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The Mathematical Possibility(?) of Retirement

 CappyCap did an interesting article on why there’s a strong case that people will be unable to retire.

retirement

retirement (Photo credit: 401(K) 2013)

He did it from the perspective of people in 1st world countries (or near 1st world) and used securities (such as mutual funds) as the primary vessel of retirement funds. And, in my opinion, he showed retirement really is out of reach for most people.

But I wasn’t 100% satisfied that retirement, at least in theory, was mathematically impossible. So I decided to do some number crunching myself, focusing on the United States.

Based on rough estimates of current demographics, about 3.6 million people reach age 65 (the age of retirement in the US) every year. Using Clarey’s number of 1 million dollars, the necessary amount estimated to comfortably retire, it would thus take 3.6 trillion dollars to pay for the retirement of our population this year. Our current GDP is about 16.7 trillion dollars, so, about 22% of our current GDP would need to be set aside, in some form or another, for our retirees.

In theory, we should be able to fund retirement. We have a 15% tax on employment, known as FICA, that should be able to provide for most people. Combined with FICA benefits, a person would only need to save 5% of their annual income to cover the rest of their retirement (we’re ignoring inflation and compounding interest for the sake of simplicity). Unfortunately, as we know, Social Security and the other programs supported through FICA taxes are fatally flawed programs, poorly designed, poorly managed and completely unfixable.

If, instead of FICA taxes, we simply required everyone with a job to set aside 15% of their income in individual retirement accounts that would store their wealth in a diversified portfolio (a mixture of commodities, national and international index funds, corporate and public bonds, and cash) about 60% of our population could retire at age 65. Those without jobs, or those who are hit with misfortune,would require additional assistance.

From another perspective, our government takes in about 17% of GDP in tax reciepts, so if all our government did was provide retirement, it could cover 77% of our net retirement needs.

So, retirement is mathematically possible for those of us in the United States, even if it’s not very probable due to government ineptitude.

The math gets better over time. Our population grows at about 1%. Our GDP grows, at least right now, at a rate of 2.5%. Over forty years (number not used by accident, we get done with our schooling and apprenticeships at age 25, and work until age 65, and this is forty years), if we compound the 3.6 trillion dollars needed to retire at 1% and do the same for our current GDP at 2.5%, we find out that in forty years, ceteris paribus, we’ll need about 12% of our GDP to support retirement. From this perspective, the adage that a person should save 10% of their income for retirement appears completely true.

Unfortunately, in a country where 30% of our income is gobbled up by the government, we would need to save 17% of our after-tax income for retirement and find a safe place to invest it. And for many reasons, the idea of safe investing in this current environment is ludicrous.

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