By Martin Hawes*
It’s the headline that editors must dream of: To Retire at 65, American Millennials Need to Save Almost Half their Pay checks. That must be worth a few clicks; and have a good number of readers reaching for the Prozac. The idea that you need to save nearly 50% of salary for a decent retirement may be designed to motivate people but it will leave most simply feeling depressed.
Most of us do need to save more – but not 40% of salary.
In fact, I think such a sensationalist headline is quite unhelpful. First, I have doubts that it is correct (and I say that even though the person who did the study and came up with that figure is a Professor at a major US University). Second, it is unhelpful because it is a turn off and has most people will give up rather than see nearly half their wages disappear for 30 years or more.
The headline came out of a study done by Professor Olivia S Mitchell from University of Pennsylvania and draws on work done at MIT. The result is, according to Mitchell, Millennials will have to save 40% of their salary to retire at age 65.
Regrettably, perhaps, half of these people plan to save no more than 6%. Only 20% are saving more than 15% of their salaries. This is a long way from the Mitchell’s recommendation of 40%.
Mitchell makes a couple of big calls to get to her number of 40%. First, she assumes that people will want to retire at age 65 and that the nature of retirement will be like it was for my parents’ generation (i.e. on a particular birthday they completely stopped working; one day they worked, the next they dont).
That assumption that people will retire in that way is fraught: already in New Zealand we are seeing many people work well past age 65. This may be part time work but there are many Kiwis (and, I suspect, many Americans) who are carrying on in paid work into their 70s.
If you are confident that you will retain your work skills and your health so that you can continue working, the savings rate should be much less than 40%.
Second, Mitchell thinks investment returns will be much lower in the coming years. She draws on work done by researchers (Morningstar, Vanguard, GMO) to support this and these low investment returns are factored in to get that required saving figure of 40%.
There may well be a period of low investment returns in the coming years – interest rates are low. However, we have to remember a couple of things: first is that low interest rates mean that bonds and cash give lower returns, but low interest rates are usually very good for shares and property.
Second, we are in a period when around the world many people are moving from poverty into the middle class and there are many new technologies continually coming on stream – there are likely to be many investment opportunities in the coming years and decades. A Millennial is saving for the very long term (30 years or more) and, over that time, real (after inflation) investment returns may not be a lot different from what they have been historically - there may be no need to save a great deal more to make up for poor returns.
Of course, Mitchell is studying Americans and the American economy. Here in New Zealand we have to factor in NZ Super. Millennials may not get this at age 65 (they may have to wait until age 67) but NZ Super is such a good scheme that people should plan for it to exist for the long term.
NZ Super is simple, cheap and effective. It would be a brave (read: stupid) politician who would vote to remove it.
Assuming that people are happy and able to work beyond age 65, that long-term real investment returns are reasonable and that NZ Super remains as the cornerstone of most people’s retirement income, a savings amount of 40% of salary is not just unaffordable, but quite unnecessary.
It is hard to say exactly the percentage of salary that a Kiwi needs to save. However, just as Mitchells figure of 40% is too high, KiwiSaver’s standard rate of around 6% (3% from the member and 3% from the employer) is most likely too low.
The rate that is right will vary by individual according to their objectives: things like how long they expect to be retired and what their retirement spending patterns will be. However, with NZ Super factored in, the rate for many is likely to be a long way from 40% of salary and may be closer to 10%. Of course, that would mean that David Chaston will have to look to another article for a good headline.
*Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statements is available on request and free of charge at www.martinhawes.com. This article is general in nature and not personalised advice. Summer competes with banks and other KiwiSaver providers.
39 Comments
Well I guess NZ need to get its priorities right, which is it to be?
1) Keep propping up our housing market with falling interest rates (Seems to be the hot favorite at the moment). Remember falling mortgage rates, means that savings rates also drop off to nothing.
Or
2) Save for the future with a decent saving scheme and let house prices fall to realistic levels to help our real economies grow.
Same vote for prudent step 2, but the fact is even for step 1 now the mortgage start creeping up CJ? - RBNZ can't move up the interest (as per most of western world herd economy, he can though.. to give a short burst of shock, to wake up the current theme), can't/not yet given the DTI tool, LVR steady from last relaxation to yet avoiding further shock. Now? other creative alternatives, at least this banks capital ratio, this shall slowly deflate the FHB approval. Imagine if he initiated this capital ration under National, clue? - look how JK from ANZ & current Finance opp/Nat scare mongering about..yip, NAT co. is all for short termist gain anything related to RE, including importing $ launderer, cheap wages migrants, all for their voters base. Lab at least doing something, but their hands are tied up.. for not rocking the boat too much, I just wish? with the surplus.. they actually commit for NZ future infrastructure that innovative, lead the world eg. on how to process all those rubbish turn into roading projects, initiate like those in 40,50,60s of major housing NZ wide.. but yea.. kind of imaginative wish.. hell do you think Winston or Jacinda? that recently bought that >2M RE? want their asset to be in deflating figure? - yip, don't think so - so now... it's becoming more & more towards, natural worldwide events or internal natural disasters to correct it.
It's all well and good if more tech comes on board, but a higher standard of middle class living means nothing if basic stuff like housing and food is unaffordable. Good luck telling millenials they should settle for less than boomers after a life time of longer work hours and commuting times for less money.
I had a friend, Tony Dickenson, who was a Boomer. Tony's birthday number got picked out of a barrel ( "The ballot resembled a lottery draw, even to the extent, in the case of the final five ballots, of being fully televised.") and his prize was he go to go to Vietnam to fight against people he didn't know for people he'd never met - the generation before him. He died of his wounds in hospital. He'd have been 67 today. Yep. Tony had it easy.
https://tinyurl.com/wuthxkm
bw. The ballots were for compulsory military training. My birthday was drawn and I was destined to head to Waiouru but Norm Kirks labour govt scrapped the draft just in time. NZ troops were not conscripted to go to Vietnam, anyone who went there was a volunteer. Not to undermine Tony's honourable sacrifice or your valid example of geopolitical threats that we boomers lived through but of which todays younger generation have little idea.
frazz. Yes, senseless indeed. But that's a retrospective view with the benefit of hindsight. At the time the west believed the now discredited communist domino theory was a very real threat. Tactically the yanks arrogantly cocked it up, disregarding the lessons they should have learned from the French debacle there in 1946 - 54. It's a sobering experience to visit the Vietnam battlefields and cemeteries and see the still clearly visible massive damage to the landscape. The people, even in north Vietnam, discuss the war with a sad but remarkable objectivity. Big call that todays youth are 'better informed'. I encounter an almost universal naive ignorance about modern conflict history.
I was interested that Hipkins recently asserted the ability to access information largely displaces the need to absorb and retain facts and information. In his view sound analysis and critical thinking skills can be developed principally through being skilled at information retrieval. I think that is wrong but it does reflect a common refrain of younger people; 'who needs to actually remember all that boring detail'. I say 'well you absolutely do need to have a reasonable understanding of the contextual facts to construct your research and conclusion development framework'. Then that slight smirking 'old fart is gaga' look and possibly an earnest recitation of some unlikely perspective on the issue they have garnered from social media. But a sound debate going more than 2 or 3 sequences is rare.
the boomer debate always hangs on two things -- price of houses and free university -- and of course the evidence is overwhelming --
in the 60's about 4-5% of Boomers went to university -- by the end of the 70's it had crept into double figures -- and of course all the courses were focused in on roles - largely in Public service - Doctors -nurses teachers being a huge chunk of the tiny % - in 2018 over 60% of school leavers go to tertiary education - with a further significant % of adult learners
the reality was that 90% of 16 yr old boomers - were in the workplace working 50 hour weeks - not getting the fabled free education that the millennial yearn for -- and those that did are still giving back to the country in those roles today -- many still working long hours well into their 60's and even 70's as future generations have never picked up the concept of society first - self second
in five years time -- when they all retire -- the gap in public services - especially health and education will be frightening -- and not a millennial in sight to fill it -- as TBH - they may say they care about society - as long as there is no personal cost involved!
kpnuts - Very well put, I do not see any benefit of any generation complaining/resenting other generations. Every Generation has had their own and unique challenges and debating it seems a waste of time and energy.
Personally I knew no one that went to Uni ( born 1957 ) I started work at 16 ( should have started at 15 as school didn't work for me ) and considered myself fortunate as my Dad born 1913 left school at 12 as most did in that era and worked on the family farm. Nor did I have to face 5 years fighting a war on the other side of the world.
My own kids have had to study much longer and did not enter the work force until 23. I say we just have had different experiences in different times.
Back to the article, being a boomer we have lived through different economic times and seen the devasting effect of inflation so investing in something that to date has been inflation proof ie Housing has make good sense.
I have read many an article about needing a million dollars to retire on, which is probably true but it needs to be a million dollars in todays money not a million dollars in 40 years time because that will probably only by you a new car by that time.
I post on here to share my experience to help anyone who is interested to see the bigger picture in life not to antagonize anyone.
The avos on toast retort is metaphorical, expressing boomer objections to the selectivity of millennials who discount their expenditure on consumer products and lifestyle experiences when making comparisons of the ability to save a deposit back then, compared with today. As you say, the data is clear that it's harder now but there is also validity in the avo cliche.
GBH,
Love beetroot and have it regularly usually roasted,but for newcomers to it, here's a warming. You will notice what looks just like blood in the toilet bowl, as I did years ago. being sensible, I went straight to the Dr. and found myself having a vigorous digital rectal examination. Nothing was found and it was only afterwards that he asked whether I had had beetroot very recently. The message is, wait for a few days and the 'problem' should go away.
Second, Mitchell thinks investment returns will be much lower in the coming years. She draws on work done by researchers (Morningstar, Vanguard, GMO) to support this and these low investment returns are factored in to get that required saving figure of 40%.
There may well be a period of low investment returns in the coming years – interest rates are low. However, we have to remember a couple of things: first is that low interest rates mean that bonds and cash give lower returns, but low interest rates are usually very good for shares and property.
Hmmmmm...
The prospect of out of thin air central bank money creation and rate cuts further discounting future cash flows to higher present values remains the only driver of upward momentum. Graphic evidence
Courtesy of Hussman :
The idea that “low interest rates justify high stock valuations” is really a statement that “low interest rates justify low expected stock returns as well.” Those high stock valuations are still associated with low prospective future stock market returns.
Worse, the notion that “low interest rates justify high stock valuations” assumes that the growth rate of future cash flows is held constant, at historically normal levels. If, as we presently observe, interest rates are low because growth rates are low, no valuation premium is “justified” by low interest rates at all.
Presently, the combination of record low interest rates and record high stock market valuations does nothing but add insult to injury.
...the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment..
The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal.
We could be nearing the end of the low interest rate / currency devaluation regime, or perhaps we are only half way through it. It is highly unlikely it will continue indefinitely. To me it is a sort of Soviet social/financial engineering scheme of enforced capital misallocation that will end in tears. Reality has a tendency to overcome illusion.
Reality will probably enforce sanity via the traditional methods of plagues and famine. We have a plague in Asia as Swine Fever spreads freely and completely unhindered by the bumbling bureaucracy of the CCP, who, it seems, while experts at controlling and monitoring the people stock, are not so good when it comes to piggies. Clearly, pigs need facial recognition software, too. Pork price inflation now 100% in China. That is why meat prices are racing up in little old New Zealand.
Reality will also re-assert itself when oil prices quadruple, as they did in the 1970s. When mining is unprofitable, the first thing to get cut is exploration and development, followed by high grading and as little capex as possible. Inventories keep swelling as producers desperately try to produce more to cover their overheads. Then they start going bust, their assets then fall apart for want of regular but expensive maintenance. Eventually inventories start to fall, but producers keep going bust as prices are below marginal cost by this point. Then suddenly, "no one saw it coming", a weather event or local crisis shuts down a production facility or a transportation route and the price quadruples. It then takes 10-20 years to do the exploration, then the development, financing, permitting/bribing of bureaucrats and politicians and building of facilities for supply to get back to demand. The cure for low prices is low prices.
I think their could be issues of pig racism too. "They all look alike to me", that sort of thing. Also pigs covering their faces with mud would have to be addressed. These and other issues would need lengthy deliberation and consultation in order to establish what is ideologically correct.
The low interests rates were caused by the massive money printing from the GFC 2008, the world was a wash with cheap money, however high interest rates are not good, it only benefits the rich and super rich, its stops the money circulating and the middle class get poorer. I remember the late eighties, interest rates were so high. if this happened now, it would destroy NZ. Interest rates must remain low, but not double digit,NZ would suffer
Excellent guys. All good stuff. Still working my way through Audaxes theories on modern monetary reality but am old enough to understand that life is often what you think it is not - deception being the key active ingredient these days. Just because someone says something or writes something doesn't make it true. Probably 80-90% of what I read & hear is bullshit & I'm quite picky these days on where I access my data from. Small sites with insights the MSM doesn't want you to know about, often supply nuggets of information that are helpful to my piecing together the bigger picture. The once powerful media industries of print, television & radio are struggling with the digital world's new realities, but even today's big digs are full of s...t. In fact worse, as they cream the old media for stories to suit their agendas without paying anything up front for the content, or at the back end to the taxman in the countries in which they live & do business, which make them utterly despicable corporate citizens in my mind. They may be great to use but they are bludgers on & of democracies around the globe & the sooner they are held to account the better. As for retiring, well MH is right as usual. It's sadly what passes for standard university mediocrity these days, underwritten by big business with their own agendas, to be taken with a pinch of salt & a whisky before bedtime.
Common sense is still found somewhere in the middle with millennials & others figuring it out eventually.
Well JC, I wish you well. if you tell me that you have cashed out at a huge profit, I will applaud your acumen, but I fear that like Icarus, you will crash and burn.
Poor ignorant peasants like me can boast only of the returns we have had over the past decade from the NZ stockmarket-substantial gains AND rising dividends.
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