Just to make sure we’re not talking past each other, can you quantify “vast” and explain what you think all these people are blowing it on?
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Sure, I’d say 80% of households should have enough to put money aside. Anything they spend money on that isn’t absolutely necessary by definition is blowing it, because that’s money that could have been saved or invested.
I’m going to zero out inflation for now to look at everything in current dollars.
And I’ll point out that I was originally addressing your original comment that what keeps poor people poor is ignoring the fact that anyone can invest. By looking at the top 80%, we’re ignoring 1 out of 5 people and no longer discussing what “anyone” can do. Assuming you’re looking at the US, the 20th percentile pretax household income is about $25k with an average household size of 2.5, which is above the poverty line ($17k for family of 2, $21k for family of 3) so by ignoring the bottom quintile we’re technically no longer discussing what keeps poor people poor.
So what does it look like at the boundary?
Over the long term, you might expect something like 5% real growth in stock prices (7% nominal - 2% inflation). I’m not sure what you mean by “nest egg” exactly, but let’s say you want to invest enough to maintain your current income into retirement. If you wanted to do that by living solely off the interest of your investments, you’d need to have invested $500k by the time you retire.
I’ll point out that lack of inheritance is one of the things that keeps poor people poor before taking the more traditional approach of assuming you’ll just kill yourself when the money runs out. I’ll go into Numbers and choose the “retirement savings” template. I’ll start saving at 20, retire at 65 and throw myself off a bridge no later than my 100th birthday. I’ll continue my $25k income, assume a 5% return on my investments and 0% inflation. Apple tells me I need to save $214 per month.
At that income, income taxes probably aren’t much of a burden. I’ll ignore FICA taxes and things like earned income tax credits.
So what is and isn’t necessary? After your $214 a month, you’re down to $1870 to pay expenses for 2.5 people. Hard to find numbers that aren’t anecdotal, but I picked St. Louis as a reference because it’s a reasonably inexpensive city. Median rent is $869. Average electric, gas, water and garbage come to $115+$75+$70+$14=$274. (I can’t find 20th percentile numbers for rent or utilities). Transit passes are $78 a month, so assuming two working adults that’s $156. Food seems to come in around $300 for one person, but the basket of goods isn’t well defined— call it $500 for a household of 2.5.
We’re up to $1800 of that $1870.
Sure you might save a bit on rent and utilities below the median or average, but what else is necessary that isn’t yet accounted for? Depreciation of clothes and appliances? Medication? Education? Internet? Cell plan?
What about elder care? Later in life, $25k a year won’t cover all of the costs of living plus the ballooning medical costs and special care needs of old age. We’d need to account for that either by increasing the necessary savings or by assuming our household is helping cover the costs of their parents.
As a friend of mine once said: when you’re poor you need to be perfect because one mistake can put you right back where you started. Get caught once without your bus pass, and there goes that month’s retirement savings. An ambulance ride? That probably wipes out a year or more.
You can argue my numbers up or down a bit, but it becomes clear that trying to fit within a budget like that takes a lot of active management which itself takes the kind of time and education that the least privileged among us don’t always have.
And are stocks really the right savings vehicle when you’re that close to the edge? If you’d been invested in stocks in 2000 or 2008 and retired shortly before those crashes, it would have laid waste to your life savings. Long run estimates of 7% growth gloss over the shorter term volatility— you need to be able to weather those storms to reap the gains.
So, while I strongly agree with what I understood your broader point to be— that the cultural perception of investing as a rich man’s game discourages people of more modest means from benefiting from an important path toward wealth creation— I think it’s equally important for people with money to invest to not make the blanket assumption that if everyone was just more responsible with their money there would be less poverty. A lot of people truly don’t have have the cash, the training, or the access they need to the benefit from the markets.
Wow, I appreciate the thoughtful response. I know I made it sound trivial, but as an immigrant who came here with very little and parents who didn’t speak the language, I can tell you from my own experience that it’s more than possible for anyone to lift themselves out of poverty. If my parents could retire very comfortably, why can’t most American-born citizens do the same? After all, they have a HUGE advantage just by virtue of having zero cultural/language barriers. Furthermore, in the example you mentioned, that household would be eligible for certain financial and healthcare benefits. My parents received none of that and had to fight, scratch and claw for everything they now have. They worked tirelessly 12/7 until we moved out of our cramped studio (in a very bad part of town, I might add) and we moved 8 more times, until we finally settled in a big house in an upscale neighborhood.
And it’s not just my parents, but I grew up watching most of their friends achieve similar success. I’m sure there are many such immigrant success stories. In fact, I just met a man this past summer who came from Guatemala, worked as a delivery person, saved up every penny, and eventually bought his boss’s business. He continued to save and went on to buy 2 more businesses. Next to his business was a pizzeria owned by a Lithuanian man who came here with just a backpack of clothes, with no family or relatives, and spoke very little English. He got a job washing dishes at a pizzeria where he worked diligently until he eventually became a manager. After 10 years of running that business, he saved enough to buy his own pizzeria. They both faced a lot of the similar hurdles my parents faced, but through hard work, sacrifice and a frugal lifestyle, they are now better off than most Americans.
So while it’s easy to assume the poor can’t do this and they can’t do that because they seem so disadvantaged, my parents and countless other immigrants are living proof that much can be accomplished in this country with far less than the example you used if they have the determination, work ethic and are willing to make sacrifices. But most of the mult-generational Americans I’ve met are not like that which is the real reason why many of them can’t break the cycle of poverty. So when I said 80% should be able to save a few bucks, I was probably being too generous and that number could easily be higher. That said, I still donate my time and money to help the less fortunate every month because I recognize that everyone’s circumstances are different.
What you're saying does resonate. I don't know whether I'm only seeing the anecdotal successes but while the US as a whole has among the lowest rates of economic mobility in the developed world there does appear to be a relatively higher rate of mobility among immigrant families.
I'm not sure what explains it. There's one theory that immigration itself is a pretty trying process and therefore immigrants as a group are already selected for success. Anecdotally, I see immigrants as taking a more multigenerational view of family. I also see a level of community support that I don't always see in non-immigrant communities. To your point, I have also seen immigrants willing to accept a much lower standard of living than many non-immigrant Americans would.
But there's also a ton of selection and confirmation bias in my perception of the differences. I like a good self-made-man story as much as anyone, so those sick in my head. I tend to believe that immigrants strengthen the nation, so I retain examples that support that view. I'm also in a place in life where most of the people around me are reasonably successful, including the immigrants, so those are the stories I hear most often. I just heard your story because you've been successful enough to have access to MacRumors and the free time to reply to me-- if you weren't a success I wouldn't have heard your story.
So I guess what I'm saying is that I understand the point you're making-- there can be a sense of entitlement that prevents people from digging deep to succeed in the long run. Immigrant families may offer an example of how to better succeed at the so-called "marshmallow test". To a large extent the secret of the American Dream has been that it's a self fulfilling prophecy.
At the same time though I don't think the problem is only that-- and I'm not even willing to say that the problem is mostly that. There is a system in place that seems to be exacerbating the problems of inequality and, while some of that problem may be in the heads of the poor, I think much of it is in the heads of the rest. There's been a shift in the economy in recent decades that increasingly favors return on capital over return on labor-- and that trend means it's easier to make money if you have money and harder to make money by working hard.
I appreciate you sharing your personal story. I bristled a bit at your original comment because I feel like saying "anyone can save a few bucks" unfairly shifts the responsibility for a systemic failure onto those most disadvantaged by that system. It sounds like you may have the moral authority to make the argument that you did, but I also hear it from many who do not.
Maybe if the poor listen to you and those with influence on policy listen to me then we'll wind up in a much better world in a few decades?