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Saving for pension? - amazing power of compound interest!
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Feisbook Control Offline
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Post: #26
RE: Saving for pension? - amazing power of compound interest!
tarquin: I was being somewhat hyperbolic before. However, here are some thoughts. If you think it's a 1/10,000 chance that the government is going to start double dipping or taxing/confiscating the middle class into oblivion then you're way more optimistic than I am. By any estimate, the U.S. has unfunded liabilities of at least tens of trillions of dollars. This has never worked out historically. You're assuming that this time will be different. Every time is always going to be different, except that it never is. The party always stops. There aren't many ways to resolve that. They're limited to the following, pretty much:

1. Cut services
2. Increase taxes
3. Inflate the debt away (a kind of tax in a sense)
4. Default (which works out as a variation of 1.)

If tens or hundreds of millions of citizens have virtually no money (or owe money) and they still get to vote, they're going to look around at anyone who has any money and want some of that. In the land of the blind, the one eyed man is king. In the land of the poor/indebted, the man with moderate wealth is rich (and a target). Smart/really rich people either have influence or have their money off shore, so they're untouchable. Who gets left holding the bag? It's inevitably the middle class. Historically, they've always had to bear the burden.

You're presenting it as a dichotomy between everyone being completely screwed or things being okay. How about everyone being mostly screwed, but not quite enough for complete pandemonium? That would still suck. Argentina doesn't sound like a barrel of laughs. The PIIGs don't sound like a barrel of laughs right now. Talk to people whose families left Eastern Europe once the Iron Curtain came down. Muddling through does not sound like a great return on working hard and saving money. There isn't just a small chance of moderate to fairly bad stuff happening, and the effects aren't that insignificant.

I'm not focusing on the negatives. What I am saying is that given any cursory glance at history, many governments have had a poor showing when it has come to respecting property rights, especially when significant levels of debt have been involved, as they are now in many nations (including the U.S.).

Have a look at this. Every year, the politicians make a song and dance about raising the debt ceiling. Every year, they do. (So I'm not really sure why they have one other than for political theatre.) At some point, that party ends. How is any of that going to end well?

I don't wear a seat belt or look both ways before going through an intersection because I intend to have an accident or because I think I will. I do such things because I know that not only am I fallible as a driver, but also because I can't control for drunk guys running red lights. Looking at the above link is like watching a guy down a couple of six packs and a bottle of Scotch, and then get behind the wheel of a car. Your answer to that seems to be, "Well, either he plows into me or he doesn't. C'est la vie."

I'm suggesting there are alternatives: stop people DUI, at the least wear a seat belt, better yet, don't get on the road if you know DUI Man has just left the bar a quarter mile up the road. None of that entails only looking at the negatives. I think it's called self-preservation.
04-08-2014 12:35 AM
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Benoit Offline
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Post: #27
RE: Saving for pension? - amazing power of compound interest!
I have serious doubts that the official retirement/pension age will not be moved back before I reach it.

Pensions aren't far removed from Ponzi schemes when you look into them - without enough new entries at the bottom they will collapse when the top level refuses to die off.

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04-08-2014 02:12 AM
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Bushido Offline
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Post: #28
RE: Saving for pension? - amazing power of compound interest!
(04-08-2014 12:18 AM)Glider Wrote:  I find it quite fanciful that people are talking about returns of 20%.

This. Even 10% would be very optimistic over a long period.

Always always always guard your capital above trying to get a higher return. Losing all of your money is infinitely worse than only getting 1% return.

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04-08-2014 08:47 AM
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rottenapple Offline
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Post: #29
RE: Saving for pension? - amazing power of compound interest!
This topic makes me wonder if it isn't just better to skip highschool and work manual labor for 6 years, put all the money you earn into stocks and watch it grow afterwards. If you have a normal family situation, you won't have costs (parents pay food, house, etc.) and high school was pretty much a huge waste of time anyway. You could do 5-hours work a day, 2- hours of study (enough to keep up with the average if you are fairly intelligent and do 2 hours of social activities afterwards (play football or something). After 5 years, you can do a one year study hard scheme to get a degree, with the discipline you have from working it could be possible. You go to college normally then for let's say 6 years, which gives your earned income from the first 5 years already between 7-12 years to grow.
04-08-2014 10:09 AM
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Post: #30
RE: Saving for pension? - amazing power of compound interest!
(04-08-2014 08:47 AM)dreambig Wrote:  
(04-08-2014 12:18 AM)Glider Wrote:  I find it quite fanciful that people are talking about returns of 20%.

This. Even 10% would be very optimistic over a long period.

Always always always guard your capital above trying to get a higher return. Losing all of your money is infinitely worse than only getting 1% return.

I'm aware of this. I was just trying to explain how Warren Buffet is so rich and explain how many of the richest people in the world are so rich. (many of which had a heavy stake in a single company for a long period of time which lowers diversification and increases risk). I was also trying to show the importance of every extra % gain you are able to get. Which is in part why management expense ratios can be a big issue.

I expect 7-11% long term. Nothing more, nothing less. Of course 20% gains is ridiculous. It was intended to show how crazy compounding works.

No one outside of a select view are generating 20%+ returns consistently.
04-08-2014 11:45 AM
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Post: #31
RE: Saving for pension? - amazing power of compound interest!
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04-08-2014 11:53 AM
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tarquin Offline
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Post: #32
RE: Saving for pension? - amazing power of compound interest!
(04-08-2014 12:35 AM)Feisbook Control Wrote:  tarquin: I was being somewhat hyperbolic before. However, here are some thoughts. If you think it's a 1/10,000 chance that the government is going to start double dipping or taxing/confiscating the middle class into oblivion then you're way more optimistic than I am. By any estimate, the U.S. has unfunded liabilities of at least tens of trillions of dollars. This has never worked out historically. You're assuming that this time will be different. Every time is always going to be different, except that it never is. The party always stops. There aren't many ways to resolve that. They're limited to the following, pretty much:

1. Cut services
2. Increase taxes
3. Inflate the debt away (a kind of tax in a sense)
4. Default (which works out as a variation of 1.)

If tens or hundreds of millions of citizens have virtually no money (or owe money) and they still get to vote, they're going to look around at anyone who has any money and want some of that. In the land of the blind, the one eyed man is king. In the land of the poor/indebted, the man with moderate wealth is rich (and a target). Smart/really rich people either have influence or have their money off shore, so they're untouchable. Who gets left holding the bag? It's inevitably the middle class. Historically, they've always had to bear the burden.

You're presenting it as a dichotomy between everyone being completely screwed or things being okay. How about everyone being mostly screwed, but not quite enough for complete pandemonium? That would still suck. Argentina doesn't sound like a barrel of laughs. The PIIGs don't sound like a barrel of laughs right now. Talk to people whose families left Eastern Europe once the Iron Curtain came down. Muddling through does not sound like a great return on working hard and saving money. There isn't just a small chance of moderate to fairly bad stuff happening, and the effects aren't that insignificant.

I'm not focusing on the negatives. What I am saying is that given any cursory glance at history, many governments have had a poor showing when it has come to respecting property rights, especially when significant levels of debt have been involved, as they are now in many nations (including the U.S.).

Have a look at this. Every year, the politicians make a song and dance about raising the debt ceiling. Every year, they do. (So I'm not really sure why they have one other than for political theatre.) At some point, that party ends. How is any of that going to end well?

I don't wear a seat belt or look both ways before going through an intersection because I intend to have an accident or because I think I will. I do such things because I know that not only am I fallible as a driver, but also because I can't control for drunk guys running red lights. Looking at the above link is like watching a guy down a couple of six packs and a bottle of Scotch, and then get behind the wheel of a car. Your answer to that seems to be, "Well, either he plows into me or he doesn't. C'est la vie."

I'm suggesting there are alternatives: stop people DUI, at the least wear a seat belt, better yet, don't get on the road if you know DUI Man has just left the bar a quarter mile up the road. None of that entails only looking at the negatives. I think it's called self-preservation.


I really don't have any disagreements as to what you've said. I have my SHTF part squared away and I can't control the stupidity of politicians, so I'm going to focus on what I can do. Perhaps it's just a difference in risk appetite? In the end, I do believe that the US will (continue to) face a crisis due to monetary mismanagement, but it won't last forever, and I'm going to put some money into my IRA with the understanding that there is the chance of it all going wrong.

As far as what the government does to make up for shortfalls? IMO, it is more likely that they reduce the estate tax threshold to 10k and get the money from the baby-boomers (and their heirs) when they make an exit. Perhaps a planned default to the money owed to China.
04-08-2014 02:01 PM
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Samseau Offline
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Post: #33
RE: Saving for pension? - amazing power of compound interest!
(04-08-2014 08:47 AM)dreambig Wrote:  
(04-08-2014 12:18 AM)Glider Wrote:  I find it quite fanciful that people are talking about returns of 20%.

This. Even 10% would be very optimistic over a long period.

Always always always guard your capital above trying to get a higher return. Losing all of your money is infinitely worse than only getting 1% return.

Does anyone really believe America will return to the days of 20% or 10% returns?

All fundamentals are trash right now. Demographics suck, consumer confidence sucks, unemployment is high, debt (esp. student loans) are skyrocketing, inflation is set to soar, etc.

I think the average investor will be ultra lucky to push even 5% annual returns for the next 30 years.

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(This post was last modified: 04-08-2014 02:21 PM by Samseau.)
04-08-2014 02:21 PM
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Blunt Offline
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Post: #34
RE: Saving for pension? - amazing power of compound interest!
@Feisbook I don't understand the philosophy of Doomsday preppers.

You look down on people for saving in a Roth because you are convinced it will get seized. You don't think the government is coming for your gold bricks too? You think your second passport country isn't going to want a piece?

If shit really gets that bad that they want to start double taxing Roths, they will probably find a way to tax you too (Hoarders' Tax) and there will probably be nothing you can do about it.
04-08-2014 03:07 PM
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RockHard Offline
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Post: #35
RE: Saving for pension? - amazing power of compound interest!
(04-07-2014 07:56 PM)tarquin Wrote:  Such double-dipping would be a "taking" by the government without compensation and prohibited by the Constitution. Sure, you can say that Constitutional rights are eroding and may not be present when I take money out in 50 years, but I would rather go for the bigger payout with a Roth IRA than kick myself later for using a Traditional IRA.

Yep, and there's no guarantees you wouldn't get screwed on a Trad IRA or 401K either. Someone will cook up a scheme for progressively taxing retirement funds, so if you save $5mil, they'll decide to give you a haircut if they need the money bad enough.

If you do have kids, it's really not a bad idea to open an IRA for your kid. And then not telling them about it until they're 35.
04-08-2014 03:52 PM
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Post: #36
RE: Saving for pension? - amazing power of compound interest!
(04-07-2014 05:09 PM)monster Wrote:  Compound interest isn't nearly as great as it first seems once you realize that inflation also compounds, and that inflation is always a helluva higher than the "published" numbers by the BLS. Like right now they say inflation is at 1-2%. That's cause they exclude everything that really matters....food, insurance, energy...basically the things that people spend 50% or more on.

Then of course there's taxes...

Suddenly compound interest isnt quite the eight wonder of the world.

Indeed, notwithstanding the magical effect of compound interest which requires an ongoing high-yield investment environment to remain optimal, one needs to remember that drastic changes to the tax code, together with serious inflation, can severely upset such well laid plans, even when the savings period was debuted very early on in a person's life. And in the most dire of cases it can all go to naught with the advent of hyperinflation (see the Wiki entry on this topic, together with the associated historical examples).
04-08-2014 04:41 PM
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Feisbook Control Offline
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Post: #37
RE: Saving for pension? - amazing power of compound interest!
tarquin: Good to know you have a SHTF plan too then. As long as you're aware of the risks, fair enough. I think you're right that they will try to hit the estates of the baby boomers. Personally, I don't think that would yield very much simply because the baby boomers currently (collectively) have inadequate retirement savings. They have another decade or two to live. Not only will most leave no estate, most will actually get to the point where they rely upon government. If anything, they're going to be a net drain.

(04-08-2014 03:07 PM)Blunt Wrote:  @Feisbook I don't understand the philosophy of Doomsday preppers.

You look down on people for saving in a Roth because you are convinced it will get seized. You don't think the government is coming for your gold bricks too? You think your second passport country isn't going to want a piece?

If shit really gets that bad that they want to start double taxing Roths, they will probably find a way to tax you too (Hoarders' Tax) and there will probably be nothing you can do about it.

Blunt: I don't look down on people for trying to be "responsible". I feel great pity for them. They've been sold that lie, much like men "manning up" and getting married, etc. It's an epic tragedy in the making. I don't want them to get fleeced, or more likely, skinned.

As far as prepping, here's what I think about that. Basically, there are no guarantees. Yet to some extent, they can't take what they can't see, or what you can move away from them. Anything where the government has you locked into a period of time and a whole lot of conditions is like nailing one foot to the floor. It's not to say that they won't hit a moving target, but they need to be a better marksman to do so. A stationary target is much easier.

As for having money off shore, a few thoughts on that. Ideally, I wouldn't even have money in only two places. Ideally, I'd have it in at least three countries on different continents with different underlying (political/philosophical) cultures, economies, etc. I know that the world is an interconnected place, etc. Yet to some extent, this would mitigate risk. Everyone talks about diversification of portfolio to mitigate risk, yet they don't consider (geo)political risk.

Let's say you had assets in the U.S., Singapore and Chile. I think you'd be extremely unlucky for all of them to take a bite out of you at once or for all of them to go to hell in a hand basket at once. Obviously, there are no guarantees. Let's say you added a fourth in the U.A.E. Again, it's not different to diversification across individual companies, sectors or asset classes.

I think you're also making three further mistakes. The first is the obvious point that there are currently, and have been, plenty of countries that have tried to impose capital controls on their citizens, pretty much with very limited results. How many Argentinians do you think currently have money off shore? Do you think the Argentinian government is or isn't trying to get their hands on such money? How successful do you think they have been and will be at doing so?

Secondly, I don't think all governments (and their underlying cultures) are of equal (or even similar) levels of outlook, nor do I think they are of equal (or even similar) levels of competency. This is where my outlook on life may initially appear quite cynical and pessimistic, but it's anything but so. Even in the worst of times, there are still winners, still those who are ascendant. When lots of people took a bath in the last financial crisis, there were a whole lot of people who cleaned up and bought assets on the cheap, and thus set themselves up. Now extrapolate that to geopolitics. To assume otherwise is to think that history began, and will end, with the U.S. being the economic super power that it is today (or was in its heyday). Obviously, that's not the case. Back in the day, the smart people/money jumped ship from Britain to the U.S., and before that, they jumped ship from France to Britain and so on. When one empire/currency falls, another rises. Times of great turbulence are times of great opportunity.

That leads into the third mistaken assumption I believe you are making. If/when the U.S. loses its power, why would others comply with their requests? It's axiomatic that power forces people to comply because they must, not because they want to. Therefore, if someone loses power, there is no imperative for them to comply, and as such, why would they want to comply? People may get the timing wrong, and thus get a backhander for doing so, but make no mistake, when the U.S. is really on the slide, its allies are going to be few and far between. Everyone is going to be jostling to sink the boot in. The last thing on their minds is going to be complying with U.S. requests to aid it in completely losing control.

If, in my first objection above, you acknowledge that there is plenty of Argentinian money offshore, the Argentinian government wants to get its hands on that, but can't, then the subsequent question to ask is why wouldn't those other countries aid Argentina in doing so? The answer is, of course, because those other countries profit at Argentina's expense in some way. To assume that the same set of conditions or assumptions wouldn't also attain for the U.S. if/when it no longer had the power to force other nations to comply would be to believe in some sort of American exceptionalism, that economics, human nature and historical precedent would not apply to them, that this time it will be different.

Historically, the changeover of power has never been particularly smooth or enjoyable for the declining power. We have been lulled into a false sense of security because the last changeover of power (Britain to the U.S.A.) was pretty smooth, but that was an anomaly. Even so, the changeover still presented plenty of shocks for those who thought they had power. For example, Roosevelt telling Churchill that Britain would have to relinquish India was one, and especially 1956. Who needs enemies when you have allies like that?

Alternatively, you may have been suggesting that other countries would try to take a bite out of people/money fleeing the U.S. Some might, but that would be very short sighted. In a global marketplace where there are some 200 countries (and honestly, I think within the next couple of decades we're going to see probably an extra dozen or so new countries just in Europe), it's not good for business. The smart players will welcome new rich citizens with open arms because they know that it will be far more profitable in the long term. You can skin a cow now or you can get milk from it for many years.
(This post was last modified: 04-08-2014 08:44 PM by Feisbook Control.)
04-08-2014 08:39 PM
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Blunt Offline
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Post: #38
RE: Saving for pension? - amazing power of compound interest!
Okay, you make some good points.

However I don't think the kind of geodiversication you are speaking of makes sense for the average investor. The amount of money you are going to spend getting accounts, residencies/passports only makes sense if you either have a large amount of assets and/or the connections (or family history) to set this up easily.

For someone with $100k in a Roth getting taxed again would be unfortunate but unless they outright confiscated the entire amount the tax would probably be smaller than the percentage you would spend on geodiversication. For someone with $5-10M it would be a different story.
04-08-2014 09:30 PM
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Post: #39
RE: Saving for pension? - amazing power of compound interest!
Anyone know where I can find a compound interest savings account in Australia with at least a 5% interest rate?
01-11-2016 02:18 AM
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Christhugger Online
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Post: #40
RE: Saving for pension? - amazing power of compound interest!
Lots of mental and mathemtical gymnastics going on here...

To start, stock market returns are in no way related to "the amazing power of compound interest". The returns are reported in an eqivilent of compound interest only in the sense that they're presented annualised, but they are NOT compounding.
The order of returns matters in the stock market.

Unlike compounding interest, stock market returns don't " just happen" magically. They are based on the increased productivity, profits, and prospects of the economy as a whole. There is no guarantee.

Those showing how a small investment effortlessly grows to millions over 40 or 70 or 100 years based on some historical 7-10% return over the last 100 years are fooling themselves that the same is practically guaranteed or bound to happen in the future...

Those previous returns were based on: 2 world wars, the invention of the car, telephone, refrigerator, airplane, computer, satellite, robot, cellphone, internet, and modern banking. Top it off with a USA population growth from 100M to 300M in a cohesive, non-religious/lightly christian society with strong rule of law and strong moral fibre and strong family values (for the first half anyways).

That is pretty god damn impressive, hard to compete with, and all THAT gets you is some 7-10% annaualized returns over 100 years...

Don't be so arrogant as to think that the next 100 years are guaranteed, probable, or even likely to to be as good as the last 100.

I sure hope they are, but all signs point to no.
(This post was last modified: 01-11-2016 07:01 PM by Christhugger.)
01-11-2016 06:55 PM
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