Southern Bread

I’ve been wanting to do this post for a while, but it takes so much research that I had to assemble it in little bits and pieces over a couple of months. The argument I’m going to present is that, if you go through life with an average salary, starting today, you will not be able to retire in the traditional sense. Let me be clear. I’m not making some type of blanket statement that starting now, retirement is over. No. I’m saying that what happened over the past 40 years is no longer possible, because it was all predicated on an unsustainable, exponential rise in the supply of money and credit. If you want to think of it as a ponzi scheme I wouldn’t necessarily argue with you. As we all know, the defining characteristic of a ponzi scheme is that the people who get in and invest early reap huge benefits while the latter groups get screwed.

Let me try to prove my point. I took historical data since 1970 and charted it all out in order to get 40 years worth of baseline data.  Here’s what the 1970-2010 numbers looked like:

• Start Career: 1970
• End Career: 2010
• Starting Salary: $9,000
• Ending Salary: $50,000
• Years Worked: 40
• IRA Contributions Maxed Every Year
• Invested in: S&P 500 Index Shares (SPY)
• 2010 IRA Portfolio value:  $912,154

So, if you started working in 1970 at age 25 and immediately started maxing out your IRA contributions each year until age 65 you would end up with $912,154 because of compounding dividend re-investments.  This may sound like a lot of money, but there are caveats.  If you had retired in the year 2000 instead of 2010 you would have retired with only $903,269.  Huh?!  How is it that 10 years can go by and your portfolio only grows $9000.  Well, it’s because the stock market has been so volatile since the dot com bust in 1999.  These are the different ending portfolio amounts you would have retired with each year during the 2000′s:

• 2001: $853,933.42
• 2002: $743,572.41
• 2003: $594,285.05
• 2004: $774,562.06
• 2005: $832,896.55
• 2006: $893,126.56
• 2007: $1,043,059.58
• 2008: $1,095,382.45
• 2009: $689,155.16
• 2010: $912,154.77

As you can see, there have been wild swings in the stock market since ’99.  Up until about 1997 or so, there had been a nice gentle sloping curve of compound gains for an S&P 500, dividend reinvested portfolio.  Then it all went crazy.  But that, in and of itself, is not my point.  Of course there are short term technical reasons for this volatility that can be pointed to by brokers and investors.  But, I think the root cause is that the fundamental numbers in our economy are eroding. The stock market was able to garner these types of returns based on a huge inflation in the monetary supply that can no longer be sustained.

Here is a chart of our hypothetical worker’s retirement account:

Now we compare this to the increase in the U.S. money supply over the same period:

They track perfectly. If you were to smooth the curve on the portfolio to take out the erratic swings they would match almost exactly. A nice exponential curve upwards. Absent large, consistent injections of money into the capital markets by the Fed, this type of portfolio would not exist. For instance, if you kept the same S&P 500 Index(it used to be the S&P 90) portfolio(this is totally hypothetical since IRA’s didn’t exist then) from 1920 to 1960 with the same contribution percentages, you would have an ending value of about $85,000. The average salary in 1960 was about $5000. With inflation, that retirement amount would have lasted you about 10 years. Contrast that with our $912,000 figure from retiring in 2010. That amount would last you probably 16 or 17 years. Clearly, the numbers have been juiced.

That doesn’t bode well for my generation and beyond. Looking ahead, there will be no more of this monstrous infusion into the money supply. At least, we hope not for the sake of our currency. The fact of the matter is that I will probably not be able to retire at all. And, in all honesty, few people are able to today any way. Most people will simply not be able to afford the large contribution percentages required to fund a retirement plan such as our hypothetical one. The contribution percentage required in the early 1970s was well over 10% of your gross income. That’s just not going to be doable for most folks. A majority of the people you talk to today end up going back into the work force, or putting retirement off until into their 70′s.

And don’t forget that inflation has also tracked this increased money pumping:

That means the steeper the curve gets, the less real dollars of your retirement portfolio will be usable in the years after you retire. What this means for us is that our retirement portfolios will end with less real dollars in the future, and inflation will eat them away so fast that retirement would only last a few years before exhausting our accounts. Therefore, the idea of me retiring at 65 with a traditional retirement plan is not going to pan out.

So, what am I saying? Well, my bottom line is that you cannot trust common wisdom on retirement any more. The financial advisor who gives you the same ol’ shpill about just keep on piling money into that IRA and stick it out long term will never tell you anything different. That’s what he’s selling and that’s the advice you’ll get. But I’m not so sure our modern notion of retirement was ever a good idea to begin with. I’ll finish my thoughts on this in the next post…