The Sarcasm Report v.53

The Millionaire's Retirement Plan

For these calculations, assume an average annual return of 8%, adjusted for inflation at 3% - a reasonable estimate of average market returns.

Great assumption!

Never mind that...

1. The 3-Month Treasury bill only yields 0.17%.
2. 30-Year Treasury bond only yields 3.89%.
3. The stock market has gone nowhere in the last decade.
4. Real estate crashed and is struggling to recover.
5. Unemployment is 9.5% and is expected to stay high.
6. Europe is now facing enormous financial difficulties.
7. Japan's been stuck in deflation for decades.
8. China is attempting to slowly deflate their housing bubble.
9. Precious metals have risen 400% in the last decade and future returns of that magnitude look somewhat suspect to say the least.

The key is diversification. No one thing can probably get us to 8% but if we bundle them together in some sort of structured investment vehicle then the sky is the limit.

I think I know just the company to package them.

Structured investment vehicle

Invented by Citigroup in 1988, SIV's were popular until the market crash of 2008.

...

When the entire spectrum of bundled loans from sub prime to premium AAA start to under-perform against statistical expectations, the valuation of assets held by SIVs became suspect. SIVs suddenly found it difficult to sell commercial paper while their previously sold commercial paper neared maturity. Moreover, their supposedly prime rated assets could be sold only at a heavy discount. In effect, this was a run on the bank.

An uncomfortable old age

In a world in which all the consumers and savers are rational, savvy and knowledgeable about calculating present and future value (a theoretical world that exists only in the fevered minds of economists ) they will react already now to the decline in yields and behave accordingly.

Fortunately, there aren't that many of us who behave accordingly. It's especially difficult to behave accordingly when we're continually told to expect 8% returns.

That isn't how it works in real life. The vast majority of savers and investors are totally unaware of the concept "yield to maturity" or the future value of deposits. They do not react to the predicted decline in yields on their future investments in real time. They react late, sometimes far too late.

Ignorance is bliss!

They will only react after realizing that over time, the value of their savings doesn't increase at the rate they anticipated. Only then, after the initial feeling of disappointment, will the reaction be: "We don't have enough accumulated wealth: we must increase our current savings."

The Church of 8% Returns continues to attract followers though. And why is that? The idea of saving a million dollars in order to actually have a million dollars is just too horrific for the average person to contemplate!

In London there is a man who screams when the church bells ring. - H.P. Lovecraft