Retirement Savings

I recently read an interesting article in the Contra Costa Times about saving for retirement. The basic premise of the article is that people need to be saving a lot of money, and that saving more and starting earlier is far more important than getting a high return on your investment. For example, they state, based on their research:

Say you're a 30-something, with 30 years to go before retiring. Assume that you've already saved a year's worth of your current pretax salary. (In other words, if you make $100,000 a year, you've banked that amount.) Say you plan to invest conservatively during your working years, with 40 percent of your holdings in stocks and 60 percent in bonds. Then assume that you will downshift even more during retirement, to 20 percent stocks and 80 percent bonds.

According to the simulation, there is a very good probability -- 80 percent, to be exact -- that you would be able to replace 41 percent of your preretirement income once you left the work force. That assumes that you're able to save and invest 15 percent of your salary annually during your working years. (This figure includes all sources of savings, including your 401(k) money, 401(k) matches from your employer and profit sharing.)

Now say you decided to become more aggressive, putting 60 percent of your money in stocks and 40 percent in bonds during your career and then moving to 40 percent stocks, 60 percent bonds in retirement. Although you are now taking on considerably more risk, T. Rowe Price's study says this strategy is highly likely to let you replace 43 percent of your income in retirement -- a difference of just 2 percentage points.

On the other hand, if you increased your annual savings rate modestly, to 20 percent from 15 percent, you'd be able to replace 52 percent of your income -- and that's under the original, conservative asset allocation strategy that emphasized bonds.

Pretty interesting, I thought... but the kicker is this. Their savings recommendations for wage earners are pretty amazing -- and I don't think they are anything near what people are actually socking away.

The Schwab research center did its own study of how much investors should be saving, based on traditional assumptions like an 8 percent annual rate of return and 2.5 percent annual inflation. Its conclusion was that 20-somethings should be saving 10 percent to 15 percent of their salary each year, while 30-somethings who have nothing in the bank should start saving 15 to 25 percent annually. And those in their early 40s who previously neglected to save would need to set aside 25 to 35 percent a year.

If you are able to save this much, you should be able to replace most of your current income in retirement. However, do people really need their full income in retirement? I think that people are going to end up wanting something close to it, at least for the first decade or so. After that, they'll probably be a little less interested in travelling and doing some of the more costly activities we commonly associate with retirement. Unfortunately, they may also have an increase in medical costs at this point, so perhaps the lifestyle savings are negated.

Related to this, I recently read one of John Mauldin's Outside the Box newsletters, titled Saving for a Rainy Quarter Century and written by Gary North. It talks about the situation boomers are going to find themselves in, and offers very good, seldom seen suggestions on what people should think about doing while they still have the opportunity. I think it also offers a cautionary tale for us younger folks, and gives us a hint of what we may be going through with our parents in the future.

The best reason to have lots of children - ever!

Subtitle: Why I love economists

Only an economist (I think) could come up with an argument like this:

Basic microeconomics recommends a simple strategy. Have the number of children that maximizes average utility over your whole lifespan. When you are 30, you might feel like two children is plenty. But once you are 60, you are more likely to prefer ten sons and daughters to keep you company and keep the grandkids coming. A perfectly selfish and perfectly foresighted economic agent would strike a balance between these two states. For example, he might have four kids total - two too many at 30, six too few at 60.

Trust me - you'll thank me later. Your third child ought to thank me too, but we all know better than to expect gratitude from the young. Now all you have to do is convince your spouse!

There is a certain sense to this, I suppose, and I always love to see logic applied to issues that are generally much more in the realm of emotion. Not because I think it's the way it should be, but because I think the results are often quite amusing. The main thing the author forgets in this (and as a commenter mentioned) is that it doesn't account for grandchildren. Perhaps it would be best to have a couple kids early, so that you could be healthy and active when your kids have children - and you could then have two generations to care about (and for!) you.

This is a post from comes from EconLog, via Marginal Revolution. Marginal Revolution is a great blog, by the way - mainly written by two economists with frequent guest bloggers. They post on all sorts of great (and very interesting) stuff.

Arranging things differently

This morning, David Brooks has a column (sorry, registration required) that discusses something I've often thought about and discussed with my husband. He discusses the possibility of accepting more flexibility in the sequencing of women's lives, so that it might be easier for families to raise children. It's what I've somewhat inadvertently stumbled into, I suppose, and it would be really neat to see it happen on a more wide-spread basis.

The basic premise is this:
For example, consider a common life sequence for an educated woman. She grows up and goes to college. Perhaps she goes to graduate school. Then, during her most fertile years, when she has the most energy for child-rearing, she gets a job. Then, sometime after age 30, she marries. Then, in her mid-30's, when she has acquired the maturity and character to make intelligent career choices, she takes time off to raise her kids.

Several years hence, she seeks to re-enter the labor force. She may or may not be still interested in the field she was trained for (two decades earlier). Nonetheless, she finds a job, works for 15 years or so, then spends her final 20 years in retirement.

This is not necessarily the sequence she would choose if she were starting from scratch. For example, it might make more sense to go to college, make a greater effort to marry early and have children. Then, if she, rather than her spouse, wants to stay home, she could raise children from age 25 to 35. Then at 35 (now that she knows herself better) she could select a flexible graduate program specifically designed for parents. Then she could work in one uninterrupted stint from, say, 40 to 70.

This option would allow her to raise kids during her most fertile years and work during her mature ones, and the trade-off between family and career might be less onerous.

I think this could be a fantastic idea, and it could really help a lot of women feel a heck of a lot less stressed out in their lives. Sometimes I wonder if the go to school, go directly to college (and perhaps even grad school) and straight into the workforce meme is a bit too overemphasized. I find it amazing that we expect 18 year olds to make decisions about what they want to do for the rest of their lives - and that the idea of having a family or work and family balance hardly even surfaces.

An additional thought... as for that graduate program designed for parents, I think it would be great if grad schools would offer classes during the day. I know from personal experience that trying to do the night class bit with a child at home is pretty rough - having to leave at 5 and get back at 11 is not an easy thing to do with a family at home. I would much rather be able to do a part time program where I could take classes during the day, as that is much easier on the rest of the family. And also, once children are in school, it is the time of day that would be least disruptive to parents. Grad schools right now seem to only be focusing on people who can either do a full time program during the day, or people who can do a part-time program at night. Neither of those situations describe parents.

Definition of Success (or, the joys of surveys)

I read this bit in the "Value Driven" column in the 1/10/05 issue of Fortune Magazine. The columnist, Geoffrey Colvin, is talking about consumer debt levels, and offers this as a vivid example of the consumer debt situation.

The question asked respondents [in a Zogby poll over the summer] "what it means to be well-off or successful". You might have expected answers about expensive cars or multiple homes or luxurious retirements. But the top answer by a mile -- cited more than twice as often as anything else -- was far more modest: "eliminate credit card debt." That's financial success? The term used to mean having enough assets to live on. Now it just means getting out of the hole.

So, a pretty damning quote, I thought, but I also wondered what the survey question was really asking. Thanks to the wonder of the internet, I was able to find the quote and I found that it isn't nearly as clear-cut as the columnist makes it.

Here's the page with the survey questions and results (scroll about 2/3 the way down the page for this particular question) and I think that given how the question was asked, the columnist is seeing what he wants to see from the survey results.

Here's the way the survey phrased the instructions for this section:

Following are some ways that people define what it means to be well off or successful. As I read each, please tell me if fulfilling it is important in your definition of being well off or successful -- very important, somewhat important, or not important.

And then, as part of a list of 10 different options, the survey respondents answer the question that Colvin singled out for his column. I think that given these instructions, this answer is not nearly as disconserting as Colvin makes it out to be. I think that most people would agree that in order to be successful part of the definition is to not be in debt. They aren't saying that being out of debt is the main definition or the most important part of defining success, rather I think the results are saying that in order to be well-off or successful you shouldn't have a lot of debt -- which seems quite self-evident, hence the high survey results for that option. I don't think there is any redefinition of what it means to be well off or successful going on here at all.

Well, enough on this particular little thought exercise. I like looking into things like this occasionally -- I think it is a great way to sharpen the saw. (Yes, I did just finish listening to the 7 Habits of Highly Effective People - which I highly recommend)

Farm Animals

Why is knowing all the animals on a farm and the noises they make considered a critical skill for young children? For two year olds, it seems like it is given the same level of importance as learning shapes and colors. Is this a lingering throwback to our agricultural heritage? Is it because farm animals are considered "cute"?

I wonder if other cultures share this obsession with barking and mooing and oinking with their children (although different languages represent animal noises with different sounds, as I learned in a library book we checked out a few months ago)

And why are there so many children's books that take place on farms? And what is with the obsession children's authors seem to have with mice? Do they think that children identify with mice because of their size?

And tangentially related... what is with the prominence of the Noah's Ark story in children's decorations and toys? I guess people pick that theme because it is biblical and has cute animals with it, but do people think about what happens in the story before they paper their child's room with boats filled with cuddly animals bobbing serenely along on the water? I know of someone who told her two children (at ages 4 and 2) the story of Noah's Ark and the two girls cried for the rest of the night for all the animals and people who were drowned in the story.

Things I think about when reading endless numbers of children's stories, day after day after day...

Reading in 2004

Inspired by Anirvan's post over on the Bookfinder Journal I decided to put together my 2004 reading stats. I don't (currently!) post a log of all that I read, but I have been keeping track of all the books I've read since June of 1998.

So, without further ado...

2004 Reading Stats:
Number of Books read: 64
Average read per month: 7.8
Greatest number of books read in one month: 9 (March)
Lowest number of books read in one month: 1 (November, the month I read Quicksilver)
Number of Pages: 22,044
Number writen by female authors: 17 (28%)
Number writen by male authors: 44 (69%)
Number writen by at least one male and one female author: 2 (3%)
Number non-fiction: 19 (30%)
Number fiction: 45 (70%) (Sci-fi: 20 or 31% of the total and 44% of the fiction I read - and what is the definition of sci-fi anyway?)
Number of books I disliked: 3 (5%)
Number of books I am ambivalent about: 6 (10%)
Number of books I liked: 52 (80%)
Number of books I don't remember anything about: 3 (5%)

Looking over this, I'm surprised that I read so few books written by women. I think that is in part because I spend so much time reading Heinlein (10 books) and other sci-fi authors like William Gibson (4 books). I am also surprised that I liked so many of the books I read, although I suppose that's a good thing! I find it somewhat disturbing that I can't remember anything about 3 of the books I read. One of them, Killing Time by Caleb Carr, I didn't remember reading even after reading the description of the book on Amazon. I wonder what I thought of it at the time.

And just for reference, here's some historical data:
2003 - 55 books, 15836 pages
2002 - 70 books, 19880 pages
2001 - 91 books, 32494 pages
2000 - 82 books, 26025 pages
1999 - 79 books, 28245 pages
1998 - 58 books, 14414 pages (only 7 months recorded though)