider: as interest rates are at a historic low, it's quite possible that the long-term trend we will see here might be to higher rates - of course, once inflation's done dealing with the corporate + sovereign debt

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

That is a good point about securing water resources with climate change in mind. Without water, the California desert really is a dust bowl.

It reminds me of the Great Depression. (https://courses.lumenlearning.com/suny- ... epression/)

The Great Depression saw some of the worst drought, famine and destruction of farmlands that country had ever seen. (read: Grapes of Wrath)

People were *left to their own devices* as the government and charity organizations did nothing.

Starvation was common and many died. The poor and the weak, such as children, elderly and minority were especially susceptible to such tragedy while the privileged and the well connected had much better chance of avoiding such fate - clearly and deplorably.

Children left homes as they knew they were a burden to the family. Millions of men left their wives and family behind and wandered about the country hoping to find work. There were clashes between regions and races - over jobs.

The details about the Great Depression, watching from today's perspective, is much more relatable now than it was decades ago when I was reading about them which just didn't seem real.

We are seeing the resurgence of the hobos in our cities today. The privileged and the well connected are lining their pockets, while those that aren't, are ending up on the streets.

We pay taxes to subsidize the privileged and the well connected, while our social safety net and our democratic process are rapidly being dismantled for their pleasure.

The white hood and robes are rearing its ugly head again under the guises of MAGA and the Republican conservatism.

Yeah, we will see the Great Depression again or something like it. Thanks for the reminder.

Though, I had already begun parking assets in FDIC insured and treasuries a while back.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

(continued)

Though, I had already begun parking assets in FDIC insured and treasuries a while back, it will be wise not to mistake these back and forth shufflings of the paper as real life.

Because the luster in these papers as they appear today will begin to dull quickly as people face the reality of hardship (which already appears underway in many parts of the country) and lose faith in them.

Managing risk is a fortunate or an unfortunate part of retirement planning (and investing). We hope for the best and plan for the worst and with some luck, we may just get there.

It is important not to view the world colored and call a spade a spade.

William Bernstein said it best - http://www.efficientfrontier.com/ef/901/hell3.htm

What else are we going do? This is the stuff that makes life somewhat interesting. It would be nice to look at our grand kids and be able to tell them that life will be worth living for - just do the right thing.

I just might one day.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

Business continuity / employer insolvency

These risks exist. In my particular case, a 50-year projection is probably sufficient.

The consequences of these events are fundamentally life altering such that it is better to prepare as if these events will occur. A more important question is not whether will it happen, but what to do about it when it does.

Two things - income and healthcare will be affected, with varying degrees of impact dependent on timing.
The effect on healthcare coverage is immediate. As such the contingency focus should be on healthcare first, then income.

The first immediate action will be to initiate healthcare coverage under ACA, if it still exists. A special enrollment in ACA is allowed for loss of healthcare coverage from employer, within a window of 60 days prior or 60 days after the loss.


It is very likely that if Trump is re-elected with Republican majority in the Congress, ACA will be eliminated. Social Security and Medicare will effectively be neutered.

Under such an outcome, this contingency plan will be re-evaluated and revised. The immediate solution is simple - I will delay retirement and work longer. (see below)


If ACA is still available:

The ACA subsidy income limit for a single household is $47,520 in 2019. This is about $4000 in monthly gross income. The cost of healthcare was about 7k/yr or $600 per month in 2019 for a gold plan under covered california estimate.

Per the Kaiser employer health benefits survey table, the inflation in the cost of healthcare premium in the past 20 years (1999-2019) for a single household was about 6.11%. For family it was about 6.54%. https://www.kff.org/wp-content/uploads/ ... .png?w=698

Using 6.5% inflation, the cost healthcare premium is projected to be about 24.7k per year or 2060 per month in 20 years. Using annual 1% COLA projection, the income will rise to about 4880 per month.

Therefore, the cost of healthcare will rise from 15% of income in 2019 to 42% of income in 2039 gone fishing at the earliest retirement window.


In an event that ACA has been eliminated by Trump and the Republican Congress and is no longer available:

The contingency will be to enroll in COBRA coverage, as this is a mandated under the federal law.
The coverage duration will be minimum 18 months, upto 36 months dependent on the circumstances. This will be a transitory solution, until a migration to a permanent solution is arranged and completed.

https://www.dol.gov/general/topic/health-plans/cobra
https://www.dol.gov/sites/dolgov/files/ ... nsumer.pdf


In either case, a permanent solution will be to work longer for the following reasons:

1. to decrease risk by reducing the duration of time needed for healthcare coverage between retirement and Medicare at age 65, provided that Medicare still exists.

2. To increase after tax savings as a contingency to purchase an immediate inflation protected annuity to subsidize the cost of living when such events take place. I will need more research to quantify this.

The key factor in this analysis is that these risks are closely intertwined with political risks. The short term actions that are need to mitigate will be dependent upon the results of 2020 election.

To be continued.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

Status Update

Net worth has increased to over 710k. The progress has been faster than projected, mainly due to interest and a small increase in salary along with profits taken from trading activities.

The accrued interest has been mostly keeping pace with inflation (I use 5% based on Ibbotson) but it is projected to fall below 4% this year. For the short term, this isn't a big problem but even 1% difference will widen as it approaches a decade by about 10%.

With the small raise, I was able to increase the 401(a) contributions. I've also been contributing gains from trading activities and have exceeded the annual roth limit by a respectable amount.

It's easy making money during times of euphoria. The current market melt up in progress is so much like the run up of the dot-com bubble, it's like being transported back in time, though it's a little less intense.

At this juncture, the focus is on avoiding a catastrophic loss and keeping up with inflation while increasing after-tax and tax-free savings in preparation for retirement.

Being exposed to a large market swing will be detrimental because the recovery will take time. I can always make more money but not without time.

Therefore, every dollar lost means taking a chunk of time away from retirement and adding a chunk of time towards working longer or taking on return risks (which may or may not deliver).

A bird in the hand is worth two in the bush.


As the window for retirement is near, I've been trying at a stick figure equivalent of a retirement planning with a bit more granularity (still at it).

It is time well spent and I never thought I would be able to find so much information about pensions. The understanding of the risks that I face is much clearer.

As I fill in the primitive details in the first draft of what-to-do-when-this-happens thoughtbook (which I hope I will never need), if there is one thing that I learned, it is to plan for longevity.

Nothing is new under the sun and there are many brilliant minds looking at this problem. (Thankfully, I only deal with scaled down version limited to my sphere of influence)


"For good or bad reasons, left to their own devices, retirees invest relatively little in traditional annuities, foregoing the significant advantages of pooling mortality risk. Moreover, thanks to Chairman Bernanke and his counterparts around the world, low-risk investments currently offer paltry nominal returns and negative real returns for all but the very longest horizons.

What's an investor to do? A frequent answer is this. Invest in risky securities, which should provide higher returns. Spend on the assumption that returns will be 7.5% (or so) per year. Not to worry, returns may vary, but they will average out in the long run. Once again, magical thinking and bad economics." -- Bill Sharpe


I certainly am better off than I was few weeks ago in terms of understanding. And I now know the blessings, even though in reality it is probably a fantasy in the long run - it's like being Cinderella at the Cinderella Castle in the Magic Kingdom. I certainly am enjoying what it could be a lot more than what it is. :D

ertyu
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Re: Generation-X' Journal

Post by ertyu »

Exactly how I feel as this bubble froths up. I am all in cash, I'm that much of a chicken.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

VX gapped up a bit, edging higher. If things hold, might get interesting.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

ertyu wrote:
Fri Jan 03, 2020 4:22 am
Exactly how I feel as this bubble froths up. I am all in cash, I'm that much of a chicken.
Being the product of the 70's and the 80's, I can not resist but to link this: https://www.youtube.com/watch?v=d-diB65scQU

Even though the economy was worse off, people were happier back then, as you can tell from this goofy video. :D

Not to worry - there are better things to do in life than worrying about money or being sucked into politics by idiots.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

Business continuity / Employer insolvency - (income)

All good things must come to an end - (eventually).


Yesterday they finally pulled the plug on my little experiment that I had been engaged in for almost a year.

We were after a good dining experience at a casino with visiting guests and happened to stumble upon an offer from the casino that allowed doubling of the bet at a card game with a casino coupon.

I knew that odds were against you at anything in a casino but to entertain the guests and so on, played at a nearby blackjack table - and lost (of course). As we were leaving, the dealer said, we could try our luck again in a day or so.

Turns out, the coupon was available several times per week, to keep people coming back. (!) Oh dear, this was a familiar territory. It was one thing to try once for giggles but to be able to do it multiple times was another matter entirely.

I kept coming back and even managed to create an optimal schedule that minimized my trip and maximized the potential. What's better, later I found out that the coupon could be used at a roulette table (!!). Oh dear.

Fortunately, I fared better in later trips and this little experiment had been providing a fairly steady inflow of lunch money which I happily shared with friends and co-workers for almost a year. (We all have gained a bit now and most of us are on a NY's resolution)

So all good things must come to an end. Which brings me to the income risk.


Unlike the corporate ladder structure where people move on after few years on the job for the next higher salary, the job in my line of work is intentionally designed to retain workers to prevent costly turn-overs and to enable long term planning, execution and maintenance.

It is in our "clients'" best interest for the system to continue operating without hiccup, for as long as possible, whether they are aware.

So the pay is low in the beginning and weighted heavily towards the end of the career. To collect the benefits, the worker must stay on-board a long time to serve our clients and keep the system running.

This butts directly against retiring early. Not only that, it provided an incentive for the employer to kick the can down the road, once they realized that they didn't really have to worry about paying for the benefits until much later - by then it would be someone else's problem.

Similar to Social Security, solvency is the risk that I must try to assess prior to retirement. Can they manage to kick the can down the road while I stay retired, and if so, for how long?


To be continued.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

In praise of the Social Security

The more I research the topic of retirement planning, the more I appreciate Social Security. To quote Jane Bryant Quinn:

Image

This is the single greatest wealth that everyone has in their lifetime. It isn't much, but it is something.

May our kids be able to keep it, away from the prying hands of the rich, especially those that are in the government.

Generation-X
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Re: Generation-X' Journal

Post by Generation-X »

If you can't be good, be careful - and don't forget to look before you leap


Making a choice to retire isn't easy. But what's harder, is living with the consequences of that choice which lasts a lifetime.

When it comes to saving for retirement, I love the ERE approach - why wait? Ramp up that savings rate and let loose.

But when it comes to pulling the plug, I'm in sync with the DQYDJ approach - leave no stone unturned. Look before you leap. If you can't be good, be careful. When in doubt, don't quit your day job!

I have a co-worker whose entire retirement plan is the pension. Little does this person realize the magnitude of the risk that he/she is taking by betting the ranch on this one thing.

This is no different than having a retirement plan that solely consists of the stock market investments or 60/40 stock-bond split or some such. What's the difference? One bets the farm on the pension and the other on the market.

As one cycles through various supposed ERE practitioners, one of the common ideas advocated is the idea of securing multiple income streams from different sources.

Essentially reduce risk by diversifying between uncorrelated income "investments". If it works in the market, then perhaps it just might extend to income sources.

As Merton states - "It's the income, stupid." (https://robertcmerton.com/wp-content/up ... keting.pdf)

What are these income sources?

Social Security
I-Bonds/TIPS - i.e. inflation protected CASH generating interest
Job-Pension pair
A House/Rental Income
The Stock Market
A Real/tangible income generating assets (a vegetable garden, chickens that lay eggs etc.)

The risk facing Social Security (SS payout > tax collected after 2034 and therefore POSSIBLE reduction in benefits with political consequences) is related, but altogether a different risk from US Treasuries, which is federal government default.

A job will continue if Social Security disappears and vice versa. A job may continue even if federal government defaults.

The pension will continue if Social Security disappears and vice versa. But it will likely disappear if federal government defaults. The pension should match the level of job generated income as much as possible.

A paid-off house stops a large income drain and is not affected by any of the risks previously mentioned. A rental income will continue if (my) job or Social Security disappears. It may disappear if government defaults.

The stock market will continue if job, pension, social security, house/rental income disappear and vice versa. The stock market will disappear if government defaults.

The chickens will keep laying eggs whether any of the above continue or disappear.

So the government default will affect most everything except for the house and the chickens.

If default is not considered, then some form of income stream will be maintained between the Social Security, I-Bonds/TIPS, Job-Pension pair, House/Rental income, stock market and the chickens

When I'm 65: https://www.pbs.org/video/dptv-document ... m-65-full/
Last edited by Generation-X on Mon Jan 13, 2020 5:11 am, edited 1 time in total.

Generation-X
Posts: 302
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X »

The outlook for the next decade - the 2020's


Most will face a frugal future, well into the decade. Possibly improving toward the end.

1. As the *perceived* good economy continues, Trump will likely be re-elected. The Neocon/Right-Wing politics will continue to escalate, without much regard to diplomacy. The only other recourse without diplomacy, is war. The path to war, will drain the US economy, as it has for the past 2 decades since the Iraq war*. (China grew its economy between 6-7 times in the same period, while managing to avoid war.) Wars cost money. We taxpayers pay for these wars through a reduction in our standard of living. As we engage in more wars, we must live more frugally. It's a mathematical certainty.

*The cost of War in Afghanistan, Pakistan, Iraq and Syria is estimated to be about 6.4 trillion - https://watson.brown.edu/costsofwar/fil ... ;rid=84648

2. The transformation to plutocracy is shifting the voting power from the masses to the oligarchy. It's to a point where comedians are making jokes about*. The plutocracy will take money away from the masses (that would be you) to their own pockets, through disinformation and by passing laws that benefit them**. Trump Tax Cuts was probably first such major law change to impact the millennials directly and it will not be the last, as Social Security and Medicare are already on the chopping block by Republicans. But due to much disinformation about Social Security and its neutering effect on the perception for the masses, they will never know how good they had it until it is too late.

*https://www.youtube.com/watch?v=LfgSEwjAeno
*https://www.youtube.com/watch?v=mS9CFBlLOcg
** https://www.washingtonpost.com/outlook/ ... lism-rich/

3. Lack of health insurance is the single most likely reason for bankruptcy*. And the cost of healthcare keeps climbing at a rate much higher than inflation. This continued trend in the cost of health care will result in reduction of standard of living for the masses, as they must either pay for the health insurance or risk financial ruin if they don't. It's a catch-22 and yet another mathematical certainty.

*https://www.cnbc.com/2019/02/11/this-is ... uptcy.html

4. US will lose population growth and intellectual assets from abroad. Without immigration, the younger population in the US will become stagnant. The age demographics make or break the economy of a country. In addition, if the current anti-immigration policies of the neocon/right-wing conservatives continue, not only will US lose the competitive edge that it has enjoyed through the brain drain from the rest of the world, these intellectual assets will compete against US by settling in their native countries instead. We are already seeing these trends by those trained at our higher education institutions choosing to return to their native countries and setting up shop. The composition of so called US technological edge is very diverse as we were able to use the world as the selection pool to pick out the creme de la creme. US will lose its technological edge as US loses its immigrating intellectual assets to other nations to catch up.


As US plunges into plutocracy induced idealogical civil war, with the outcomes that are affecting US world relations to population growth and the standard of living, the path to the future is clear - we face the frugal future*. This is a mathematical certainty.

*I don't believe having a "million dollars" today will be sufficient to weather through the storm in what's to come.

Generation-X
Posts: 302
Joined: Mon May 06, 2013 4:43 am

Re: Generation-X' Journal

Post by Generation-X »

Business continuity / Employer insolvency - (income - continued)


I have been combing through the annual statements going back to the last 20 years for the pension and believe I have a decent ballpark understanding of the risks involved.

The funded status is the issue, but the devil is in the details. The problem will come, likely in the next 12-15 years. There are multiple factors. The bottom line is that the annual rate of growth in the expenditure is around 8.2%, while annual investment growth is around 6%, after factoring in the payouts that make up for the shortfalls in the current member contributions (income).

Currently, the total annual income, consisting of investment returns and member contributions, comforably exceeds the annual expenditure. The current pension assets can cover about 15 years worth of expenses without having any income.

In little over 12 years, the total annual income will start falling behind the annual expenditure due to inflation and it will begin eating away at the assets. At this point, the pension assets will cover about 5 years worth of expenses without having any income.

Based on the ballpark analysis, I believe the risk is justified in taking the pension route. There will be more than enough time to recover the cost of pension contribution in retirement. Chances are, the pension benefits will be reduced and will continue in the reduced form, subject to the full whims of inflation. In conjunction, the Social Security could be similarly affected.

The pension and the social security are not only the largest retirement net worth, they serve as the foundation by providing an income floor in retirement with a combined estimated life time pre-tax net worth ranging from 1.4M to 2.4M, dependent on the date of retirement and the life expectancy.

To hedge the risk of likely devaluation, it makes sense to delay retirement to increase savings (bird in the hand) prior to retirement to make up for the possible short fall as this will be harder to accomplish once retired.

This is likely to be the critical factor in paving the way for a successful retirement. The time spent was very much warranted. The risk is better understood and quantifiable, as is the hedge.

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