Archive for April, 2009

Some arithmetic on retirement income

April 3rd, 2009 20 comments

I’ve been thinking about the impact of the financial crisis on retirement income policy and individual strategies, and have come up with a reasonably simple way (I hope) to illustrate the core problem. Pre-crisis, it seemed reasonable to base a retirement strategy on the idea that a long-term investor, focusing on stocks could average a 7 per cent real return over 30 years, with relatively little risk. Now it’s clear that assumption has been proved wrong for lots of people. So it seems reasonable to ask how retirement strategy would look if, instead, you assumed a 2 per cent real return (what you might get with a portfolio of government bonds and the safest stocks).

To answer this question, we can use the magic of compound interest. At 7 per cent, money doubles in 10 years (the rule of 70), so a dollar invested today will be worth 8 dollars in thirty years time. That means someone with a stable real income, who starts saving 10 per cent of their income at age 25 and retires 30 years later at age 55, with a further life expectation of 30 years, can retire on 80 per cent of their pre-retirement income, as compared to 90 per cent net of saving in the working years. Quite attractive!

At 2 per cent, though, money doubles in 35 years. To get a more less stable consumption stream you need to change the balance above by a factor of four. A simple way to do this is to double contributions, to 20 per cent of income and shift the work-retirement balance, so that you work from 25 to 65 to finance an expected 20 years of retirement income.

Among other things, this means that the flow of savings into superannuation will have to increase a lot in the medium term which may help to resolve some of our many macroeconomic imbalances. But how this is to be brought about remains to be seen.

Categories: Life in General Tags:

Trailing the world

April 2nd, 2009 23 comments

For a brief period after the election of the Rudd government, Australia wasn’t right at the rear of the pack in the race to cut emissions of CO2 before irreparable damage is done to the global environment. The ratification of Kyoto and a strong performance at Bali deprived both the Bush Administration and would be backsliders in Japan and Canada of a crucial ally.

But, with the release of US plans for cuts in emissions, and the deplorable 5 per cent target of the CPRS (with a conditional maximum of 15 per cent) we are now further behind than ever.

Its obvious now, that even the watered down CPRS will never get the support of the Libs/Nats. And its hard to see the Greens settling for the quarter loaf on offer here. So, it’s time for the government to do a drastic overhaul of the legislation and come back with something serious.

The idea that we could just decide that it’s all too hard is untenable, and not merely in terms of environmental responsibility. Just like the EU, the US is now talking about carbon tariffs on non-complying countries. Some commentators think the WTO will stop this, but it’s equally likely that by declaring carbon dumping to be an unfair trade practice, the WTO may judge it can divert other protectionist pressures.

The Goods: Live Hard, Sell Hard movies

Categories: Environment Tags: