In between the happiness of Christmas and the promise of the New Year, permit me to introduce a sour note, a hint of a scold. If you're like, well, almost everybody, you're not saving enough. 15% of each paycheck into the 401(k) is the bare minimum you can get away with, not some aspirational level you can maybe hope to hit someday when you don't have all these problems.
I mean, obviously if one out of two workers in your household just lost their job, or has been stricken with some horrid cancer requiring all sorts of ancillary expenses, then it's okay to cut back on the retirement savings for a bit. But let's be honest: that doesn't describe most of us in those years when we don't save enough.
What describes most of those years when we aren't saving is normal life. We moved. We got married or had kids. The kids required entirely expected things like food, clothes, and schooling. Work was hard and we felt we wanted a really nice vacation. Friends and family went through the same normal life stages that we were, requesting that we travel and bring gifts to the happy events.
These things are not an excuse to stop saving, for all that I have used these excuses myself from time (and regretted it later, at length). The recession should have driven home some hard facts, but the nation's 3.5% personal savings rate indicates that these lessons haven't quite sunk in, so let me elaborate some of them.
1. You cannot count on high asset growth rates to bail out a low savings rate. In the 1990s, we believed that we could guarantee something like an 8% (average) annual return by pumping our money into the stock market and leaving it there. The problem is, this may no longer be true. For the last few decades, there have been a number of factors pushing up the price of stocks:
a. Low interest rates on bonds prompted investors to look for higher returns elsewhere
b. People started believing that over the long term, equities offered a low-risk opportunity for higher returns. Unfortunately in finance, many things are only true if no one believes they are true. If everyone thinks that equities are low risk, they will bid away the "equity premium"--which is to say, the discount that buyers expected for assuming greater risk. At which point, stocks no longer offer a low-risk excess return.
c. Baby boomers who had undersaved started pouring money into the stock market in an attempt to make up for their lack of savings.
However, stock prices cannot indefinitely grow faster than corporate profits; eventually, you run out of greater fools. And future corporate profits are going to be constrained by slower growth in the workforce as baby boomers retire, and by the taxes needed to pay for all the bailouts and stimulus we just did. Unless there's a sudden boom in productivity--entirely possible, but entirely impossible to predict, or count on--there's every reason to expect that stock markets performance will continue to grow more slowly, and be more volatile, than we got used to.
We saw a similar cycle in houses. A mortgage used to be a form of forced saving that gave you an (almost) free place to live in retirement and a little bit of value when you sold the house. We didn't realize that a number of developments had been pushing up the price of homes:
a. The development of the 30-year self-amortizing mortgage, which enabled people to pay a much higher price for a given house than they would have in the era of 5-year balloon mortgages.
b. The baby boom, which increased demand for houses as they aged
c. The run-up in inflation in the 1970s, which gave (relatively inflation-proof) real estate a boost--and then the subsequent decline in inflation (and interest rates), which gave people the illusion of being able to afford more house because the up-front payments were lower.
d. More widely available credit, which let more people take on bigger loans
e. The increasing value of (and competition for) a small number of slots at selective colleges, which put a rising premium on houses in good school districts
These trends gave people the illusion that houses were, in some fundamental way, an "excellent investment". But they're risky in all sorts of ways: neighborhoods can get worse rather than better, local economies can stagnate, the style of your home can go out of fashion.
Moreover, like the stock market, houses are still pretty expensive by historical standards, as this chart from Barry Ritholtz shows:
If you can't count on a steep run-up in asset prices to build up your retirement savings, that leaves you with one alternative: save a much bigger chunk of your income.
2. People are still living longer in retirement. The increases in life expectancy post-retirement aren't as dramatic as they were in the antibiotic era, but they're still creeping up. That means that you have to take smaller sums out of the kitty each year, so that what you have left will be enough to live on.
3. Government finances are extremely strained. The Baby Boomers are about to dump an even heavier load on them. That means yes, higher taxes--but it also means that despite their formidable voting power, retirements financed mostly on the public dime are very likely to get leaner. Especially because birthrates are falling everywhere--which means that the supply of young, strong-backed immigrants to man the nursing homes will not be as ample as it is now.
4. Employers are not kind to older workers. I wish this weren't so, but I'm very much afraid it is. People who say "I won't be able to retire" may not be given a choice in the matter. Like most modern economies, we've cut a societal deal where you're underpaid in your twenties, and overpaid in your fifties and sixties . . . and as a result, it's very tempting to fire those overpaid oldsters when times get tough.
And once you're forced out in your fifties, it is very, very hard to find a new job of any sort, much less one that pays what you're used to. Even if you're willing to take a big paycut to work a less prestigious job, employers are reluctant to hire the overqualified--particularly since 99 times out of 100 the overqualified 55-year old simply does not have the stamina or the life flexibility of the single twenty-somethings who are applying for the same job. And physically, you may not be able to do many of the low rent jobs that paid your way through college: by the time you're sixty, you're quite likely to have back, joint, or skeletal problems that make it hard to stand on your feet all day or lift heavy objects.
The upshot is that you can no longer plan on "making up" anemic retirement contributions later. You have to start making them--right now.
5. Emergencies seem to be lasting longer than they used to. Before the 1990s, unemployment used to crater sharply during recessions, then recover quickly along with demand. We had our first "jobless recovery" under Clinton, and now we've got two more under our belt. That means that the old advice of three to six months worth of emergency funds are no longer enough. 8 months to 1 year is more realistic.
When I write these posts, I generally get two types of responses: people who smugly tell me that they are saving 30% or more of their income (way to go!) and people who tell me that it is simply not possible for them to save t15-20% of their income.
You know better than I, of course. But most of the research on consumer finance shows the same thing: people can usually save a lot more if they make saving a priority. Most people don't. Savings is an afterthought--it's the residual of whatever hasn't been spent on clothes, groceries, cars, dinners out, school trips, travel soccer team, college tuition, vacation, etc. Unsurprisingly, there's frequently no residual. However, if people decide how much to save, and then budget their consumption out of what is left, they suddenly realize that they could drive an uglier car, take the kids out of dance class, live with the kitchen the way it is, stay home for a week in August instead of going to Disneyworld, and so forth. And those people are not, as you might think prospectively, made desperately unhappy by these sacrifices. Savers are actually happier than the general population--in part, one assumes, because they're less worried.
Many people tell me they can't save because children are so expensive. Children are indeed very expensive. But they're getting more expensive every year, and that's because we're spending more money on them. We're spending more money on houses to get them into good school districts, on activities so that they have every chance to get into Harvard (or the NHL), on clothes and cell phones and video game consoles and the list is endless, plus then there's that tuition to Harvard or some sort of even-more-expensive smaller private college.
These expenses are optional, not mandatory. And before you tell me about how unhappy your child will be if you do not buy him all of these necessities, think about how unhappy he's going to be if you have to move in with him. Better yet, volunteer for some outreach to the bankrupt seniors whose kids wouldn't let them move in, and see how their lives are going.
This is not to criticize. Saving is hard, which is why, just like you, we're trying to figure out how to hit even more ambitious savings goals in the New Year. And consumption is fun. That's why most people struggle to save very much.
But a lot of people are going along on autopilot; they're saving 5% because it seemed safe when they were 25 and so what if they're now 37? They look at the neighbors spending a fortune on cars and school activities and figure that if it's safe for them, it must be safe for me too. But this is the opposite of the truth. If your neighbors aren't saving much (and trust me, they aren't), that means a less productive economy in the future--and more people trying to claim a very limited supply of public funds. You don't want to be among them.
It helps to remember that the object is not to turn yourself into a miser; it's to make your spending patterns sustainable. Your splurges will actually be a lot more fun if you know that they aren't putting you at risk of bankruptcy, foreclosure or a retirement in poverty.
If you're not saving enough--and you know who you are--don't decide today that you're going to save 15%, and then forget about it tomorrow when you realize how daunting a task that will be. Instead, try this: divert an extra 5% of your income into a 401(k), IRA, or other tax-advantaged savings plan. If your 401(k) is stuffed but you don't have much of an emergency fund--or if, for some reason, you don't qualify for tax-advantaged savings--have 7% of every paycheck diverted to a bank account which isn't linked to your other accounts. It's a slow week at work, the perfect time to fuss with HR paperwork.
The important thing is to pay yourself first. Savings should be the first thing you do, not the last. After you've saved, then you budget your consumption. I won't tell you what to cut, because when you confront your new, slightly leaner budget, you'll be perfectly able to calculate what's no longer worth the money to you. I think you'll be pleasantly surprised to find that after a few weeks or a few months of initial pinch, you won't remember that you miss the money much.
If at the end of the year, you still aren't saving enough, then you can do the same thing again--pull another 5-7% out of every paycheck. Within a few years, you'll be at a healthy level of savings, without excessive fiscal pain.
But the most important thing is this: don't start looking for reasons you can't. If you hunt hard enough, you'll find them. Unfortunately, those reasons aren't going to do a damn thing to pay your house payment if you get laid off, or keep you in prescription drugs when you retire.
The social network learns more about its users than they might realize.
Facebook, you may have noticed, turned into a rainbow-drenched spectacle following the Supreme Court’s decision Friday that same-sex marriage is a Constitutional right.
By overlaying their profile photos with a rainbow filter, Facebook users began celebrating in a way we haven't seen since March 2013, when 3 million peoplechanged their profile images to a red equals sign—the logo of the Human Rights Campaign—as a way to support marriage equality. This time, Facebook provided a simple way to turn profile photos rainbow-colored. More than 1 million people changed their profile in the first few hours, according to the Facebook spokesperson William Nevius, and the number continues to grow.
“This is probably a Facebook experiment!” joked the MIT network scientist Cesar Hidalgo on Facebook yesterday. “This is one Facebook study I want to be included in!” wrote Stacy Blasiola, a communications Ph.D. candidate at the University of Illinois, when she changed her profile.
The second episode of the new season was a slow burner with a dramatic twist.
Let’s start at the beginning, with Frank in bed with his wife, Jordan, discussing water stains on the ceiling and childhood entombments. I don’t know about you guys, but I found this whole bit slack and familiar. Maybe there was a two-minute scene in there, but five? Maybe a more charismatic actor could have pulled off that lengthy monologue. But Vince Vaughn is no Robert Shaw, and his childhood basement is no U.S.S. Indianapolis.
The historian and Knesset member Michael Oren accuses the president of distancing the U.S. from Israel, and calls out left-wing Jews and Israel’s Jewish critics in the American press.
In a recent post, I suggested that the intervention of two men, the former U.S. national security advisor Tom Donilon and the former Israeli ambassador to the United States, Michael Oren, might help improve the dysfunctional relationship between the Obama administration and the government of Israeli Prime Minister Benjamin Netanyahu.
At the time I wrote this, both men had reputations as people who were concerned about preserving the extraordinarily complicated, and extraordinarily close, U.S.-Israel relationship, and both had spent a good deal of time calming the waters between Obama and Netanyahu. Today, Donilon maintains that reputation. As for Oren …
Put it this way: If Goldblog readers would allow me to withdraw the suggestion, I’d be much obliged. Oren has created a new role for himself: acid critic of the Obama administration and of left-leaning American Jews (especially in the press and in the White House) who, he believes, are trading on their Jewishness when they criticize Israel. Oren’s critique, at its heart, is simple: Obama, in part because he wanted to reconcile the U.S. with the “Muslim world” (a very large, ill-defined, and politically complicated concept, in Oren’s mind), decided to distance the United States from Israel; to surprise Israel by altering U.S. Middle East policy without prior notice; and to negotiate with Israel’s most potent enemy without alerting Israeli leaders.
Over the last two weeks, Republican presidential candidates have repeatedly missed opportunities to demonstrate that they care about communities outside of their traditional base.
After Mitt Romney’s defeat in 2012, the Republican National Committee published an “autopsy.” “When it comes to social issues,” the autopsy declared, “the Party must in fact and deed be inclusive and welcoming. If we are not, we will limit our ability to attract young people.” The autopsy also added that, “we need to go to communities where Republicans do not normally go to listen and make our case. We need to campaign among Hispanic, black, Asian, and gay Americans and demonstrate we care about them, too.”
The last two weeks, more than any since Romney’s defeat, illustrate how miserably the GOP has failed.
Start with June 17, when Dylann Roof, a young white man enamored of the Confederate flag, murdered nine African Americans in church. Within three days, Romney had called for the Confederate flag’s removal from South Carolina’s capitol. Four days later, the state’s Republican governor and senators called for its removal too. But during that entire week—even as it became obvious that the politics of the flag were shifting—not a single GOP presidential candidate forthrightly called for it to be taken down. Instead, they mostly called it a state decision, a transparent dodge politicians deploy when they don’t want to make a difficult call.
For centuries, experts have predicted that machines would make workers obsolete. That moment may finally be arriving. Could that be a good thing?
1. Youngstown, U.S.A.
The end of work is still just a futuristic concept for most of the United States, but it is something like a moment in history for Youngstown, Ohio, one its residents can cite with precision: September 19, 1977.
For much of the 20th century, Youngstown’s steel mills delivered such great prosperity that the city was a model of the American dream, boasting a median income and a homeownership rate that were among the nation’s highest. But as manufacturing shifted abroad after World War II, Youngstown steel suffered, and on that gray September afternoon in 1977, Youngstown Sheet and Tube announced the shuttering of its Campbell Works mill. Within five years, the city lost 50,000 jobs and $1.3 billion in manufacturing wages. The effect was so severe that a term was coined to describe the fallout: regional depression.
The president delivers his single most accomplished rhetorical performance, and it’s one you should watch rather than read.
I think Barack Obama’s eulogy yesterday for parishioners of the Emanuel African Methodist Episcopal Church in Charleston was his most fully successful performance as an orator. It was also one that could have come only at this point in his public career—and not, for instance, when he was an intriguing figure first coming to national notice, as he was during his celebrated debut speech at the Democratic National Convention in Boston 11 years ago; or when he was a candidate fighting for political survival, as he was when he gave his “Race in America” speech in Philadelphia early in 2008.
I’ll explain why I say so, but first a word about the odd circumstances in which I’ve heard and learned about the speech.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
Twenty-five percent of Americans are spending more than half of their income just to keep a roof over their head.
If you’ve gone through the painstaking process of renting a new apartment in the past few years, you probably faced some sticker-shock. Vacancy rates are low, really low. And despite ever-present scaffolding, construction in many cities is still slow, as new tenants move in but few move out. The result is that in almost every major metro area, the rent is, in fact, too damn high.
Basic wisdom (which was largely established by rules governing public housing eligibility) warns a healthy bank account means that one’s housing costs shouldn’t exceed about one-third of a person’s take home pay. While that might be a prudent suggestion because, after all, people do have other bills and savings goals, it’s become virtually impossible to adhere to for many who live in major metro areas.
The meaning of the Confederate flag is best discerned in the words of those who bore it.
This afternoon, in announcing her support for removing the Confederate flag from the capitol grounds, South Carolina Governor Nikki Haley asserted that killer Dylann Roof had “a sick and twisted view of the flag” which did not reflect “the people in our state who respect and in many ways revere it.” If the governor meant that very few of the flag’s supporters believe in mass murder, she is surely right. But on the question of whose view of the Confederate Flag is more twisted, she is almost certainly wrong.
Roof’s belief that black life had no purpose beyond subjugation is “sick and twisted” in the exact same manner as the beliefs of those who created the Confederate flag were “sick and twisted.” The Confederate flag is directly tied to the Confederate cause, and the Confederate cause was white supremacy. This claim is not the result of revisionism. It does not require reading between the lines. It is the plain meaning of the words of those who bore the Confederate flag across history. These words must never be forgotten. Over the next few months the word “heritage” will be repeatedly invoked. It would be derelict to not examine the exact contents of that heritage.
Eight out of every 10 lawyers are white. Social scientists and architects are probably in need of some diversity too.
Earlier this year, Deborah Rhode, a professor at Stanford Law School, lamented the state of diversity in the legal profession. Rhodes wrote that despite what it looks like from the outside, statistics show that there are few lawyers who aren’t white. Data from the U.S. Census supports this claim, showing that 81 percent of lawyers are white, down from 89 percent in 2000. Further, only 7 percent of partners at law firms are blacks, Hispanics, Asians, or Native Americans. Rhodes attributes the problem partly to the lack of diversity at law schools, but also to unconscious bias and lack of access to networks.
These days, criticisms about the lack of racial diversity are perhaps most focused on the tech sector. But usually, these criticisms of diversity at top tech companies exclude Asians and focus on the low percentage of blacks and Hispanics in the tech industry. Data from the Census bureau shows that while blacks and Hispanics are underrepresented in the computer workers category, Asians are overrepresented (Asians make up 5.3 percent of the U.S. population). In the spirit of transparency, companies such as Google, Microsoft, and Facebook have all revealedinternal data about the racial makeup of their employees, but in general information about the racial composition of many companies can be difficult to come by, and is often incomplete. The best guess is data compiled by the Census and the Bureau of Labor Statistics.