Getting Rich Slowly
November 13, 2013
Without going into any of the particulars, or embedding
any links to supporting documents, let me simply suggest that there are several
approaches that claim to be able, over a several-year period, to reduce the
"biological age" of typical American adults by 15-or-more years. (One
approach is calorie restriction.) These approaches involve a different life
style than senior citizens have practiced in the past: serious exercise in old
age, along with diets aimed at optimal nutrition rather than optimal taste,
plus, maybe, supplements that shore up falling levels of vital substances that
decline with age, and with the switch from family farming to agribusiness.
The take-home message is that without any anti-aging breakthroughs, we may already be able to slow human aging and at least in certain ways, partially reverse it. This prospect is real enough that the Prudential Life Insurance Company has begun publicizing it, asking, "What would you do with another forty years?" (youthful and in good health).
I take this seriously because it may be happening with me. (If I were 104 and running 2½ miles a day instead of 84 and running 2½ miles a day, I'd be more assertive about this. Still... )
Ok Suppose you can lower your physiological age by 20 years (assuming you're at least 50 years old (:-)) Of course, it would be awhile before the bulk of the population followed suit, especially since these candidate strategies require a measure of self-abnegation in a self-indulgent society. But suppose that it could happen, or suppose that improvements in anti-aging "technology" lower the bar so that a majority of the general public can be playing tennis or backpacking at the age of 100. Will you have to work until you're 80 to save up enough for retirement?
Happily, the answer is "no". It turns out that if you work and save for 36-to-48 years, that should build a large-enough investment nest egg to fund your retirement forever.
Back in September, I wrote about what it would take in the way of a conservative savings and investment program to render you and me permanently financially independent. In it, I assumed an average, annual, after-inflation rate of return on investment of 6% a year. I'm going to carry out that same calculation here, assuming an annual, average, inflation-adjusted rate of return of only 4% a year on a Roth IRA or Roth 401k.
Annual Retirement Income as a percentage of average annual salary = % of annual salary saved each year X (2t/18 - 1),
For example, if you and your employer each set aside 7½ % of your salary each year (for a total of 15% of your annual salary), and you worked for 36 years, then your retirement income would be 15% X (236/18 - 1) = 15% X (22 - 1) = 45% of your inflation-adjusted average annual salary.
Another way to calculate this would be to suppose that you and your spouse each contribute $5,500 (in 2013 dollars) to Roth IRAs from the time you're 25 until you're 50, and that after adjusting for inflation, you earn 4% a year on your IRAs. Then the equivalent formula is
Total Savings = $11,000 a year/0.04 X (225/18 - 1) = $265,000 X (2.62 - 1) = $265,000 X 1.62 = $430.000.
Now suppose that you and your spouse start contributing $13,000 a year between the ages of 50 and 70. Your existing $430,000 will slightly more than double, increasing by a factor of 220/18 = 21.1111 = 2.16, bringing it to $930,000 by the time you're 70. Your $13,000 a year contributions between the age of 50 and 70 will be $13,000/0.04 X (21.1111 - 1) = $325,000 X (2.16 - 1) = $377,000. Your total account value will be $1,307,000 (in 2013 dollars), and your permanent income from this nest egg at a 4% annual rate of return will be a tax-free, inflation adjusted $52,280 a year.
Social Security Income
Your Social Security income is more complicated to calculate, but if you earned the maximum amount ($113,700 for 2013) taxed by Social Security for each of 35 years over which your taxable earnings were calculated, and you waited until age 70 to start drawing your Social Security, then you would get about $40,000 a year if you're single, and about $60,000 a year if you're married and your spouse is drawing on your Social Security.
Given that your contributions to both Roth accounts and Social Security are in after-tax dollars, your actual net income is only about 80% of your gross income before you start paying for everything else. Among the expenses that you won't need after retirement are life insurance, disability insurance, commuting costs, extra clothes and dry-cleaning bills, and other work-related expenses. Income tax is a little lower for those over 65. Hopefully, your home mortgage will be paid off. Hopefully, there will only be the two of you to support.
As an example, suppose that you and your spouse made $113,700 a year (the maximum taxable under Social Security). After retirement, the two of you receive 45% of $113,700, or $51,165 a year from your employer-sponsored plan plus $60,000 a year from Social Security. This adds up to a tax-free $111,165 a year, or sizably more than the net income that you made while you were working.
Alternatively, you might earn $52,280 a year on your Roth IRAs plus $60,000 a year from Social Security for a total tax-free retirement income of $112,280 a year.
Can Everyone Be Retired?
Obviously, the answer is "no". Even if they could, work can be very satisfying if it's something we're doing because we want to do it rather than because we have to do it. But to give an example of how technological advancements might facilitate higher levels of automation, how about a fast food service that downloads its menu onto your cell phone? You select what you want, you pay for it electronically, and then you pick it up at the drive-through window. At the restaurant, your order is assembled from frozen food packets, run automatically through a microwave oven, and delivered to you without human intervention.
I don't know whether this is practical or desirable, but it's food for thought.
Another automation application that I think is rather likely to make its debut within the next two or three decades is that of self-driving trucks.