Why is it rational to invest in retirement? I don’t get it.
I know I said I’d be gone… but this was just a comment originally, and I noticed it may actually be relevant.
Elharo said in Munchkin Ideas:
Put as much money as you can afford into tax advantaged retirement accounts. In the U.S. that means 401K, 403b, IRA, SEP, etc.
I’m interested in the following:
Why should people invest in retirement? Or, instead, why should someone invest as much as most do in retirement.
Few facts that make it a boggling question for me:
You are 10% to 20% likely to die before you enjoy even your first retirement year.
People adjust much more to harsh economical conditions than they believe they would. They remain happy, as many studies by Seligman and others show.
People who retire are only happier as retirees if they retired by choice (I lost the paper, sorry).
Most people here live in rich countries—darn, hate to be the exception! - , and their state would happily provide them with at least the maximal retirement plan legal in my country (aprox 2000 dollars/month). And surely would provide them with double the minimal (about 200/month) if they needed.
If you have descendants, they may support you in case you are still alive, and if you are not rich enough to keep a house, you have a good excuse to be in company of loved ones (you have nowhere else to go).
Last, but not least: That person is not even you that much anyway.
Given all that, I have no clue what the whole fuss about retirement plans, and being 60% of a rich old person with a crappy body is all about, specially if you are in the grave.
I mean, in the cryopreservation chamber, of course.
Edit: A related question not worth its own post, but maybe worth discussing, is Should inheritance “jump” a generation. Everyone inheriting from grandparents, instead of parents? Just the abstract ethical question. Regardless of implementation procedure.
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I would prefer to save more and retire earlier. That would increase my chances to enjoy the retirement and make the person enjoying the retirement more similar to the person who saves the money. Also, the sooner I retire, the more chance I have to make money while retired—so I could just make a plan to retire as soon as possible after I have enough money to survive; and then optionally make some more money and add them to the retirement.
As a programmer, these days I make more money than I need, but I find it hard to imagine doing this job at 60. Not because I wouldn’t have valuable skills, but in my experience during job interviews most employers only care about familiarity with the few most recent frameworks—there is not much competitive advantage I could have against someone who just learned that at university; and in addition the young competitor will probably be willing to do a lot of cheap overtime.
Unfortunately, I don’t know how to do that. In my country, the rules for retirement change after almost every election. The money in the retirement funds is taken to repair some other part of economy, or is simply stolen. The state is willing to support old people with some small amount of money after a given age (which is gradually increasing), but beyond that, the rule of thumb is that the state will punish those who try to help themselves (e.g. have savings, have other income, etc.). The money paid “for retirement” is effectively redistributed, only a very small part or my “retirement saving” would actually influence how much money I get when I retire. (I am not even going to calculate how small part that is, because in five years the rules are going to change again, anyway.)
Okay, my point is… if I lived in a country with transparent retirement laws, and if I could put some money into a retirement fund and expect with high probability to get that money back, protected from inflation… I would invest as much as possible. And retire as soon as possible. And then, use the additional 8 hours a day to do something awesome (which could—but wouldn’t have to—bring some more money).
I need money to survive, but I need time to enjoy life. The dilemma is not just between “having money while young” and “having money while old”. It is also between “having no free time while middle-aged” and “having free time while middle-aged”. Sure, as a young person you will get more enjoyment of your new helicopter, than as an old person. But if your expensive helicopter remains locked in your expensive garage, while you spend your daylight at work, you are not enjoying it anyway.
Have you looked into opening an investment account in the US as a non-resident (so your government won’t be able to easily appropriate your money)? I’m not familiar with it myself, but a cursory Google search seems to indicate that it’s possible and not too difficult. Or if the US doesn’t work for some reason, some other country...
I concur with your sediment. I posted this on the munckin thread, but it bears repeating MMM Simple Math of Early Retirement. Going purely on your investments and saving(i.e. no government programs) you should be able to retire in 51 years if you save 10% of your income annually. However, if you save 20% of your income, it drops to 37 years.
MMM and Early Retirement Extreme advocate investing 50-75% of your income, if not more. This will let you retire between 7 and 17 years, leaving plenty of time to enjoy your retirement.
I fully agree with the last paragraph. When it comes to valuing my time, the less free time I have, the more valuable it is, and the less reluctant I am to spend it (the value of an hour of my time isn’t constant).
If I’m busy at a given time, it might not take much for me to go out of my way to help a friend; but if I’m really busy and they ask, there had better be some kind of incentive.
...upon reflection, that would be why people get paid time and a half for overtime.
What career paths are open to programmers? Do a lot of programmers go into management (head of a programming team), or specialize in something harder to learn? You seem to be saying that a programmer with 20 years of experience wouldn’t have that much of an edge over someone with only 2 or 3 years experience.
As an engineer, two of the popular paths are going into project management or similar, or gaining a high amount of technical proficiency in certain domains. Either way, these types of positions really do require the extra experience.
I am aware of four paths, but maybe I am missing something. 1) Get into management. 2) Become an independent contractor, or start your own company. 3) Stay many years in one company and become an internal specialist on their software. 4) Work for a software company that sells to other software companies (e.g. Oracle), and become a specialist on their software. These paths are ordered by a number of people I know who took them, which is probably not a representative sample.
1) Getting into management brings somewhat higher salary, but also more overtime and having to deal with bullshit on daily basis. Which means that your actual salary is almost the same or even lower, but you are supposed to get a big bonus when the project is successfully finished on time. Depending on the company, you may need to talk with your customers daily, telling them a lot of buzzwords and assuring them that the things you actually have little control about will all end well and on time; also if the customer wants to yell at someone, you are the person. If your company works for government, you will have to read a lot of paperwork, and cooperate with people who would prefer if everything failed and they were just left alone. It is a great choice if you don’t care about the content of your work, or if you don’t really have good programming skills, but you enjoy feeling “important”. On the other hand, if you are in IT because you love programming; well, that’s exactly what you will not do.
2) This seems to be the best choice. It requires some skills I don’t feel sure I have, such as networking and making deals with customers.
3) I could actually enjoy this, but there is a lot of risk. You have to spend many years in the same company, and there are some things that could go wrong and then a decade later you would start from zero again, because the skill is non-transferable. For example the company could get bankrupt, or someone else could get your place because of e.g. nepotism.
4) I never worked for a company like that, so I don’t know about the advantages and disadvantages. Could be actually a good choice.
Well, reading what I wrote… seems to me I should seriously put more time into networking and similar things. (But if I had an option 5 -- a safe way to protect my savings from inflation and use them for early retirement, I would certainly prefer that. And possibly combine it with some of the other options.)
Many countries make this possible. Is moving an option?
I would prefer not to move.
But that may be an irrational decision. Where by “irrational” I don’t mean “emotional”, but “failing to calculate the costs and benefits of each option properly” (impacts of moving vs impacts of early retirement).
Is there a good reason for the title to read “is it rational” rather than, say, “should I”?
Only that it seems like a cached thought that many never thought of but are following. If the ‘I’ is not indexed to me, than obviously no. So if you designator is flacid, no. If the designator is rigid (Kripke 1972) then yes, the question is about claims such as elharo’s, which are hipothetically giving rational investment advice, and the disagreement is over how rational are them.
Honestly my plan was to give well-researched, evidence backed, outside view compatible rational advice on how to save for retirement and manage other aspects of personal finance. It had not previously occurred to me that I might have to explain, rationally or otherwise, why to plan for retirement. I was taking that as a given. If indeed there are a lot of young folks out there who don’t see why they should plan for retirement, then I may need to back up and rethink my first few chapters. So that is useful information. I do need to consider whether you’re an outlier or not. If most folks don’t need to be convinced that they should save for retirement, then I don’t need to write those chapters.
Of course I’m also writing and thinking from a developed world, U.S.-centric perspective. It may well be that what’s rational financial planning for someone in the U.S. is not rational for someone from Brazil, and I may just have to put disclaimers about that on the sections. Certainly even between the United States and Canada, there are significant differences. For instance, planning for medical disasters is much more necessary in the U.S.
I would like to hear from anyone else who isn’t sure why or if they should save for retirement. If you don’t mind mentioning your age and nationality, that would help too. Thanks.
I wonder if maybe the reason we retire, i.e. set aside a very relaxing experience for the end of our lives rather than spread that utility across our entire lifespan, is the same reason that the idea of heaven was so appealing for medieval peasants. Perhaps the only way we can motivate ourselves to work is by irrationally believing that one day there will come a blissful time free of suffering where we never have to lift a finger ever again and can live in utter peace. In this way, we avoid accepting the essentially Sisyphean nature of reality.
Which even though brilliant, is kind of ironic in a way, given, that all the evidence about money spending indicates to spend on the few things spread over time, and never, ever, ever, ever! on the big things more discrete in time.
Besides the classic “If money doesn’t make you happy, then you probably aren’t spending it right” (Gilbert et al 200x)
Seems like there is a new antidote for the christian manthra, but I don’t have time to read it. http://csi.gsb.stanford.edu/if-money-doesnt-make-you-happy-consider-time
Personally, I’m worried about becoming unemployable. I’m especially worried about new technology replacing human labor. The best insurance against my labor being devalued is lots of capital.
Invested in whatever the machines can’t do. Or what they will multiply instead of devaluate.
Like hairdressing, chef cooking, extreme sport tour guide, land in scandinavia (if Hansons guess about the emulations hub is right), energy sources. Which is what one should invest in, if afraid of the emulation economy.
Can you link me to this? I searched but could not find what you are talking about.
It’s a reference to ‘em cities’, where the limiting resource will be a combination of electricity generation + cooling. Scandinava has dams and geothermal energy so cheap electricity (think why Iceland has aluminum smelters) but also cold weather and even colder oceans, so cheap cooling.
Depending on your current career path, up to a certain age it’s entirely possible to switch careers entirely, even to something that makes concrete use of skills acquired from another career (so it’s not a complete restart). Built-up capital or some other means of remaining self-sustainable for a period of time could allow you to return to school in something completely different.
I’m not speaking from experience though; I can guess that this type of situation would be difficult. But when saving, balancing the return on investment with the accessibility of the funds seems wise.
Agreed, but the options listed, sadly, don’t help you there. If you use a tax advantaged savings vehicle, it’s much harder to actually use the money before retirement. At best you can borrow from it (which i ended up doing as a buffer when switching careers) or take the withdraw penalty, which eliminates a large portion of the savings.
So I’d agree with keeping savings as a hedge against unemoyability, but against usIng the 401k etc methods the OP listed if that is your goal.
This question is a subtype of “Why should I save any money, anyway?”
There are two basic answers. One is the utility function, as has been mentioned. The same dollar amount has different value for someone rich and for someone poor. If you expect that at some point in the future you will become more poor than you are now (because your income stream dries up), it makes sense to transfer some money from the rich now-you to the poor future-you. That transfer is known as saving.
Answer two is risk management. Future in uncertain, generally speaking you would like to be able to handle a variety of unfortunate events. Money really helps with that. If you have no savings, you have no tools to deal with what economists would call “negative shocks” and that is likely to send you down a financial death spiral. Speaking technically, the costs of not having a reserve of cash on hand to deal with emergencies can be very high.
There is a variety of other answers (e.g. future might provide much better utility for your dollar so you want to save up for that better utility), but I think that the two above are the main ones.
This is one of my main reasons for saving a lot and I’m surprised nobody else has mentioned it. If technological progress continues, it seems likely there will be all kinds of cool toys and useful procedures (e.g., cognitive enhancement or life extension) that one could buy in the future, not to mention investment and charitable opportunities, and I’d hate to be left out because I had already spent my money on a bigger house or flashier cars and clothes.
Do you anticipate technological progress flattening out at some point? Or, perhaps more relevantly, do you anticipate anticipating a lower rate of technological progress than you currently do?
If not, it seems some additional factors should be taken into account here.
Even if you do anticipate flattening, some of the potential perks on the horizon are of such large +EV that a small chance of them is worth apportioning non-trivial resources towards.
There is the other side of the coin. If the dollar collapses like Peter Schiff predicts it would make sense to buy valuable stuff now(house, land for planting food, guns & ammo) as long as the dollar is still worth something.
Careful, this is from birth and for all categories. The survival rate to age 65 for a healthy middle-class educated person in his late 20s or early 30s is likely much higher than the survival rate from birth (the first few years of life are quite dangerous, and many chronic diseases should be already diagnosed at age 30), and middle-class educated persons doing intellectual jobs (the typical audience of LW) live longer than factory workers or miners.
According to Wolfram Alpha if you’re a 30yo male in the US then your probability of reaching 65 is somewhere around 80%.
The other demographic details surely make some difference, but I wouldn’t assume they’re all favourable; for instance, being largely sedentary brings all kinds of problems.
[EDIT: I wrote 20% where I meant 80%. Thanks to wedrifid for catching my mistake!]
Shouldn’t that be 80%? Either that or have a “not” in there someplace?
Oooops. Absolutely right, of course. Now fixed.
The richest country, the United States, does no such thing. Poverty among the elderly is a big problem here. I have two friends in the 70+ region, who are trying to skimp by on around $1000 a month in Social Security + medicare and food stamps. One is currently homeless. Both would like to find a job, but neither is medically able to work any more. And these are people who worked for a long time. Not everyone gets as much from the U.S. government as they do. I have another elderly friend who is selling her apartment in NYC and moving to Iowa to have enough money to live on.
I also have a few more retired elderly friends who are quite well off. This is because they were successful in their careers (some very successful) and saved a lot of money along the way. I can think of one other who’s still actively working at a high-paying job.
The goal is to end up like the happy, well-off retired folks and not the ones living out of their cars or on the street.
The United States is actually only the 8th richest country by per capita income (PPP adjusted).
en.wikipedia.org/wiki/List_of_countries_byGDP(PPP)_per_capita
(No active link because of the damn parentheses)
You can escape parentheses with a backslash, like so:
[Wiki link](http://en.wikipedia.org/wiki/List\_of\_countries\_by\_GDP\_\\(PPP\\\)\_per\_capita)
producing:
Wiki link_per_capita)
(You also need to escape underscores if you want to avoid toggling italics in body text, but it’s not an issue in the destination field of links.)
Thanks for the correction. I will update my thinking going forward.
The extreme poverty line is around $1.25 a day, and the poverty line at around $2.50. They are well above both. By global standards, they’re not poor; merely relatively poor to other Americans (which is to say, not poor at all)
Cost of living needs to be considered. It costs more to live in the United States than Mexico. Someone who’s living on the street, and eating out of garbage cans, or who is hungry because they can’t afford to buy food is objectively poor. And yes, this sort of poverty exists in the United States; and it disproportionately occurs among the elderly.
That is already PPP adjusted. Here is a good blog post on the subject by Will Crouch.
Even PPP adjustment doesn’t tell the whole story. It’s not legal to live like you’re in a Harare slum in the US, whether you’re willing to or not.
Good luck finding any place in the United States you can live in for $1.25/day. Minimum wage is livable >90% of the time, but Nigerian wages are not.
And $1,000 a month in social security plus food stamps valued at $200 plus Medicare valued at $680, you get pretty close ($1,880) to $2,000 a month from the US Federal government.
I just realized that without knowing the costs of living in USA, these numbers don’t mean anything to me. (I made cca $2000 a month in my previous job, and being homeless was never a risk.)
Well, if living abroad is an option, send these poor people to Slovakia, and they will live like… well, not like kings, but perhaps like junior computer programmers.
I invest about 60-80% of my income. There are a variety of reasons but here are some:
Spending money doesn’t seem to make me much happier. Buying stuff is certainly fun, but the enjoyment of owning a new thing wears off in a few weeks. Also, some things have carrying costs, they make moving more difficult etc.
I’m in my 20s, and I’m worried about possible trends toward large scale structural unemployment and declining median income per worker in developed countries. If these trends do continue, owning a fair amount of capital will be vital if you want to be financially secure.
I also get some pride from watching the numbers roll upwards on my accounts. It reminds me of how people who have lost weight often say, “no food tastes as good as being thin feels.”
People really do seem to have different utility functions/discount rates etc. YMMV, but I like the feeling of having money more than I like buying/owning stuff.
How much at what interest rate, etc?
I also spend very little money, and am not doing anything intelligent with the ~1k/month that I save, so I’m interested.
I mostly invest in index funds (US and foreign). I also have some money in REITs, a growth-oriented mutual fund, and bonds. I’m not advocating any particular investment strategy, but if you’re just leaving this money in a savings account, you could probably do better.
“If money doesn’t make you happy, then you probably aren’t spending it right.”
How much do you make, if you don’t mind me asking? I’m saving about the same percentage, but I’m living with my parents for the next few months, and that percentage is going to plummet as soon as I actually have living expenses.
Tax advantaged retirement accounts are, you know, tax advantaged. That pretty much says all that you need to know about it. You should invest dollars into where the free money is up until the marginal dollar invested yields as much utility as the marginal dollar spent elsewhere.
In other words, as much as you can afford.
I don’t think the marginal dollar invested in a retirement account yields anywhere near the utility of the marginal dollar spent elsewhere, even with the tax advantages. Freezing your money for decades is a huge deal. If you’re 55, sure, go ahead; if you’re in your twenties, putting money into a retirement account is almost as bad as setting it on fire.
There are various ways you can take money out of your retirement accounts if you need to, with and without penalty. For instance, you can take loans against a 401K.
Meanwhile I’m updating my outline for a rational financial planning sequence. I think I may have to begin with posts on why it makes sense to plan for retirement, and how cool compound interest is.
I’d love to read that :)
You (general ‘you’, not elharo) know someone is “out to get you” when they downvote your comment saying that you will enjoy something someone else is planning to do, and encourage them with a smile, and that correlates perfectly with all your comments in a single post being downvoted by one since last you saw.
If you ever need to make sure, try it. Now that there is no more way for people to go to someone’s name and downvote everything they wrote, it will be a good way of knowing if haters are haunting you.
Sort of, but the value of money is not linear in utility. If we simplify our assumptions and pretend it’s really a binary choice, would you rather buy some flying lessons when you’re in your twenties, or your own airplane when you’re in your fifties? Some trips to Hawaii in your twenties, or a house in the Maldives in your fifties? I may exaggerate, but my point is that larger sums of money can buy an entirely different class of things.
I actually agree with you, however, if only because I believe it’s unlikely that the economy will still be around when I’m 55.
Good insight. Can you elaborate on why you think it’s unlikely that the economy will still be around when you’re 55? Also by economy to you mean the world economy, the U.S. economy, or the economy of some other specific country or region?
I suspect this gives me two more posts for the rational financial planning sequence:
Why existential risk does not mean we should ignore common, personal risks.
How to ignore financial hucksters and doomsayers
I was being tongue-in-cheek, gesturing towards the basic transhumanist stance that everything will be different. What I mean is that any investments I make today are tied to many implicit assumptions about the world’s trajectory over the coming years, and that I don’t expect these assumptions to hold true over that time frame, especially considering the accelerating change I’ve observed in my lifetime so far.
None of this actually stops me from investing a reasonable amount in boring investments like index funds because I simply don’t have that much stuff I want to spend money on.
If you’re expecting a 3.5% ROI, then after 30 years you’ll only have 2.8 times what you put away. (Assuming no taxes)
“only”
Jimrandomh’s point (which I strongly agree with) was regarding saving in tax advantaged accounts. The withdraw restrictions, even after retirement age, would not let you make those massive purchases anyway.
You can withdraw money from a traditional IRA for a first time home purchase without penalty, I think.
Only $10K.
Robin Hanson thinks an optimal donation policy looks like saving up and investing as much money as you can and then making a large donation at the end of your life. So retirement accounts seem sensible from this point of view (“tax advantaged” seems like an important keyword here).
Another reason would be to save up money to pass on to your family after you die.
The mortality rate you cite doesn’t control for demographics, which I think is important. Many people die early in ways that I think the LW demographic can avoid.
From a tax perspective, my understanding is that you can deduct up to 50% of your income from your taxes if you give it to charity. Are retirement account tax incentives that good? If not, you might want to put your money in a donor-advised fund instead of a retirement account. (See this comment for more relatively clueless speculation from me.)
In Canada, investments made in a retirement fund and donations made to charity both work identically—no taxes are charged on that dollar amount(there’s some caps, but they rarely come up for most people). It will obviously depend on where you live, though.
Or simply insuring against being a burden (a cost) to your family in case your health declines.
It depends on your prognosis about the future. As the average person in society gets older it’s not clear whether the state has still as much money for financing retirees as it does at the moment.
In the UK it is clear: it doesn’t. State pension ages are slowly going up, and the state pension isn’t much anyway. It’s no more than a safety net for people who haven’t made their own arrangements. My occupational pension will be very much larger.
It’s about choice, as far as I’m concerned. Debt makes you brittle, assets make you flexible. Additional money right now is of low value to me, especially if I calibrate my spending habits to taking 20% off the top and stashing it and don’t develop as many expensive hobbies as someone of my income bracket typically does. But having money put away lets me keep living decently even if I can’t work, or I can raid it if I lose my job, or I can use it to help buy a house or put my (hypothetical) kids through college, if stupidly overpriced college is still a thing in 20 years. Having that flexibility is one of the best insurance plans on the market, and it’s one I get paid to carry. How could I say no?
Besides, government insurance is looking like a pretty terrible deal to 27 year old me, even if I do live in a rich country. Exactly how solvent do I expect it to be when I’m 65? And it’s not like I can retire at 50 on a government pension that doesn’t start until 65, but I can on my own dime.
(Also, speaking personally, I’m an investment advisor by trade. Being able to talk about investment decisions in the first person gives me direct business benefits)
I wrote an article with a smilar conclusion: http://messymatters.com/savings
It includes this caricature of traditional financial advice: “You want to stop working when you’re 60ish, right? And you don’t want to be dirt poor at that point, right? So here’s what you do: live as if you’re dirt poor from now till you’re 60. Problem solved.”
Utility per annum is strongly sublinear in expended money per annum.
The point of diminishing returns goes up when you have additional maintenance expenses. Being old is expensive, and having to skimp is rougher when you’re old.
SO, for example,
if you save for retirement, you get 6 utilons per year now and 3 later, if you live that long.
if you spend heavily now, you get 7 utilons per year now and 1 later, if you live that long.
Seems like a good trade to me.
I didn’t put it in the original, but it feels the reverse to me. Younger people have more taste buds, more tactile pleasure, more reason to signal to others, more uncertainty, more mobility. All of those seem to increase the amount of utilons one gets in a youth age as opposed to an old one.
So for example. Say I give, out of the blue, no strings attached, 500 Euros to a 70 year old man, and 500 to a 22 year old man.
Who do you think will make the most out of the money given?
The guy may go to a paintball, a theme park, begin a startup, buy a star wars clothing article, buy some narcotics and give a party, travel to the beach, pay 6 months of a course he always wanted to do. The older man has fewer good uses for it, and probably would just save it to keep it safe. He may give a party, but he can’t stand in the party for long, or drink as much, probably he wouldn’t begin a startup, or fulfill a childhood dream. He could, it is true, buy painkillers if he has chronic pain. A better TV-set, maybe.
But it still seems to me that the marginal utility of money is higher by a large factor when one is younger.
And this is in addition to all the other reasons I mentioned. Even if this is false, the other reasons stand on solid ground.
With the 500E, an old person could indeed get better pain meds that would allow them to basically function instead of living in hell.
A 70-year old is fully capable of doing the last four of the seven items you named (though he would be more likely to do the last three than the middle one). My grandfather finally gave up body-surfing when he was 85. It seems like you’ve imported ‘be boring’ into your definition of ‘old person’. Plus, drug-fuelled party? Now THAT’s a really high efficiency use of money. Really utilitarian.
I’m not posting about efficiency, I’m posting about what people would, actually, on average, do, and how good that would be for them. You know, random people in the park, not utilitarians.
I remember seeing one of Aubrey the Grey presentations, and he said something like:
It is very simple, look.
Shows a picture similar of young women playing volleyball.
Fun
Shows another picture of old women sitting on a bench next to them
Not Fun, see, it is simple.
I’m really glad your grandpa has all that energy. My grandma used to walk 10 kilometers a day when she was 80, I couldn’t catch up. But let’s face it the way Aubrey faces it. It is not that 95% of elders are boring and don’t want to go do what our ancestors did. It is just that they can’t. They are not able to. It is painful, or impossible, or really hard, or socially frowned upon. I don’t think older people spend more on food and wine because with experience people realize that the best things in life are food and drinks. I think they do it because there is nothing left for them to use their money on. It is a cruel world, and Woody Allen makes a good case for it: My next Life
Random people in the park are affected by utility theory whether or not they use it.
“The older man has fewer good uses for it”—that’s an entirely arbitrary assumption. I don’t see any good reasons to believe that (and that’s even before we get into what “good uses” means).
Besides, you can flip the sign and ask who can tolerate lack of money easier. Would you prefer to spend a year being homeless when you’re 22 or when you’re 70?
I disagree that your characterization of this as flipping the coin is a good one. Flipping the coin would be to say, if I stole 500 moneys from a 70 year old account, or a 22 year old, which one would suffer most. I believe the 22 year old would suffer more.
There is a completely different question which is: Is it better to be financially miserable when old, or when young. I think Puneet Sahani has settled this issue by awesomely being homeless at 26-28 and indian while travelling many countries. It is better to be financially miserable when young.
So the marginal return per unit of money, I’d claim, is higher near misery values when you are old, and higher otherwise when you are young. Do you think we may be going towards an agreement here?
Edit: Apparently, as a non-native I did’t know the connotations of “flipping a coing” I though it meant something like “reverse your argument” or “do the opposite to see how inconsistent your position is”. Now I have no idea what it means.
It’s not flipping the coin, it’s flipping the sign of the transaction. Anyway, you’re just reasserting your beliefs but don’t provide arguments as why do you think that’s true. Not to mention that you’re contradicting yourself by saying both “It is better to be financially miserable when young” and “I believe the 22 year old would suffer more”.
With regard to the marginal value of a dollar, I think you’re claiming that the slope of the utility function is different for the young and for the old. That I don’t know. It doesn’t seem to me to be self-evident and I would like to see some data and/or good justifications before accepting that.
No I’m not, you didn’t understand. I’ll try to rephrase it, and you can try to help by steelmanning what you read.
My point is that comparing the last 500 dollars of an old man, with the last 500 dollars, the old man needs his more. So I agree with you, being old and homeless sucks more than being young and homeless.
Now if you take actual people, they are not near the misery line (if they are friends with whomever is reading this comment, they probably will sleep under a roof in a place with electricity). Then, if you go to a park, say, in Oslo, or Chicago, or ciudad del mejico, and steal 500 bucks of someone, one old, one young, the young one will miss it more. and of course, this is a factual question that could be solved by going there and asking lots of people. but neither of us will, and I see no reason for the burden of proof to be on me. I gave my reasons for the slopes I believe correct. That is all I will ever be able to offer.
To ‘Flip a coin’ is to choose randomly between two options.
Well, first of all, if you set aside enough money for retirement, you can retire early. Example: If your retirement accounts are 84,000 dollars at 64, you probably aren’t retiring early. But if your retirement accounts are 84,000 dollars at 29, retiring early looks far more practical. Imagine being able to be retired at 50 instead of 65.
Second of all, if you have enough in your retirement accounts, rather than having your descendants support you, you can support your descendants. Personally, I think my descendants (in this case, my nephew, I don’t have any kids of my own yet) are awesome (happy bonding family brain chemicals are like that.) and would love to give to him support.
Third of all, if your government has a certain level of dysfunction, you may not trust your state to give you a good retirement plan.
Fourth of all… I don’t need to spend the money now for more utility. The marginal gains on money for utility trades are fairly pathetic right now. The best results I get are “luxury” food items because I actually have time to eat them. Other than that it’s a solid regiment of allocated time (even rest time is usually pretty well allocated doing social maintenance). And I can’t easily take vacation days with my current workload to only enjoy things. When I take vacation days (or honestly, even sick days) it’s usually to visit relatives, or run errands, or more social maintenance.
On the other hand, if I had more time (because I was retired) I could do all sorts of things with money to get utility.
As a speculative ecurrency investor, I am gambling for retirement.
Not to mention, that there is also some chance that technology will make your investments less valuable—be it because of nano machines, 3d printing, uploading, AI-related progress, x-risk or ‘the singularity’.
The odds of that are low—new technology increases the overall wealth of society, after all. Yeah, I might lose some if I invest in the wrong fields, but if I invest in index funds, the mint made by a company with a really good new idea will outstrip the losses from the buggy-whip companies.
Is it rational to invest in Bitcoins for retirement?
The generalized question is is it rational to invest in things with small chances of large payoffs. The answer is a qualified yes, given a few conditions.
You must have some expertise in the area you are investing in.
You must be young and thus have high risk tolerance.
You should not devote too large a fraction of your portfolio to this, despite above.
The pool of people who would devote a significant portion of a windfall to SENS or MIRI should be more risk tolerant in their investments than average.
According to the academic literature, the opposite is true:
“Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets?” Antti Ilmanen Financial Analysts Journal, September/October 2012, Vol. 68, No. 5: 26–36.
“The empirical evidence is unambiguous: Selling insurance and selling lottery tickets have delivered positive long-run rewards in a wide range of investment contexts. Conversely, buying financial catastrophe insurance and holding speculative lottery-like investments have delivered poor longrun rewards. Thus, bearing small risks is often well rewarded, bearing large risks not.”
People seem to overestimate events that are salient yet have small probability of occurring. The empirical evidence bears this out.
Investors tend to overestimate the odds of tail events, so selling insurance and lottery tickets is long-run profitable.
According to this TechCrunch article, 87% of surveyed economists are bearish on Bitcoin. So we can speculate about cost of adoption, velocity of money, deflation, and volatility all we want, but it seems that the people with PhDs who really know this stuff aren’t optimistic.
Still probably a good idea to invest in Bitcoins some, just keep a diverse portfolio.
Edit: these economists don’t seem that bearish, and they also seem to think they are pretty clueless.
I’m not sure that bitcoins will stay this valuable for several more decades.
Maybe, invest some but not all of your savings in bitcoins.
Standard financial theory says that in the absence of specialized information about what assets are better than others, you want to invest in every single investable asset proportionally to their total value. The Bitcoin market is worth about $2 billion at current prices, compared to some $25 trillion for stocks, meaning that in principle you should put $1 into Bitcoin for every $12,500 you have in stocks. (In practice, transaction costs make this completely infeasible, as should be obvious, but that’s the mathematical argument)
“Kelly’s results are not necessarily normative but rather descriptive.”
Forget saving for retirement, even if that is the stated reason. Perhaps people are actually saving for the sake of saving, and it happens that they start using the savings when they can work no longer.
Why save at all? Maybe to help your children when they need your help. Maybe it’s fun.
That said, everything depends on what you want out of life. If you must believe that you will live on after death through cyropreservation, then it makes sense live and let freeze. But I would rather choose to prepare for a situation where cryopreservation is not possible within my lifetime, until I am convinced otherwise. I’m not yet convinced.
Which dystopian state is this, that caps retirement payouts? I can understand corrupt states stealing retirement money, but having an actual policy that none may have more than that?
I suspect that the OP is talking about what would in the US terms be called “defined benefit” plans—as opposed to “defined contribution” plans (like 401(k), etc.)
This is Brazil. I’ve checked now, and indeed: A aposentadoria pode variar de R$ 678,00 (salário mínimo) até R$ 4.159,00 (valor máximo corrigido anualmente). 10 Brazil reais = 4.93754 U.S. dollars
Is this not like this elsewhere?
Is anyone open to negotiating a formal marriage by the way? message me. I generally fear that maybe states will pay for longevity stuff, and my citizenship will put me out of play. Also, I want to live in Berkeley or Oxford.
I suppose the cap limits the pensions provided by the state and you can in principle buy a private life insurance to increase the payoff, right?
Sure. Though I thought life insurance means something you get when you die. We have private enterprises that do retirement plans too. Maybe that is what you call “annuities”, or not.
Annuities refer to a fixed stream of payments for an extended term(life or a defined term, depending on the annuity). There’s also conventional retirement accounts, that are just a big pile of stocks and bonds that you sell when you want cash. Neither is capped in any non-Communist country I’ve ever heard of.
Saving for retirement is the traditional conscientious young person thing to do. It doesn’t make any sense if you believe in radical life extension or uploading or the singularity (assuming it’s within your lifetime). As medicine and technology increase, retirement age will stop even being a thing, because it won’t make sense to stop working at 65 and then live 65-650 more years.
On the other hand, investing to maximize your long-term income and wealth potential makes a LOT more sense than saving for retirement. Basically: saving for retirement is like taking the sure 450 instead of flipping the coin for 1000.
It still makes sense as a hedge against being wrong about any of these, I would think.
I get that the tax structuring in some countries makes the two seem like different things, but at least where I live(Canada), you can pretty freely relabel “retirement” money as “stuff I want to buy” money. (You pay tax on withdrawals, but given that deposits are pretax, it’s usually a wash). Savings made “for retirement” can easily be used differntly if medical technology does advance that far. If it doesn’t(which is my expectation, sadly), then I’ll still be able to retire when my body turns to shit.
Saving for retirement makes sense even if you don’t expect to retire provided that you can access the retirement funds for other purposes, and that the laws of your country are such that this is still an advantaged position. In the United States and some other countries, saving for retirement is investing to maximize your long-term income and wealth potential.
Saving for retirement makes more sense, not less, if there will be radical life extension. Do you want to work for 650 years? or work for 50 and play for 600? (Feel free to define “play” as choosing more fulfilling but less lucrative work.)
Most importantly, saving for retirement makes a heck of a lot of sense if you don’t place 100% certainty on uploading or the singularity by the relevant date when you’d otherwise retire. Or you aren’t sure the singularity will actually eliminate the need for money and capital. For instance, what if uploading is possible, but costs $2 million a person in 2013 dollars? A magical singularity genie that grants everyone a cycle of infinite wish spells would be awesome, but it is not a retirement plan.
Assuming logarithmic utility, that’s the right thing to do if you have less than about 2000 to start from—and that’s without even considering the possibility that the person offering you the bet may have loaded the coin.
Even if you believe in radical life extension or uploading or the singularity will be within your lifetime it still makes sense, indeed it makes more sense, to save in tax advantaged retirement accounts. Given two accounts into which you can place the same investment, one taxable and one not, by all means pick the non-taxable one. This is investing to maximize your long-term income and wealth potential.
Feel free to keep working and making money at 65. For myself I hope to be productive and active well into my 90s or beyond. But tax advantaged retirement accounts are still the best possible investment vehicle for almost everyone. The only exception I can think of would be someone with a very short time horizon due to illness or something that’s going to require a lot of cash fairly soon like a house purchase. If you’re planning to live forever, you absolutely want to use a tax advantaged retirement account for your investments even more.
I wonder if there are any death insurance companies, where you give them your retirement savings, and when you retire they pay you money continuously until you die. That way, they can pay you extra to take into account that you might not live that long.
The question is how much you care about that person. Does having a worldline connecting you matter regardless of length? Does it matter at all? Do you care about them inversely to their chronological distance to you? There’s not a particular rational answer. It’s just a question of your values.
Yes; they are called annuities (well, some types of annuities work this way).
Wait annuities are tontines? Cool.
Not precisely tontines. For variable annuities, your return depends much more on the market (highly unpredictable) than on the deaths of other members (highly predictable, in aggregate). For fixed annuities, of course, your return is fixed.
The “death Insurance” you propose is called an annuity. It’s a very standard and common product. However in practice it is almost always a bad investment. You get higher returns at less risk in an index fund with a large bond component. There may be very special cases where it makes sense for very wealthy individuals, with particular tax or estate issues, but for most of us an annuity is a ripoff.
That article is about deferred annuities which when used correctly are basically a tax-advantaged retirement account. There are lots of kinds of deferred annuities, some of which are gimmicky, all of which charge some fees to capture some of the tax subsidy.
Immediate annuities are “death insurance.”
There’s no reason in principle it has to be a bad investment. What’s stopping banks from lowering prices to compete against each other?
Banks need to make money on their products. Instead of offering annuities they could just put that money into the stock market* . So they need to make as much as they would in an index matching fund plus operating expenses plus a profit.
So their actuary says, “this guy will (statistically speaking) live another 23.2 years. If we pay him x dollars a month, we’ll break even on his premiums”. And the actuary’s boss says, ok, pay him x-.12x.
Banks could compete on that −12%, but only so far. The cost of administering the program, plus profit is the friction, the waste that you’re losing out on, and it’s usually far more than the risk you’re mediating by not putting it all in an index fund.
Basically, the bank is an unnecessary middleman. But a) they’ve got good salespeople and b) most people don’t control their money optimally, so the waste of annuity may be less than the waste an undisciplined investor may make.
*This is an oversimplification, there are issues of risk diversification, and probably some laws about where banks invest their money.
Can you explain further?
If that’s an honest question, you’ll need to be more specific.
When I asked that, it just said “actuaries”. Based on the time of the last edit, I can only assume that you edited it before I actually posted.
They’re not mutually exclusive. I would assume they’d invest the money they’re holding. I guess it needs to be a little more complicated if you add that you don’t mind a chance of them losing some of your money, but it can still be done.
Yes, sorry, I realized quickly after I posted that “Actuaries” was both inaccurate and unhelpful.
And it’s much more complicated.
Longevity insurance is available from several insurance companies.
Is it a good idea to give a financial incentive to a big company to make your life shorter?
If after the moment you buy your insurance you make some changes that increase your expected life span (e.g. give up smoking), can you be sued for insurance fraud?
This depends partly on the terms of the insurance and partly on the laws. I work as an actuary and at the moment our company’s rules are:
if the price of the insurance depends on your occupation, you are obliged to report if your occupation has changed and your premiums may be reset to new values (higher or lower)
if the price depends on whether you smoke, you aren’t obliged to report when you start, but we reserve the right to ask you and then you must truthfully answer (and then the premiums may change)
if the price depends on you weight, only your weight at the insurance start date is important, no need to report later changes (and even if you do—e.g. in case you sign another insurance—your old premiums remain intact)
if you lie or violate your obligations to report, your benefits may be cut in the ratio of your actually paid premiums and the premiums you would counterfactually pay if you hadn’t lied (this is, more or less, specified by the law)
We don’t sell any policies which are more expensive for people who are less likely to die (such as pure endowments), but even if we did, I find it hard to imagine that we’d offer lower price for smokers. That would be pretty bad marketing—“insurance company XY motivates their clients to smoke” makes for a pretty diappointing headline. Suing a client for quitting smoking? Unthinkable.
By the way, if I decide to invest in my retirement, I’d want to buy pure annuity without any guarantee or death insurace; I’ll need the money if I survive to old age. Unfortunately I don’t even know whether such products are ever sold, people clearly prefer to have a guaranteed 10 year annuity or fund transfer to their heirs in case of death or whatever similar, since they are now certain that the insurance company doesn’t consume their savings if they die. But it makes the insurance significantly more expensive and most of the advantage the insurance has over bank savings is lost.