“Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal.”
If you’re alive and over the age of twelve, you’ve already been lectured on the subject of saving up for retirement. If you’re literate and old enough to work, you’ve been told at least a hundred times how important it is to start your retirement account right away and invest a regular portion of the fruits of your toil in the volatile stock market which, no matter how bad it may look at any one time, is certain to earn huge returns in the long run.
Like everything else you think you know, this is a combination of distortion, misdirection, and lies.
Take the stock market, which bounces randomly up and down like your girlfriend’s mood on the rag but (like your girlfriend’s weight) always gains in the long run. Except that it doesn’t. If you bought stock in the Dow Jones companies at the market peak in 1929, you’d have to wait forty years before it got back up to its original real (inflation adjusted) value. That’s a whopping zero percent return for forty years! How long do you plan to work before you retire? Right around forty years, ain’t it?
Of course, every expert will tell you that an episode like that could never happen again. That’s exactly what the experts said in 1929, too, and before the 1987 crash, and in 1999 right before the bubble burst – no creature on this green Earth is more resistant to learning from experience than an expert in any kind of economics. It’s true that the stock market has had an overall upward trend for the last forty years, but that’s hardly a valid predictor, unless you’re the kind of person who thinks you’re going to live forever because you’ve never died yet, and you expect the next forty years of history to be the same as the last forty years. Anyway, half of the “gains” of the last forty years were just inflation.
But wait, it doesn’t even get that good – you can’t actually buy stock in the Dow Jones. The companies that make up the average change from time to time, with losers being dropped and strong newcomers added. That means the actual returns from owning stock in these “blue chip” companies will average less than the Dow Jones over time. Most of the “blue chip” stocks will pay some dividends as well, but for some years now these have generally been paltry compared to the price of the stock – and companies have no legal obligation to pay any dividends at all. If that doesn’t sound like a good enough deal yet, here’s an added bonus if you order now: any managed fund you invest in will skim a generous helping off any earnings, with extra charges for any transactions you might want to make. Think you can beat the market by second guessing the pros and hand-picking your own stocks? So did the fools that bought into Enron. Unless you have genuine inside information – not a “tip” from someone who is probably trying to unload his own stock or a glowing report from a fucking magazine – the stock market is like a casino: the odds are stacked against you and there is no way to change that.
Don’t despair yet, there’s other things to invest in, nice safe things like bonds. Actually there’s tons of things, like money markets for the noncommital, commodities for the daredevils, and real estate for the swindlers, but none of them are worth a lick to the typical small investor.
The price of bonds fluctuates and you can speculate in bonds (and get skinned) the same way you can in the stock market, but (unlike stocks) bonds actually have some intrinsic value – they pay interest. Unless the company goes belly-up, of course. Government bonds (of a real government, not some shithole like El Salvador) are reasonably secure, but they pay even less interest. Still, something is better than nothing, right?
Not if something is less than nothing after inflation. Now, if you go by published figures you can generally count on getting a 2% net yield out of government bonds, which means your investments will double in a mere 35 years – that twenty cents you save now will buy you two packages of ramen noodles for your old age!
Except that it won’t. To start with, the taxes you pay on interest don’t account for inflation. Suppose your marginal rate is 25% (I’m pulling this number out of my ass, but your combined state and federal marginal rate will probably be at least that much), secure bonds pay 5.2%, and inflation is a modest 2.5% – your net yield is really only 1.4%. But that’s probably understating inflation.
Even if we don’t have another surge of high inflation like the Seventies, which would totally devalue any long-term bonds you might have, the published consumer price indexes do NOT reflect the actual increase in the cost of living, which is what you’re probably going to be concerned with when (if) you retire. They include a composite of luxuries and necessities that is probably not representative of what you’re going to need when you’re seventy – they especially underweight the cost of medical care, which is going up far faster than inflation. Rent, energy, and food are also going up much faster than the published rate. Maybe you plan to maintain a middle-class level of expenditure and spend most of your retirement income on fancy clothes and toys like new electronics – in which case, if you’re thirty and expect to maintain your current level of expenditure until you’re eighty, retiring at sixty-five, you’ll only need to invest roughly a fifth of your current pre-tax income (or slightly less, if you keep your money tied up where you can’t get it and take the tax shelter, gambling that tax rates won’t go up). That’s a heavy burden, but it’s doable if you don’t have any major problems in 35 years and your medical expenses don’t go up when you get old. Unfortunately, the first is quite likely and the second is almost certain, if you live that long at all.
That’s a relatively benign scenario, though. The actual increase in cost of living – housing, utilities, food, health care – is unknown (to me at least), but certainly higher than 5%. This means they will be taking a larger and larger share of consumer expenses, and the rate of inflation is going to go up. If you’re only concerned about having enough to live on when you retire, and not having anything extra, the rate of inflation you have to account for is already over 5%. That means that, even without paying taxes on interest, you are getting NO return from any secure investment – more likely, you are losing money on it. If real inflation is 6%, the amount of your pre-tax income you’ll need to save goes from one-fifth to about one-third, with or without tax deferment. This isn’t likely to even be in the realm of possibility.
If you start investing for retirement fresh out of college, as you are constantly being urged to do (or reminded that you disgracefully failed to do), you aren’t accomplishing as much as you think. In the first place, your money is NOT going to double every ten or fifteen years or whatever lie you’ve been told; most of that hypothetical yield will be eaten by risk and inflation and the “miracle” of compound interest is more like finding a quarter on the floor at the laundromat – it doesn’t hurt, but you’re not likely to get on your knees and thank God for the miracle. Money you invest when you are twenty-five may (if you are lucky) be worth twice the same amount invested at fifty-five, but just as likely it’ll be the same, and it damn sure won’t be worth ten or twenty times as much like some sleazy investment managers will tell you.
In the second place, in real life, it’s unlikely your income will be constant for thirty or forty years. If you’re stuck in the working class, it will probably not keep up with inflation, and you won’t be making enough to invest anyway; if you have kids, you’ll be lucky not to have a net debt when you turn 65. On the other hand, if you make it into management or a profession, your income will probably rise faster than inflation for at least a part of your career. This means that the painful and risky investments of a third of your income that you make in your twenties aren’t likely to make a huge difference to your retirement anyway. If you’re prosperous enough to even have a shot at retirement, you will probably make twice as much real money (after inflation) after the midpoint of your working life as you do before – and if you’ve lived within your means for the first half, you should be able to painlessly save a large part of what you make in the second half.
Taking a “long view” when you are young also increases your risk of making bad decisions, unless you have some kind of psychic vision of the future. The whole notion of investing for retirement assumes that there will be no major changes in the structure of society, the economy, or the laws before you cash in. It’s easy to look at the last forty years of relative stability and assume that the conditions of 2047 will be much the same as those of 2007, but history says it ain’t necessarily so.
In 1917, Russia was a backward, agrarian nation, convulsed with civil strife, defeated in war, and partially occupied by Germany. Forty years later, the Soviet juggernaut, a rival superpower to America, led the world into space and had a huge nuclear arsenal and a formidable, modern industrial base. Another forty years, and Russia was again backward, impoverished, and in chaos, no longer a major power. In 1910, government welfare programs were the hare-brained idea of Socialist radicals; forty years later, most of Europe was ruled either by welfare states or outright Communism. Before WWII, periods of inflation were offset by periods of deflation – the price level in WWII was much the same as the price level during the War of 1812. Forty years after WWII, continuous inflation had become almost universally accepted (if not exactly appreciated).
It’s difficult enough to account for the possibility of minor changes in conditions, like revisions in tax codes or bankruptcy laws or surges of inflation or a savings and loan collapse or the invention of new excuses for suing people; all of these are likely to happen in forty years. It’s quite impossible to account for the possibility of major changes, like the hyperinflation that destroyed the middle class of Weimar Germany, a major war, or the introduction of radical government policies (or even of a new government). U.S. government bonds are now considered perhaps the most reliable security in the world, yet it’s entirely plausible that out-of-control debt will force the U.S. government to default well before forty years have passed. And don’t assume you can just sell them before that happens – the government is not above restricting your right to buy and sell.
In some ways, the rate of change in Europe and America since WWII has been slow, but don’t expect this to last forever. The world as a whole is changing rapidly, and someday our institutions will have to adjust. Other nations with different economic models are competing with us – and winning. A major catastrophe like repeated nuclear terrorism, global pandemic disease, or an environmental disaster is at least possible – and even the mere possibility could motivate very drastic reforms. Technology continues to race at an accelerating rate into an unpredictable future. There’s no guarantee that the stock market, the dollar, the United States, or even the money economy will even exist in forty years. Maybe we will enter a new era of prosperity in which no one need want for basic necessities; maybe those who have vast imaginary fortunes in the electronic vaults will lose it all when the System breaks down – maybe both.
Drastic change isn’t the only risk to hoarded treasure; lawyers and government are bad enough. I don’t know what the laws are (if any) protecting retirement savings, but consider that these can always be changed anyway, and probably will be. There’s no way to ensure that your IRA won’t be confiscated due to some bogus lawsuit, a conniving spouse, or the schemes of greedy politicians. Even now, part of your funds are likely to be indirectly eroded by taxation of your meager “Social Security” check, based on your total income. There’s nothing to stop the government from pilfering as much of it as they please, indirectly or otherwise.
Perhaps even worse than global catastrophe, civil war, or lawyers, there’s also a very real possibility that you won’t live to retire – or that you’ll be too debilitated to enjoy it, and spend your last years in a hospital, maybe not even remembering or caring that you have money you can’t enjoy. The average lifespan is supposedly going to go up a bit (though I’d take that with a grain of salt), but even if you make it to thirty with an expectancy of eighty you have a substantial chance of shuffling off this mortal coil before sixty-five, or seventy, or seventy-five, or whatever age the government requires.
This doesn’t necessarily mean that there isn’t anything you can do to prepare for eventual retirement – but the conventional method is, at best, a minefield. The further you are from retirement, the riskier it is: if you’re sixty you’re probably not worried about the possibility of a Communist takeover or even an increase of the retirement age to eighty, but if you’re twenty-five, you should be. Government-regulated accounts like the 401k are particularly risky because the government knows you have the money and has unlimited power to change the rules (which may have something to do with why the government is so anxious for you to have one). Market investments in general tend to be weighted against you because as a small investor you have very little knowledge and are gambling against people who have a great deal of knowledge and perhaps even some influence over the outcome. This is particularly true of the stock market, which has become a gigantic pyramid scheme in which people buy “securities” at far above their reasonable value intending to sell them later at an even more outrageous price – sooner or later, the suckers run out and the whole house of cards collapses. You might get lucky, but the odds don’t run that direction. The real yields you can expect from conventional investments are little or none, or less. Hoarding cash is a guaranteed loss – even four percent minus inflation will always beat zero percent minus inflation. Fortunately, there are better (if more difficult) options.
The most important thing you can do is stay out of debt. It’s amazing how many people think they are doing something for their future by putting token funds into a 401k while carrying tens of thousands of dollars in credit card debt at twenty or thirty percent vigorish. There is absolutely no sane reason ever to purchase anything with a credit card – if you must have one to build your credit, you can use it to pay bills. If there’s something really important that you have to borrow for, like a house or a car or an education, get a bank loan. If you can’t, then live without. The bank doesn’t think you can handle the loan at ten percent, and they are probably right; how the fuck are you going to handle it at twenty-five percent? Answer: you won’t. You’ll wind up paying several times the original principal to the loan sharks and still owing more than you borrowed. If you have money to invest, you have money to pay off debt. Consider that when you pay down debt you are effectively getting a guaranteed return on your money of whatever the interest rate is, whereas if you invest it you are getting a smaller return and/or taking some risk as well. Even a home mortgage at a choice rate like six or seven percent is a better yield than anything you will find on the market. You should pay that mortgage down before even thinking of investing – just make sure you have a clear title, and for God’s sake don’t be a fool and get married so some gold-digging bitch can steal the home you paid for. The only reason to get married is if you are the gold-digging bitch.
One thing you can invest in that can’t be stolen is education. It’s highly risky; you have to pick a field that actually pays something, and gamble that you’ll be able to finish a degree and find work in that field. There’s also the chance that your chosen specialty will become obsolete while you still need to work and you’ll wind up being an over-educated file clerk. But if you stay away from the liberal arts and work hard in school, there’s a good chance that you will get an excellent return. A bachelor’s degree in a marketable area is estimated to double your lifetime earnings, and if you’re not smart enough for a technical specialty, you can get a business degree. If you don’t have the money or time for college, there are endless other opportunities. In the past (though not necessarily the future) truck driving was a high-paying field which one could get into with a very modest investment of time and money, and there’s plenty of other things if you’re too lazy for that.
Of course, even moreso with education than with other investments, you’re gambling that there won’t be any radical societal changes that would make your qualifications irrelevant. But at least if you’re well educated you’ll be better prepared to deal with that sort of thing, even if you have a pansy-ass liberal arts degree.
If you can get the right job, you can still get a reasonable guarantee of a good retirement. Mostly these days that means a government job; there are still a few jobs in the private sector with good retirement packages but in most cases there is a substantial likelihood you will lose out: the company may go under or they may fire you the day before your retirement plan is vested or find some other way to cheat you out of all or part of it. Mostly, company retirement plans just give you some stock in proportion to your investment, which may be a good deal or quite worthless depending on the company. Don’t let a paltry amount of stock in a dubious corporation (sure they’re dubious, didn’t they hire you?) lure you into starting a 401k that will only tie up your money for decades without giving you a real return – and don’t leave their stock as a large share of your account. Putting all your eggs in one basket is a good way to magnify your risk, and the company you work for doesn’t have any special advantage. Probably just the opposite, unless you quit soon.
There’s one kind of major investment that’s usually worth making, provided you aren’t married: a home. The cost is usually about the same as renting – in fact landlords often set rent equal to their mortgage payment plus property tax and insurance, so that they have no expenses while you buy the property for them. For the price of the down payment, you can accumulate equity for yourself instead of for the parasitic landlord, and eventually escape the crushing burden of housing expense – or most of it, at least, you’ll always have to give the government its pound of flesh for the privilege of owning what you’ve paid for. Just be careful what you buy – real estate sellers are worse than used car dealers, and it’s worth a few thousand dollars of investigation to avoid being cheated out of a hundred thousand.
One thing you shouldn’t do is buy and sell real estate as an investment without knowing what the hell you are doing. Property is in some ways better than monetary instruments – its value will go up right along with inflation, unlike the value of a bond, and it can’t become worthless overnight, like stock (unless you fail to insure it) – but even more than other markets, real estate is a great place for the non-expert to get skinned alive by the expert. Even going into the landlord business for yourself isn’t likely to be a cakewalk and you can wind up losing.
Which reminds me what I meant to say in the first place: like everything else, investment requires work to succeed. Simply having money isn’t enough, no matter how hard you worked for it; if you want to turn some money into more money you can’t just write a check and wait. Or rather, you can, but only dumb luck will help you then. If you want to get any reasonable surety of real returns, you have to work at investing. If you just give your money to someone else to manage, you can expect them to bend you over like a woman at a service garage. If you manage it yourself, following interest rates and stock prices and news is NOT good enough, because there are plenty of other people who do that and some who do more (maybe illegally, but that won’t help you). The better a form of investment (potentially) is, the more knowledge and attention and outright work will be required to make it profitable.
If you loan someone money to start a business, you can expect to lose it if they fail, but if they succeed you won’t get one dime more than they can possibly avoid giving you. If you want something done right, you have to do it yourself, and if you want to get the benefits of someone else’s work you have to have some leverage over them and some knowledge of what they’re doing. A successful business is a great investment, if you own it – so why would you give someone else money for a business, taking the risk, without having ownership or any involvement? Because involvement is work, and you’re hoping to get the benefits without doing the work. That’s exactly what you do when you invest money in a market you don’t understand or an enterprise you don’t control – you take the risk but give up the responsibility.
At this point (unless you’ve decided that I have no clue what I’m talking about, or you’re already rich) you may be feeling less than confident about your chances of a comfortable early retirement. Well, don’t sweat it – you are not legally required to quit working at any age.
It’s almost a religion of our culture that the goal of life is to cease productive work (or at the very least, compensated work) at approximately the same age that a person would formerly have been too old and infirm for the heaviest agricultural labor. Of course, in those days, the few people lucky enough to live that long didn’t loaf around watching television or even go on Branson vacations; they did whatever useful work they could do, for as long as they lived. Modern Americans are far more likely to reach old age, and probably more likely to remain able-bodied, but we have an irrational horror of having to keep working until we die or reach total incapacity – to the extent that many of us will work brutally hard for the largest part of our lives in the hope of having ten years of complete idleness at the end. Yet most people in their seventies are still capable of making a living, even if they can no longer harness a team of oxen. Why should it be so important to have abundant leisure time at the end of life, as opposed to the greater part between childhood and old age?
The most unorthodox solution to the problem of saving for retirement is simply not to do it – not necessarily to not save at all, but not to save with retirement and ten or fifteen years of idleness as the goal. Instead, if leisure is the true reward of work, it’s possible to take it in installments, working less exhaustively in exchange for working a bit longer. All you really have to do is to be qualified for work you can still do when the body is weak; if the mind fails, you won’t be able to work at all, but you won’t know the difference, either.
This approach has advantages: there is less accumulated wealth to attract thieves or be eaten by inflation, no risk of losing all the fruits of your labor before you can enjoy them (by dying young), and no sudden stressful transition from full-time worker to full-time idler. It may not be quite respectable for an American, but what the hell – having one’s own ideas is never respectable.