Pension investment projection nonsense
I have been following news about the rate of projected earning on pension funds. "Long term" those making the decisions justify rates in the 7-8% range and they completely fail to assess what might be different so that long term that might not be so realistic.
The only reason I can come up with to justify that is that is what they've seen long term and if I expected the world to continue in the manner it has been going forever that would be fine. However, I think there has been a perfect storm of events to dramatically increase that "long term" rate.
1) Population has been growing at an exponentional rate for a few hundred years. Our planet is like a big petri dish and already we are seeing a declining rate of population growth and I expect that to continue. If you are making investments and there is constantly more people and more opportunity, well, it is much harder to go wrong then when population isn't increasing so fast. It does give a different demographic mix, and one with more competition as there is more "maturity" in the mix, less having to spend money on the family as there are fewer and smaller families. With population growth you end up with a very triangular demographic, weighted with youth at the bottom and age at the top.
2) Again with the population growth, there are less at the top that need to be supported. It seems to me it is way cheaper to support children then seniors. There is enormously less taxpayer support.
3) With a demographic bulge like with baby boomers we have had a huge growth in resources available for investment. They've been in their highest income earning range where many have seen costs reduce due to having paid off homes, children leaving home and there has been a growth in investment resources. Additionally, many have pensions that are also investing. This is simply supply and demand. There is a lot of supply of wealth for investments. It simply pushes the price up. We've had investment resources increasing due to the baby boomers probably for 25 or 30 years now and this is over and above the increasing population as a whole. This demographic bulge is very significant in being a long term thing and something that is going to look very different as each year now the number of people retiring is dramatically increasing.
4) Retirement is increasing simply due to the demographics of the babyboomers. This is going to lead to a complete reversal of what's been happening as I describe in number 3. I was doing some projections on my retirement income last night and I'm at the tail end of the baby boomers. We are this huge group and we are all thinking about retirement and what that's going to look like. Right now I save, and when I retire I will draw on savings. I will do a completely reversal in terms of increasing those investment resources to be drawing on them and I think this will be true for most people. Pension funds are hiding this reversal right now because there are still more people in the high income contributing range then those retiring, but each year this swing is going to get worse. With supply and demand we have to see a massive repricing of investments and it isn't going to be in our favour. It isn't going to peak until around 2026. I give this year as my estimate because I'm at the tail end of the boomers, the year that I was born was the peak year for births before the birth rate turned around and started to decline. I just don't see how the market does well over this period. Well, massive devaluing of the dollar might give the appearance of "growth" and investment return...
So, back to my "projection nonsense" title. I was looking at actuary figures for my own retirement and I looked at how much income per month a person could draw for each $100k in savings, and it varies enormously based on the interest rate. I also did the calculation for 30 years, which is too long for the average, but certainly what an individual wants to use to because we all want to believe that we are going to be the one that exceeds average life expectancy.
So, here it is, from 0 to 10%:
0% - $277.78
1% - $321.64
2% - $369.62
3% - $421.60
4% - $477.42
5% - $536.82
6% - $599.55
7% - $665.30
8% - $733.76
9% - $804.62
10% - $877.57
So, these pension funds are using rates of return in the 8% range based on a perfect storm of events which cause unsustainable returns on investments and they REJECT a 1/4% adjustment down when they ought to be adjusting down by about 15-20 TIMES that 1/4% they reject.
But, look at that 8% rate compared to say 4%, that's saying the fund can pay out 54% more then what is realistic. Using 30 years does make this difference larger, however, there are a ton of programs out there that allow people to retire in the 50 to 60 age range rather then over 60, and 30 years is realistic for a retirement age of say 55. I'm actually using 3% in my target.
One pension I was looking at was calpension. I can't see this ending well for taxpayers or pensioners when there is such ostrich behaviour on the part of those making the decisions.
The other thing to consider with what I've done here, this is a rate that you can draw without a cost of living increase. At 3% increase in cost of living over 30 year buying power declines to about 41% of what it started at, so how much more are pensions underfunded if they expect to pay cost of living increases?
Actually, in terms of personal planning, I think it is best to use 1-2% and then assume the extra return pays for a cost of living adjustment so that way you can be doing an increasing draw over the years.