Retirement? You can not afford it, and neither can your retirement fund.

How much money do you need to retire?


I don't know if you have seen this, but the retirement fund for public servants in the otherwise paradisical North Marianas, whose capital is Saipan, has filed for bankrupcy since it no longer has enough assets to guarantee its commitments.
That immediately made me donder: How much assets do you actually need to retire? Of course, it depends on how much you want to get per month. Say you need 2000 dollars a month, which probably is on the high side, but it depends a lot on where you live and what other assets you have. But it is an easy figer to use in calculations.
If you want to get 2000 dollar per month, and assume a return on capital of five per cent, it means you need 480 000 dollar. If you are assuming a return of three per cent, it almost doubles, to 800 000 dollar.
I think you can figure out what happened to the fund in the North Marianas: the return has gone down but they no longer have enough capital to guarantee the monthly payments to the retirees. And a fund has administration costs as well. So they probably did the right thing. The taxpayers may be on the hook but they have become hooked for so much that they will not notice. They will when the US states and the federal government stops whitewashing, though.
So this leads to two questions: how long time does it actually take to get together almost half a million dollar? And can you really get a return of five per cent on your money?
Let us start with getting the money together. 480 000 dollar is a lot of money. If you start working when you are 22, and stop when you are 67, it means you have 45 years to get the money. Actually, you do not have to save as much as that, since the compound interest kichs in and gives you some help. But not as much as it used to. Every 12 years or so your money doubles - if the interest is 10 percent. And since it is far from that, let us ignore it for now and just even out the numbers - 450 000 over 45 years. That is 10 000 dollars per year. 833 dollar per month. If your salary is 2000 dollar that means you have to save almost half. Well, not quite, but you may have to pay tax. This, by the way, is why it is so important to make tax-deferred investments, so you do not have to pay tax when your salary is at its highest. And to accept any employer contributions.
Let' s face it. Most.people will not be able to get together that kind of money. So can they get a return of five per cent?
That is a much more realistic proposition. On the Swedish stock exchange, which I know better than the American ones, there are several companies who consistently pay five percent - even more - in dividends. So it is quite realistic.
Now, there are two problems. The first is that there were many people who promised great returns - 10 percent was considered low, you may remember. They did it not by buying and holding stock which gave low returns, but by buying and se lling, preferrably using futures and options. Let us not go into how it works here, but in principle it lets you buy stocks at a much lower price than they are selling for. And you only paid a small fraction of the price for the right. You can make a lot of money that way. Or you can lose a lot of money. Most of the funds our retirement money is invested in did just that.
The second problem is worse, however. The funds do not hold stocks. Most public retirement funds hold one type of asset only, and may even be required by law to do so. They hold governement bonds.
But governement bonds are supposed to be a safe investment, you protest. That may be, if you like borrowing money from yourself. Or worse, your children.
The principal is less of a problem. Most governements borrow more money when they have to pay it back. But usually, they can not borrow to pay interest. They really should not be allowed to borrow to meet their running cost of operations either, but they are and they do and then you get a situation like Greece.
So where does the money to pay the interest come from? Why, the same place the governement gets the rest of its money: your taxes. Which means that if you have your money in governement bonds, your own or someone elses taxes will pay fur that five per cent return on investment.
Personally, I stopped hoping for much of a publicly funded retirement long ago. I do not believe governements will honor their obligations when push comes to shove - even if Sweden has a much better system than most. But I did not start saving until it was much too late. I just hope I can work until I am a hundred years old.