MONEY Planning

When Conventional Wisdom About Retirement is Good Enough

Retirement investing isn't an exact a science. Rather than worrying whether the rules need to be tweaked, just start saving.

What keeps you up at night?

As a money manager, I recently polled my clients on several questions, and that was one of them. Replies ranged from “my bladder” to worries about the Federal Reserve printing too much money.

The most common answer, though, was fear of outliving one’s savings.

For decades, people have confronted the issue of how much they need to retire. Today the topic hits with special force. People are living longer, and the financial crisis of 2007-2009 set millions of people back twenty squares on the economic game board of life.

Now, there’s much debate about whether traditional retirement planning advice needs to be tweaked.

The traditional advice on income, for instance, is that people in retirement need about 60% to 70% of their old annual income to keep roughly the same standard of living. Remember, when you retire, your taxes may be lower, your children may be grown, your commuting and clothing expenses may shrink, and you may move out of a big house into a smaller house or apartment.

If savings and investments were your sole source of income, you would need – again, by conventional wisdom – about 25 times that sum in hand when you start your retirement. That is based on the traditional assumption that you can safely withdraw 4% of your initial nest egg each year and still have it last at least 30 years, regardless of market conditions.

That means if you earned $100,000 a year at the peak of your career, you would need about $65,000 a year in retirement, and 25 times that amount is $1,625,000.

Of course, inflation may increase your costs as years pass. If inflation runs at a 3% clip, a loaf of bread that costs $2.50 today will cost $4.50 in 2034. At 5% inflation, the same loaf would cost you $6.62.

You can offset some of the effects of inflation by your savings and investments, post-retirement. My father retired at 77 but invested in the stock market, logging prices and trends on charts he kept by hand. When he died at 98, his net worth had increased 75% from the day he retired.

Social Security can help, too. Despite doomsayers’ screeds, I believe the Social Security system will be around in 30 years. But benefits may be a little less generous than they are today.

These days, I see a lot of articles by financial planners questioning the guideline that it’s prudent to withdraw 4% a year.

I’ve seen planners argue for anything from a 2.8% withdrawal rate to a 5% one.

Those arguing for a smaller withdrawal rate — which implies the need for a bigger nest egg — say it’s hard to earn 4% a year after taxes without wading into risky investments. Savings accounts are paying a paltry 1% to 2%, and that’s before taxes.

But I think that’s a short-term view. Savings rates probably won’t stay as paltry as they are – just as inflation didn’t stay sky-high, as it was in the early 1980s.

For the long run, I think the 4% rule provides a decent, if crude, approximation.

Let’s be realistic here. Accumulating a pre-retirement hoard of 25 times the expected annual need is an ambitious target to start with.

But it’s something to strive for.

MONEY The Economy

The Capitalist Argument for Renewing the Export-Import Bank

While this bank is a government agency, it levels the global playing field and promotes U.S. jobs.

Having excoriated big-government liberals and tax raisers, the Tea Party has now set its sights on the Export-Import Bank.

To the anti-government Tea Party movement, the bank is just one more government intrusion into things that private parties can do for themselves.

Created in 1934 by President Franklin D. Roosevelt, the Export-Import Bank is a U.S. government agency that lends money to foreign buyers to help them purchase our airplanes, computers, and other goods and services. Since 1945, its charter has been subject to periodic renewal by Congress. The latest renewal runs out in a couple of months.

In the vast majority of cases, the loans are paid back in full, with interest. Last year the default rate on loans the bank made was about 0.2%. The bank earned about $1.06 billion for the federal Treasury.

The bank is not supposed to compete with private lenders; therefore, it specializes in higher-risk loans that private institutions are unlikely to make. Over the years it has financed many large projects, including the Pan American Highway that runs from Alaska to Chile. It was involved in the Marshall Plan after World War II, and in the rebuilding of former Soviet countries after the fall of the Berlin Wall.

Who Benefits?

The purpose of the bank is not primarily to help the countries to whom money is lent. It’s to enable them to buy our goods and services, and therefore to create jobs in the U.S.

Between now and September, the reauthorization deadline, the Tea Party will be arguing that the main beneficiaries in the U.S. are big companies that don’t need help.

When you look at the organizations now lobbying for a renewal of the Export-Import Bank, it might appear that the Tea Party has a point there.

Among the organizations that have been speaking up on behalf of the bank are Boeing, General Electric, the U.S. Chamber of Commerce, and the National Association of Manufacturers.

At this moment, the battle is too close to call. In the Senate, sentiment appears to favor renewal of the bank’s charter. In the House, there is a good chance that the majority will vote for its abolition.

Competitive Landscape

My biggest disagreement with the Tea Party here is that it doesn’t make sense to be an ideological purist and think only in terms of the U.S.

Foreign companies such as Airbus receive a variety of subsidies to help them compete internationally. The Export-Import bank provides an indirect subsidy to U.S. manufacturers, helping their customers afford our goods and services.

Why should the Tea Party attack an institution that evens the playing field, helps to create jobs in the U.S., and makes money for the Treasury?

Harry Reid (D., Nev.), the Senate majority leader, is talking about a short-term reauthorization of the bank, tied to a bill that would fund the government past September 30 — again, for the short term.

A more statesmanlike solution, I’d say, would be to extend the bank’s charter for at least another three years, as Congress has done 16 times before. The most common extension period has been five years. That’s what the administration has asked for this time, and that’s what Congress should do.

John Dorfman is chairman of Thunderstorm Capital LLC, a Boston money-management firm. He can be reached at jdorfman@thunderstormcapital.com.

MONEY The Economy

The Surprising Reason You Need to Save More

While households are encouraged to spend for the good of the economy, history shows that high savings rates actually correspond with strong economic growth.

Does the U.S. save enough?

I’ve heard lots of rhetoric spilled on that question, but few facts.

That’s why I was intrigued by an analysis published this year by Ned Davis Research. The investment research firm looked at seven decades of data and compared “net national savings” with real growth in the U.S. economy.

National Savings

Net national savings is the sum of all the savings by individuals and families, corporations and the government. This number is then divided by gross domestic product (GDP) to get the national savings rate. Here are some of the findings:

* A “high” savings rate of 8.2% or better corresponded with an annual rate of GDP growth of 3.6%, on average.

* A mid-level savings rate of between 2.8% and 8.2% corresponded with GDP growth of 3.4%.

* And a “low” rate of below 2.8% corresponded with GDP growth of only 2%.

The conclusion: “The more money people have in savings, the more money there is to invest, and the better the economy performs,” wrote Ned Davis, head of the research firm.

During and after the financial crisis of 2007-2009, the savings rate plunged into the low zone, and actually turned negative in 2010 and 2011. Only very recently has the savings rate — barely — climbed back into the medium zone.

“The net national saving rate is greatly improved,” Davis wrote, but remains in “troublesome territory.”

Personal Savings

The personal savings rate (leaving government and corporations out of the picture) also deserves close attention. For years in the 1960s and 1970s it stayed near 8% of household income or above. In 2006-2007 it fell to around 3%, and lately has climbed back up to around 5%.

US Personal Savings Rate Chart

US Personal Savings Rate data by YCharts

Is that enough to finance a new boom in the U.S.? My guess is probably not. I’d like to see the personal savings rate resume its historic rate of 8% or more.

What Can Be Done?

Suppose the U.S. wants to improve its national savings rate? What needs to be done? To me, two things stand out.

First, we need to cut the budget deficit, probably through unpleasant but necessary measures such as making Social Security and Medicare slightly less generous. Why pick on these popular and important programs? For a simple reason: That is where almost half the money in the Federal budget goes.

Defense spending, which accounts for roughly 20% of the budget, can’t go unscathed either.

Second, if we want people to save, we need to wean ourselves gradually off the emergency medicine of super-low interest rates that was used to head off a potential depression in 2008. From 1990 through 2008, the average rate paid on savings account was 4% or more almost every year — sometimes much more. Today it’s around 1.75% or less.

No one wants to throw a monkey wrench into the economy’s engine by raising rates too abruptly too soon. But if we want people to save, it would help to pay them something to do it.

John Dorfman is chairman of Thunderstorm Capital LLC, a money management firm in Boston.

MONEY The Economy

Fix Roads and Bridges — Just Don’t Hike Gas Taxes to Do it

Closed-up cracked asphalt after earthquake.
Yiannis Papadimitriou—Shutterstock

Raising the federal gasoline tax targets the groups that contribute most to wear and tear on America's crumbling roads. Yet there are less regressive ways to address the country's infrastructure needs.

Who should pay to repair and improve the nation’s transportation system?

Someone has to. About 10% of the nation’s approximately 600,000 bridges are structurally unsound. Another 14% are antiquated. Tunnels, highways and mass-transit systems also cry out for improvements.

Yet the federal Highway Trust Fund, which is supposed to pay for most of this, is shaky. It has needed infusions from general revenues a few times in the past six years, and will run out of money this year unless Congress gives it a new allocation.

So who will be stuck with the bill?

• Taxpayers at large? This would come through the federal income tax.
• Trucking companies that put extra wear and tear on roads? That might be done by raising tolls on federal highways.
• People who drive a lot? This would involve raising the gasoline tax, as proposed this week by a couple of Senators.

Sen. Bob Corker (R-Tenn.) and Sen. Chris Murphy (D-Conn.) want to raise the federal gasoline tax to 30.4 cents a gallon over two years, from 18.4 cents a gallon at present.

Perhaps mindful of the Tea Party’s growing power, the senators say their plan won’t necessarily raise the total tax burden on Americans. To offset the gas-tax increase, they say, Congress could extend certain tax breaks that have expired or are scheduled to expire.

As one example, they mentioned the deduction for teachers who spend money on classroom supplies. Another example was the federal deduction for taxes paid to states. These deductions may be good or bad, but none of them offer much comfort to people who use a lot of gasoline.

The federal gasoline tax is only part of the picture. When I fill the tank of my wife’s Subaru in the Boston suburbs, I pay about $55. The gasoline itself costs me roughly $48, Massachusetts takes $4 and Uncle Sam takes $3.

If I lived in California I would be paying about $11 in combined state and federal tax for the same tank of gas. It would be about $10 in Connecticut or Hawaii.

Taxes on specific goods and services, such as gasoline or cigarettes, have two main purposes — to raise revenue and to discourage the use of the item in question. Proponents of higher gas taxes often point to the health effects of air pollution and a desire to encourage mass transit.

As a clean-air proponent, I’m tempted to endorse a higher gasoline tax. But it’s a regressive tax, hitting hardest those people who – often by necessity, not choice – have to commute a long distance to work.

It is more logical to have funds for transportation infrastructure taken from general revenue. That way the benefits of each item — defense, Social Security, Medicare, bridge repair, highway construction, and so on — can be weighed each another, and we can decide how much of each we can afford.

John Dorfman is chairman of Thunderstorm Capital LLC, an investment management firm in Boston.

MONEY The Economy

Don’t Count the American Economy Out Just Yet

Sure, China is gaining ground. But that's what they said about Japan a generation ago. And the U.S. remains the world's economic champ in more ways than one.

Now that China has passed Japan in Gross Domestic Product (GDP), some pundits figure it’s only a matter of time before it surpasses the United States to become the world’s economic power.

It’s way too early to come to such a conclusion. Here are the standings as of 2013, according to the International Monetary Fund:

GDP Chart new new In the 1980s, many people felt it was only a matter of time before Japan topped the U.S. Japan had a homogeneous population, low crime, good elementary education, a minimal defense budget, “just in time” inventories, “continuous improvement” in business practices, and a strong tradition of excelling at exports.

But when Japan hit what turned out to be an excruciatingly long period of economic stagnation, the tune changed. All of a sudden people were talking about Japan’s “structural economic flaws,” excessive consultation, inefficient subsidies for rice farmers, and political gridlock.

What it proved was a truth that has been demonstrated over and over – that people are good at predicting anything except the future.

To my mind, the advantages the U.S. has over China are considerable: a free market system, a tradition of rewarding success, peaceful resolution mechanisms for disputes, and best of all a culture of innovation. And while our education system at the lower levels may be so-so, our higher education system is still the envy of many countries.

Total GDP counts for a lot in determining which nations will wield power on the world stage. If you want to amass armed forces, or to send an astronaut to the moon, GDP is the raw material for those achievements.

However, the total gross domestic product doesn’t tell you how rich the average person is. For that, a decent approximation is GDP per person, and the rankings would be topped by the likes of Qatar, Luxembourg, and Singapore.

And even that measure fails to capture the ultimate thing that matters, the quality of life. Close to 50 years ago, Senator Robert Kennedy spoke eloquently about the limitations of GDP.

GDP, said Kennedy, “counts air pollution, and cigarette advertising, and ambulances to clear out highways of carnage. It counts special locks for our doors, and jails for the people who break them.”

At the same time, GDP “does not allow for the health of our children, the quality of their education, or the joy of their play….It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials….

“It measures everything in short except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.”

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser