Mea Culpa

For the first time ever, I am deleting a post.

The numbers in this morning’s post (now missing) were completely wrong as were, therefore, the conclusions I drew from them.

For the record, all of the numbers concerned what happens if you save $1000 a month. I often show these numbers to my students, and when I do, I get the assumption right. But this time, I somehow a) convinced myself that the assumption was $100 a month, not $1000 a month and b) therefore concluded that saving is a whole lot easier than what I tell my students every year, and c) said a lot of nonsense that followed from this.

(I tell my students that for *them*, saving $1000 a month will soon probably be a plausible strategy, which is likely to be true. Having conflated $1000 with $100, I drew implausible conclusions in the blog post about what you could do on $25,000 a year.)

I could say things about the folly of posting at 2AM, but I think the wiser course is simply to apologize.

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30 Responses to “Mea Culpa”


  1. 1 1 TjD

    Greetings,

    you should still do some research about your risk-less 3% + inflation rate, the assumption that this is possible seems wrong as well. ( I have not been able to find 1 such investment that did this for 25 or more years ).

    T.

  2. 2 2 Phil

    The post will continue to show up in my Google feed, and probably others. Before deleting it, modify it to emptiness. Then Google will display it as blank instead of showing the old post.

  3. 3 3 Alan Wexelblat

    Bravo. It speaks well to your character that you are up front and able to move on. I know it’s hard to clean these things up – lord knows I’ve goofed up enough in my own blogging.

  4. 4 4 Steve Landsburg

    Phil: Your good advice came too late. Is there any way to get the post back so I can modify it (short of reconstructing the entire site)?

  5. 5 5 Tom

    Does this change the conclusion of the post, that saving whilst on $25,000 a year can realistically lead to a comfortable retirement if only people would sacrifice now to reap the gains later?

  6. 6 6 Steve Landsburg

    Tom: I think that on $25,000 a year, you could (plausibly, though not painlessly) put $200 a month into a safe investment and retire in 50 years with well over a quarter of a million dollars. (Or, a bit less painlessly, make it $400 a month and retire with something like $600,000.) So yes, the conclusion that you can retire pretty comfortably after making $25,000 a year (as long as you save instead of buying lottery tickets) still holds. But the original post was a wild exaggeration of what’s possible.

  7. 7 7 Robert Easton

    Regarding removing the deleted post from people’s RSS feeds: I often find that if someone modifies a blog post, I see two copies of it in my google feed, before and after modification. Perhaps that depends on the publishing software used and I don’t know what will happen with wordpress.

    Regarding saving on $25k a year, I still think Steven is being optimistic. 3% for a “safe investment”: Can you show me an example of this? Also working for 50 years is not necessarily realistic for someone on a low income: typically such jobs are more strenuous than high income jobs, and low income earners on average retire sooner. Yes it is possible to save a sensible amount for your retirement, but doing so requires a genuine, noticeable sacrifice of current living standard. This applies equally well to high income earners, assuming they want to continue the same living standard into retirement.

  8. 8 8 Jonathan Campbell

    If someone is making $25,000 per year (assuming they start when they’re 20), what is the point of saving (and forgoing the pleasure that could be derived from) $400 per month, just so they can, when they are 70 yrs old, be satisfied by having a $600,000 bank account. Doing this would seem to me to be massively overweighting the amount of pleasure you are going to get post-age 70 at the expense of all the cool things you could do in your younger years. Of course some people might be disposed towards such a way of living (e.g. those who are extremely concerned with the well-being of their heirs, those who are somehow extremely confident that they’ll live well-beyond 70, or those who live in a monastery) but I doubt that most people would.

  9. 9 9 Robert Easton

    For example, 30 year US treasury bonds currently pay 3.75%, probably about 2% after inflation. UK treasury bonds, 4.25%. Germany, 3.25%. I’m willing to call these “risk free”, although not entirely convinced of that. But they are nowhere near 3% after inflation.

  10. 10 10 Dave

    Why do we need to save for retirement? A few generations ago, some politicians made a promise of social security to all retired people and almost every politician since then has commited to ensuring that current and future generations will vow to keep the promises made by other people.

  11. 11 11 Robert Easton

    S&P averaged 5% inflation adjusted growth from 1970-2010, although as an EMH believer I have no reason to expect the stock market to earn more than bonds in the future. I am inclined to think it was just luck that they did so in the second half of the 20th century. If Steven or someone else has a argument why we should expect stocks to earn more than bonds, I’d be interested to hear it.

    To Jonathan, if you have made it to 20, you should should expect on average to live to about 80. And the first figure of $200 a month for $250,000-300,000 at retirement seems pretty sensible in that case. I agree saving $400 a month would be a lot for such a person, and some people have higher time-discount rates than me, so would not want to save as much. In fact if your time-discount rate is below the market interest rate, why save anything?

    My only concern personally is that, as a “two marshmallow” person, I am politically outnumbered by “one marshmallow” people. See http://www.themoneyillusion.com/?p=9359 if that sentence made no sense.

  12. 12 12 Matthew

    Bob,

    Stocks should earn more than bonds as bonds are more senior in the capital structure. With their more senior position comes lower expected losses upon a default. Stocks should pay more to entice investors to take the risk.

    Matt

  13. 13 13 Robert Easton

    Matthew, yes most years that will work. But then comes the occasional year in which there is a default. Bondholders lose little, stockholders lose nearly all.

    My point is that the extra “return” for stocks should be cancelled out by the extra risk, and on average you are no better off. The same argument applies for safe treasury bonds vs corporate bonds. The latter claim to pay a higher rate, but the difference is cancelled out exactly by the risk that you get nothing.

  14. 14 14 Matthew

    Robert,

    What you’re saying isn’t true. If it were, the long run returns across all asset classes would be equal. They’re not equal.

    The spread over the treasury that corporate bond investors earn is not all eventually given back through credit losses either.

  15. 15 15 Robert Easton

    Matthew, if some asset classes predictably earn more than others, why haven’t people invested more heavily in those, lowering the return, and less heavily in the others, raising the return? If it is possible to predict which asset classes will earn more, even adjusting for risk, why have people not taken advantage of that, until all the benefit has been used up?

    I am aware that historically stocks have earned more than bonds. I claim this is because previously stocks were undervalued but no one could have predicted this reliably. You could specifically say Apple stock has gone up faster than other stocks, and so clearly was a better investment in 2000 than other stocks. But how could I have known that then? If you have a reason why stocks are undervalued relative to bonds, even now after stocks have earned more in the 80s and 90s, I would love to hear it. Of course, I wouldn’t be offended if you wanted to keep it secret. But personally I have no reason to think one kind of investment will beat another long term.

  16. 16 16 Matthew

    Robert,

    Different investors have different objectives besides return and therefore purchase different instruments.

    Of course you don’t know which investment turns out well and which turns out badly beforehand. Actual outcomes are different from expectations. However, if this were 2000 again, I’d expect Apple stock to yield more than Apple bonds (if they had any).

  17. 17 17 Jonathan Campbell

    Robert,

    Are you saying that all investors should be risk-neutral, i.e. that two investments, one with a sure 10% return, and one with an expected 10% return, are of equal value from an investor’s perspective?

  18. 18 18 Robert Easton

    Yes, some investors do not only prioritize return. But I would expect enough do that any “easy” opportunities are long gone, or never appear in the first place.

    Jonathan, no, many investors have reason to prefer safe over volatile investments. Personally however I do not. I diversify significantly, and only really care about the long term, since I have another 40 years or perhaps more to retiring. I would expect enough investors (especially including investment institutions) to take the same perspective, that again, any “easy” opportunities are taken. So volatile investments should have the same expected return as safe ones. If volatile investments have higher expected return, personally I would happily take them.

    BTW by diversify significantly I mean that I have all my savings and pension, apart from an instant access savings account, in index funds, in multiple countries.

  19. 19 19 Alan Gunn

    One of my colleagues uses some useful calculations to compare the accumulation at age 65 of tax-advantaged (e.g. IRA) savings early in one’s career vs. the same kinds of savings later. I don’t recall the details, but it’s along the lines of the first ten years of savings accumulating to more than the last 30 years’ worth (using the same amount saved every year). Another useful lesson on the miracle of compound interest, this time with the emphasis on the importance of a long compounding period. I think a lot of people figure they can put off saving until they have higher earnings. Too bad about the math lapse, but there are important lessons about planning here that I hope don’t get lost in the discussion of details.

    As for teaching the young people: I have some bragging rights, I think, because before my son’s unit deployed to Afghanistan a few years ago he invited his platoon to his apartment and talked to them about the advantages of having their combat pay put into the army’s version of a 401(k). I think his stress was more about “If you keep it in your checking account it will end up going to strippers” than on compound interest, though.

  20. 20 20 Jonathan Campbell

    Robert – you say “Jonathan, no, many investors have reason to prefer safe over volatile investments.”

    You also suggest that high vol and low vol instruments have the same expected return.

    Assuming that the investors referred to in statement 1 are having an effect on prices — which is not cancelled out by the opposite effect of a group of investors who prefer volatile investments — how could your 2nd assertion be true?

  21. 21 21 Matthew

    Robert,

    The additional return that you get from stocks wouldn’t be easy. You’d have to be willing to stomach the risk to get it.

    Also, saying that you don’t care about volatility is another way of saying that you don’t care about risk. If you don’t care about risk and the expected returns on all assets are the same in the long run, why bother to diversify?

    Matt

  22. 22 22 Dan Hill

    The paradox is that the sort of person who is disciplined enough to save $100 month out of their $2000 a month salary every month for 50 years is the sort of person who is disciplined enough to do many other things that probably lead them to earning more than $25K a year …

  23. 23 23 Robert Easton

    “Assuming that the investors referred to in statement 1 are having an effect on prices” is the problem. Prices are determined at the margin. I am claiming that the investors who prefer safe over volatile investments are not the marginal investor.

    Suppose there are 10 apples in the world and 10 oranges. Suppose there are 10 people who think an apple is worth $1 to them, and think an orange is worthless. Suppose 11 others find apples and oranges equally appealing, and would pay $1 for either. Everyone has exactly $1 and there is nothing else in the world to buy. No one prefers oranges over apples. But the price for both will be $1. If the price of apples is below $1, one of the people who is indifferent between apples and oranges will switch from buying an orange to buying an apple. A simple example but I think it still applies. If volatile investment opportunities pay even slightly more, many people will move towards them, until the price advantage is bid back down.

    I would agree with you if I thought the vast majority significantly favored safe investments. Because then there would be too many volatile investments for the number of volatile-willing investors. But since so many investors are interested in a investment term of decades, I would not guess that is the case.

  24. 24 24 Robert Easton

    Matt, “saying that you don’t care about volatility is another way of saying that you don’t care about risk.”

    I do think these are different. I very much care about risk in the sense that if you offer me on the day of my retirement:

    1) 100% chance of $250k
    2) 50% chance of $501k, or 50% of being totally penniless

    I would take 1 without hesitation. But in the 40 years between now and then (or perhaps the first 35 or so), I do not care much if the market goes up and down. I know the market fluctuates in the short term, but expect it to all cancel out in the long term. You say someone investing in stocks needs to be willing to “stomach the risk”. But I don’t suffer much watching my investments go down, as they have in the last few weeks, because I expect equally large swings upwards.

    I prefer stocks to bonds because I think there is some chance that Matt and Jonathan are correct; that volatile investments will earn more. It is more plausible than the opposite. But really I have little reason to think either.

  25. 25 25 Matthew

    Robert,

    Again, you’re confusing expectations with outcomes. Upon your retirement, an outcome will be waiting for you. It may or may not equal your expectations now. The volatility just doesn’t exist between points A and B, with A and B static. The amount of money waiting at point B is a moving target.

    Matt

  26. 26 26 Robert Easton

    I’m not clear on when you think I confused expectations and outcomes the first time yet. I gave an example of a stock that had high outcomes, but people did not have especially high expectations for beforehand. That alone should make it clear I can see the difference. I asked you for an example of something that I should have high expectations for, as opposed to something that has previously done well but you have no particular evidence to think this will happen again.

    When we have been discussing the extra “volatility” of stocks, this is something that happens in the short term only. Over a period of 40 years, that volatility is far smaller. That is the overall risk of my retirement plan. If I do not diversify, the amount I have in 40 years time could very easily be 0. This is true for bonds as well as stocks. Any bond issuer may default. This is a very different kind of concern than the extra short term fluctuations that happen for stocks compared to bonds.

  27. 27 27 Phil

    Re: post 4: Sorry, Dr. Landsburg, I don’t know how to get back a deleted post. I don’t know much about WordPress (I use Blogger). Perhaps some other reader can help?

  28. 28 28 Mike H

    Re : undeleting a post : When you deleted it, did you also clean it out of the Trash? If not, you can undelete it. If I were you, I wouldn’t worry too much.

  29. 29 29 Silas Barta

    Your return will be negative as the the government has to raid your savings/IRA/whatever to pay the insane entitlement bomb that is coming up.

  30. 30 30 Jeffrey

    >I know the market fluctuates in the short term, but expect it to all cancel out in the long term. … But I don’t suffer much watching my investments go down, as they have in the last few weeks, because I expect equally large swings upwards.

    If you plan to flip a coin 1,000,000 times, and start out with 4 heads, the expected outcome is now 500,002 heads. In that sense, the fluctuations do not cancel out. A short term loss is still a loss in the long term, and higher short term risk implies higher long term risk.

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