Tuesday, April 30, 2019

Wednesday insights

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How boomers are stealing from babies (Link)
Recently, the C.D. Howe Institute used an economic technique called lifetime generational accounting to assess the fairness of Canada's fiscal policies. Every generation pays taxes and gets government provided benefits in return. The cost of broadly shared programs like defense or the bureaucracy, is generally split equally across all generations. But the size and scope of individually focused benefits like health care, education, welfare and public pensions, along with the taxes meant to pay for them can vary greatly over time. These variations will depend on politics and demographics.

In this study all figures are adjusted to birth-year values.

Baby boomers can expect to pay, on a net basis, around $200,000 per person over their lifetimes for all the health care, education and other social services they receive. That might seem like a lot, but it’s nothing compared to the current generation of newborns who are expected to pay $736,000 more in taxes than they will receive in individual benefits. The luckiest Canadians are those born in the 1970s. On average, these kids of boomer parents face a net tax burden of just $27,000 each for their lifetime of social benefits.

This huge discrepancy between newborns and older generations is the result of an aging population, which reduces the proportion of working folk who are available to pay taxes, while increasing the amount of health care and elderly benefits owing, combined with the accumulation of past government debt.

What if you retire at a stock market peak? (Link)
Sam’s entire family has terrible luck when it comes to the timing of their retirement.

Sam’s great-grandparents retired at the end of 1928. Over the ensuing three years or so the stock market would drop close to 90%. Sam’s grandparents didn’t fare much better, retiring at the tail end of 1972. This was right before a brutal bear market which would see stocks cut in half from 1973 to 1974. Inflation also ran at a rate of 121% over the first 9 years of their retirement. Sam’s parents retired at the end of 1999, feeling pretty good at the top of the tech bubble. In the first decade of their retirement, they would witness the U.S. stock market go down by 50% on two separate occasions.

With balanced portfolios let see how Sam’s family actually ended up with an annual 4% withdrawal rate and a starting value of $1,000,000.
Even retiring right around the peak of the market, their portfolios actually ended up in a good position in each case. In each case, the ending market value for the portfolio is higher than the original amount even after accounting for annual withdrawals.

J.P. Morgan 2019 retirement guide (Link)
Here's one chart from this year's guide showing how a $10,000 initial investment fared over the past 20 years depending on whether the investor stayed invested or instead, missed some of the market's best days. As you can see you don't have to miss many good days to feel the impact. Your return quickly goes from positive to negative by missing only the 20 best days.