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The World Isn't Prepared for Retirement (bloomberg.com)
An anonymous reader writes: Most online quizzes are relatively mindless, promising to reveal which vegetable, sandwich or rock band best represents your personality. That was not the case for a short online test given to 16,000 people in 15 countries this year. It revealed just how unprepared a good chunk of the world is for retirement. The three-question test, given as part of the Aegon Retirement Readiness Survey 2018, measured how well people understand basic financial concepts. Many of the participants failed the quiz, with big potential consequences for their future security.
Beyond the sobering lack of financial literacy, there were some rather curious data in Aegon's annual survey, published on Tuesday. For example, some 20 percent of workers surveyed in China envisioned spending retirement with a robot companion. But before we get to that, take a look at this question -- which only 45 percent of people around the world got right: Q. Do you think the following statement is true or false? "Buying a single company stock usually provides a safer return than a stock mutual fund."
The possible answers? True, false, do not know and refuse to answer. Sixteen percent of people got it wrong. "Do not know" was chosen by 38 percent. In the U.S., 46 percent of workers got it right. Good for you, America -- though Germany beat you handily. (The answer, in case you were wondering, is false.) It was an inflation question that had the highest percentage of wrong answers, however. More than 20 percent of workers didn't grasp how higher inflation hurts their buying power. Given that declining health was the most-cited retirement worry, at 49 percent, and health care is an area (in the U.S., especially) with high cost inflation, well, that makes the subject something older folks should have down cold.
Beyond the sobering lack of financial literacy, there were some rather curious data in Aegon's annual survey, published on Tuesday. For example, some 20 percent of workers surveyed in China envisioned spending retirement with a robot companion. But before we get to that, take a look at this question -- which only 45 percent of people around the world got right: Q. Do you think the following statement is true or false? "Buying a single company stock usually provides a safer return than a stock mutual fund."
The possible answers? True, false, do not know and refuse to answer. Sixteen percent of people got it wrong. "Do not know" was chosen by 38 percent. In the U.S., 46 percent of workers got it right. Good for you, America -- though Germany beat you handily. (The answer, in case you were wondering, is false.) It was an inflation question that had the highest percentage of wrong answers, however. More than 20 percent of workers didn't grasp how higher inflation hurts their buying power. Given that declining health was the most-cited retirement worry, at 49 percent, and health care is an area (in the U.S., especially) with high cost inflation, well, that makes the subject something older folks should have down cold.
>$600 per year x 50 years = $30,000. Where do you get interest rates that makes those savings become $1,000,000?
$50/month for 50 years = $30,000
$50/month for 50 years earning 9.99% returns* = $869,950.48 (not a million, but close enough).
In retirement, this can very easily provide and inflation protected $44,000/yr in additional income.
* S&P 500 30 year period returns (http://www.moneychimp.com/calculator/compound_interest_calculator.htm)
1926-1956: +10.77%
1956-1986: +9.63%
1986-2016: +9.99%
** 7% growth - 2% inflation = 5% or $44,000/yr
Does a person in the UK "deserve" to earn 100 times more than the same person doing the same job in India? Unless you want the UK to look like India that isn't going to happen.
Middle class people in India can afford full-time maids and live-in child care for their four kids. Middle class people in the UK make four times as much, but live in shoebox apartments and can't afford to have children at all, so the government has to encourage immigration to keep the population from dropping.
Economic classes are not directly comparable country to country. Paper numbers do not make reality.
First, what the _hell_ are you doing on /.. I don't think Bernie Madoff could pull that off with a pyramid scheme. You must be some kind of financial genius.
Second, you do know what inflation is, right? At the current rate you're $1 million saved will have about $140k in buying power in 50 years based on the Cureau of Labor Statistics' calculator. Only inflation is _much_ worse than it was 50 years ago, so better plan on that being $100k.
Also, better plan on a few major market crashes wiping out your savings. We just repealed Dodd-Frank and a whole bunch of other Wall Street regulations that were passed after the 2008 market crash.
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The long-term average return with a low-fee index fund is around 9%-10% per year. About the same as the AVERAGE return from individual stocks - which makes sense because index funds are composed of many individual stocks.
The risk and volatility is much lower - you can almost guarantee you won't make much more than 10% or much less than 9%, over the long term.
A lot of the volatility of index funds is actually volatility of inflation - they tend to have higher nominal returns when inflation is higher, so the real returns are more stable than the nominal returns.
Even if retirement is 5 or 10 years away?
If you retire at 65, you can expect to live another 20 years. So if you are 5 or 10 years out, you have a 25 to 30 year time horizon, which is enough to smooth out volatility. If you have significant savings, you should stay mostly in stocks.
Seems to me you ought to shift into less volatile options.
There are index funds designed to be less volatile. They track utilities and health care, which tend to have fairly steady profits even in recessions.
Having a larger pool of companies in the fund changes the probability distribution function. The bell curve gets narrower and taller in the middle the more stocks you put in the fund, meaning you're more likely to get an outcome closer to average, less likely to get an extreme outcome.
It's a consequence of statistics, nothing to do with stocks. If you roll a 1d6, every number between 1 and 6 has an equal chance of appearing. If you roll a 2d6, the bell "curve" becomes a triangle, with 2 and 12 being the least likely outcome (1 in 36 chance), and 7 being the most likely. A 3d6 turns flat sides of the triangle into a true bell curve. Increasing the number of dice results in the curve narrowing even further. By the time you get to 10d6, it's virtually impossible to get either of the extreme outcomes (1 in 60 million chance of getting a 10 or a 60).
So when you put thousands of stocks in a mutual fund like an index fund, it's virtually guaranteed to perform at the market average. Whereas if you buy stock from a single company it could perform average, or you could make a lot more money, or you could lose everything. Insurance companies and casinos rely on the same thing - by grouping lots of insured or gamblers together, the overall outcome becomes much more predictable. The increased accuracy of prediction (outcome closer to the average) allows them to make money despite decreasing their margin (offering a lower price for insurance than the competition).