What You Really Need for Retirement

If you look at advice from financial adviser after adviser, they all say you need to have 70 to 80 percent of your pre-retirement income and at least 10 times your earnings in savings in order to maintain your same living standard in retirement. Is this really true, or is there a certain amount of scare tactics in all all this advice (after all, you more you save and invest through those same advisers, the better their income will be!)?

 

Let’s look at what changes when you retire. The big change in income sources is from your paycheck to social security, pensions, and money you withdraw from your savings (instead of adding to those savings). The other big changes deal with what you do in retirement – at the least, there is no more daily commute to work, which might mean no need for two cars, but might also include more vacation type travel that you couldn’t do while working. Let’s put some numbers behind this.

 

Assume a total family income of $100,000. Out of this, you normally pay a net of about $13,000 in federal and state income taxes, plus an additional $7400 in social security and medicare taxes. In California, there’s also another $900 in worker’s compensation taxes. So your net after tax income is about $78,700. If you’ve been following the advice about savings, you’ve also been stashing at least another $5000 in your IRA/401K, and paying another $4000 in medical insurance, assuming a typical employer/employee split of this cost. So your actual cash income to handle everything else is about $69,700. This number matches up pretty well with the low end of what they say you’ll need in income, but will you still need this much?

 

As alluded to earlier, one of biggest changes when retiring is no more commute or need for a second car. Just how much does this cost? The annual cost of car is about $2500, assuming a typical car bought and held for 10 years. Gas for a 20 mile commute 250 days a year at 25 mpg at $3.35/gallon is $1340. Car maintenance is another $800 (tuneups/oil changes/smog checks/tires, etc). Auto insurance is another $600/year. Total cost/year $5240/year, which is not insignificant. Let’s reduce what you need to retire by this amount, leaving us with $64,500 that we need to find somewhere.

 

The other big change is hopefully you have now paid off your mortgage on your house, or, if not, you have enough equity to buy another smaller house (after all, there probably aren’t any kids to house any more) free and clear. This is probably the biggest variable in calculating what you’ll need; obviously if you’ve been renting all your life, you’ll still need to rent or take enough out of your savings to buy one. As a mortgage on a $250,000 house runs about $1250/month or about $15000/year, whether or not you’ll need to fund this in retirement is a big deal. I’ll assume for the moment you don’t need this, leaving us with only $49,500/year to come up with.

 

Social security at full retirement age for someone who earns $100,000 (and has earned similar amounts adjusted for inflation through most of his/her working life) is about $2500/month, or $30,000/year. This leaves about $20,000 that we need to get from our savings. Assuming you’re withdrawing at 4% from your IRA/401K, that means the account balance should be $500,000. Note that at this income level, your federal and state income taxes are near nonexistent. If you haven’t paid off your house, let’s add another $250,000 so you can buy one. This makes the total savings needed is $750,000, still quite a bit less than the advisers advocate.

 

So it would seem from all the above that the advisers are inflating the requirements by about 1/3 to ½, which is quite a bit. More might be better, but some people are being scared so much by the advertised numbers that they are delaying retirement, and possibly missing some of the best times of their lives.

Ayn Rand and the Gold Standard

This is the first in a series of posts that will look at the philosophical points Rand presented in Atlas Shrugged. I picked on this particular item to tackle first because its probably the easiest to debunk, and it’s an item that I flagged as invalid even on my first reading of this book back in 1965, when the US was still nominally on the gold standard.

Rand makes several references throughout the book that gold is the only ‘true’ money, that anything printed by a government is essentially valueless as governments can always print more bills, essentially creating value from nothing. But she is making a very basic logical error, that just because gold has been used for many centuries by many cultures as a yardstick of value, that gold has an intrinsic real value. This is obviously false. If you are standing naked on an iceberg, which would you rather have: a nice warm parka or a pound of gold? If you answer this by choosing gold, then I’m afraid you’ll not be around for very long.

Gold’s value is relative to what use it can be put to. Clearly it won’t directly help in a survival situation, and gold has very few everyday uses other than for jewelry and electronics. But if there was an Inuit standing on the other side of that iceberg who had an extra coat that he would be willing to give you in exchange for that pound of gold (because he likes how it looks, and he’s not freezing!), now that gold has some real value. This illustrates that the value of any gold you have is dependent on what other people are willing to exchange for it.

So why has gold been used as a currency standard by so many for so long? Gold has several properties that make it useful (but not essential) for this purpose. It doesn’t corrode (do you really want that money you stuffed under your mattress to turn into crumbling powder a year from now?), it’s not flammable and resists acids quite well, it’s quite malleable and easy to strike into coins that are easy to carry, it is relative rare and takes a fair amount of effort to find, extract and refine (if your money was based on, say, timber logs, then everyone could go chop down their backyard tree and presto! they have more money – except, when everyone does this, no one would want more timber logs) . It’s this last property that Rand seized on – governments can’t just create a new ton of gold whenever they want; the supply is limited and not likely to grow substantially in any human-life time frame.

But gold is not money! Money is merely a medium of exchange, a human invention to allow for the exchange of goods between various parties without the hassle of barter – my bushel of wheat for Joe’s ounce of salt, that I will then use to trade for Jimmy’s rabbit – barter as a system is unwieldy and does not scale with increasing population densities. Anything can be used as such a medium, from cowrie shells to, yes, salt (they’ve both been used as such). All that is required for something to serve as money is that all the parties in a society will accept the item as a marker of value, and the same people have pretty much the same appreciation of what the value of one unit of that marker is.

So what will change people’s valuation of the worth of that marker? Like almost anything else, the value of a currency is dependent on supply and demand. If a government prints more and more markers, supply goes up, but the value of each marker will only thereby go down if there is not an equal increase in demand. What causes the demand to increase? Production of more goods, things that have intrinsic value (food, clothing, housing, etc), and more people. If the supply of markers was totally static, population increase alone would eventually increase the value of the markers (only so many to go around!), so governments (or whoever is controlling the supply) do need to make more markers available over time. How many to make is not clear cut; clearly if way too many are made, you end up with the hyperinflation of post WWI Germany; too few can lead to a brake on growth and recessions.

But forcing a government to limit its marker supply to the amount of gold it has in its treasury (as Rand basically advocates) is idiotic. Money is a tool, and like any tool needs to be used correctly. Using gold as a basis for a currency does impose some limits that would help curb irresponsible spending, but the real answer is for the government to act in a responsible manner at all times – and if it doesn’t, it’s time for a new government, which will almost automatically occur if hyperinflation sets in.

The ultimate value of any currency is dependent on the people who use it having confidence that everyone else will accept it, will be willing to trade things of value for it. Here the Tea Party has some valid points. They are insisting that the US government limit its spending and have a concrete plan for how to pay for the things the government is funding. Both of these items are likely to increase everyone’s confidence in the long-term viability of the dollar. But adamant, no compromise allowed, stances on these issues to the point where the government must shut down does just the opposite, and can do real harm to our economy and everyone’s standard of living.

Atlas Shrugged as a Novel

Got to wondering about just what makes the Tea Party members tick after their disgraceful showing in the government shutdown debacle, so I decided to re-read Ayn Rand’s Atlas Shrugged, which many Tea Partiers will list, if not as their Bible, at least as their inspiration.

WARNING: There are major plot spoilers below. If you haven’t read this book yet, and don’t know what happens within it, stop reading here!

Now this is a massive tome, clocking in at near 500,000 words, and is basically Ms. Rand’s magnum opus, laying out in detail (very detailed!) her philosophy of life. I first read it when I was about 18, along with her other novels and some of her non-fiction works like The Virtues of Selfishness. Many of her points registered very well with my younger self, though even then I could see some problems with parts of her stated positions.

This post will try and tackle the merit of the book as a novel, without (as much as possible) delving into the philosophy; later posts will tackle that aspect. Now this book has, in various reader polls, been highly touted as one of the best in American literature in the 20th century, so one might expect to see a truly impressive work that delves deep into what makes people act the way the do and provides great illumination into the mysteries of life. Unfortunately this is very much not the case.

First is how Ms. Rand depicts her characters. Every character who stands on the ‘good’ side is depicted as standing straight, with forceful demeanor, with great pride in both body and mental outlook. Every character on the ‘bad’ side slouches, won’t look other people in the eye, and has either confused or poor images of themselves. This is not a realistic depiction of people in real life, but rather the type of characterization typical of melodramas. In real life you can find heroic characters who are fat and slovenly, and lowlifes who look great and have both charisma and strong positive interactive traits with other people. The constant depiction of all the characters in this manner eventually becomes quite annoying.

Then there is the aspect of her major characters on the ‘good’ side all knowing exactly what they want to do with their lives at a very early age (like 12), and who actually follow through with those initial choices. Again, not realistic. On top of this, the three major characters all work their way up through their occupation of choice, starting at the very bottom of their industries, even though they did not have to, while those characters on the ‘bad’ side either directly inherit their positions or obtain them from friends in high places. Then too, her ‘good’ characters are always superbly competent at whatever task they try and tackle, while the opposition is portrayed as remarkably incompetent and incapable of making any decision of any import. Even her minor characters follow this template, this either-or construct of being very competent at what they do or totally incompetent, not capable of doing anything constructively. This black-and-white depiction of people is more suited to an allegory than a novel about real people in a real world.

The portrayed sexual relationships of her characters are also far removed from reality. Each of them, just at the sight of someone of the opposite sex who embodies Rand’s ‘perfect’ traits, falls immediately in love with same. And if someone comes along who is even a better match for what Rand considers ideal, well, the love allegiance immediately switches to this new person, with hardly a guilty glance backward to the prior lover. Also noteworthy is that same-sex relationships are carefully not touched upon, even though there is a stated strong bond between those who respect each other. And it’s a very white world that is depicted; people of color don’t seem to be part of it, or if they do show up, it is in very minor roles.

So why do so many readers so closely identify with her protagonists, who find these characters intriguing and very much worth emulating? I think the answer to this lies in the fact that they are presented as out-and-out heroes, a thing that has become very uncommon in American literature from about the mid-20th century onward, replaced by Joe everyman, the man in the street, the psychotic, the down-and-outers, the milquetoasts and just-get-by people (as a prime example of this, and a very good one, see Arthur Miller’s Death of a Salesman). There is an element in most people that needs someone to look up to, someone who is much better than they are, that they can imagine themselves as possibly having some of the same traits, and Rand’s heroes certainly fit this need. Then too, Rand’s heroes actually change the world by their actions, overcoming obstacle after obstacle, and fighting a seemingly never ending battle against the forces of obvious evil. This, I think, produces the same kind of attraction that something like Tolkien’s Lord of the Rings does; everyone has at least a small fantasy of being able to change things for the better.

Let’s look at the setting for this work. It imagines an America that is slowly falling apart, where industrial production of goods and services keeps falling, and company after company is failing. It is an America that is very much dependent on the railroads for essential transportation of most resources and products, which will probably strike a modern reader as a little odd. Here I have to give Ms. Rand a little slack, because at the time she starting writing this work (1946), this dependency was actually true. Like many authors trying to predict a near future world, she did not foresee certain advances such as the rise of the airlines as cargo carriers and the interstates with 18-wheel semis that made her depicted world somewhat anachronistic. And it is still true that the railroads do carry the lion’s share of natural resources and bulk items around the country, although their passenger business has declined radically. Where this becomes important is exactly in the passenger area; the ability of people to get from place to place quickly hinges in this novel almost solely on the railroads, a great odds with the world as it is today.

Also highly visible in this setting is the role of government in commerce, in taxation, in the setting of rules that companies, unions, and the working man must abide by, a stifling, omnipresent octopus invading every aspect of American life. Some may claim that this intrusion of government into everyday life has gotten far worse than what prevailed at the time this work was written, that there has been a steady erosion of individual freedom to do as they wish, but many of these things are at least intended to help the individual avoid catastrophic risks (think airport security checks). Within the confines of this work, Rand sees the government as the ultimate looter, taking from all those who are productive and giving some to those who are only looking for handouts while lining their own pockets. I will cover this aspect in greater detail in the posts on the philosophy of the book.

In terms of plot, the first two-thirds of this work mainly follows Dagny Taggert, Vice President of of the largest railroad company in America, and Hank Reardon, a self-made man who has invented a new metal considerably better than steel and who has built a large company of foundries and forges, becoming one of the preeminent suppliers of this basic construction material. Each faces opposition, Dagny from her brother James, who as President of the company takes all the credit for her successes, and is the one with so-important ‘connections’ with Washington, even though he himself never seems capable of making a decision or have an idea of his own, and Hank from his wife, who doesn’t understand his obsession with making the best structural metal in the world, who wants him to be her slave, who feels entitled to everything he does, without any effort on her part.

Both Dagny and Hank, in order to perform their job, are dependent on the products of other companies (iron, copper, coal, oil, railroad switches, diesel engines, etc). The best companies that can supply these things are headed by forceful, decisive, and forward looking people, people of the same mold and mindset as Dagny and Hank themselves. But mysteriously, one by one these company heads are disappearing, ‘retiring’, even though they have very vocally and publicly declared they would never do such a thing, that their companies were their lives. As these people disappear, their companies are taken over by incompetents, and can no longer be depended on to supply the things Hank and Dagny need. The government’s reaction to this problem in the supply chain is to declare an economic emergency that freezes pay and profits and makes it a crime to leave a job, and intellectual property must be ceded to the government for proper ‘use by all’. Seemingly as a sidelight to this, Francisco D’Ancona, head of the largest and oldest copper mining company in the world, is portrayed as a wastrel, a party-hound, out to destroy his own company, even though he is clearly highly intelligent, competent, and keeps making statements that are in direct opposition to this image.

These elements do make for a fair amount of suspense (who is making all these people disappear, and why?), and much of the middle section of the book focuses on Dagny’s search for the “Destroyer”, all the while battling the increasing problems of continuing to make her railroad operate properly. However, I have a serious problem with Rand’s assumption that companies need to have super-competent and driven people in charge in order to function, and that therefore the removal of these people would cause an economic crisis. First, there are simply too many companies producing all manner of goods, in a very complicated interweave of interdependencies and with a large amount of redundancy, for the demise of merely a few companies to seriously impact the economy. Second, many companies function quite well without having a hotshot in charge – sometimes a cautious, risk-averse company head is exactly what’s needed to keep the company producing its goods on time and on budget.

And this is the prime assumption underlying the plot – that a strike by a few main ‘producers’ of the world will eventually bring the entire world economy to its knees and force a realignment of the social order. Clearly this assumption does not have a good basis in the real world, so when this is revealed as the basis behind all the disappearances, it makes the reader feel like he has been cheated somewhat, that the entire framework of the novel as a novel is based on something that is not real.

Dialog within this work seems to go on forever, as character after character spouts multi-page discourses on morality, sex, economics, the goal of science, what constitutes ethical behavior, the value of money and the gold standard, looters and moochers, and every other part of what constitutes Rand’s philosophy. This all culminates in a 60 page (!) speech by John Galt, the person who instigated the strike. Once again, normal people do not speak like this, and the repeated statements of various parts of this philosophy become quite wearisome by the end of this work.

Given all the above, I find it remarkable that this novel is not only still read today, but is immensely popular. As a novel, this work is blatantly bad. It only really has two points going for it: its portrayal of real heroes, and a presented philosophy that seems to resonate with many people who don’t look at its underpinnings too closely.

I’ll look at those underpinnings in later posts.