Book Overview
Good discussion on the required asset to fund pension funds giving changes on life expectancy, aging population, and low interest rate environment. On the asset side, the author compares the savings in retirement products such as pension funds, mutual funds, and life insurance products, to the GDP (Gross Domestic Product) across multiple countries. It's surprising to understand that countries such as France, Germany, and Brazil have less then 15% of their respective GDP's in Total Pension Assets (as of 2012). Well developed private pension systems such as Chile, Canada, and US have 61%, 84%, and 108%, respectively. Considering GDP (USD $) as a measure of country's yearly salary, it's striking to realize that most countries have less than 1 year of income in retirement-marked investments, giving the assumption that individuals will require 60% of their income during retirement stage of life. Based on dependence ration (number of active workers required to support one retiree) and interest rate forecasts, it's expected that the world as a whole has a funding need of 199% of GDP, but is currently funded by 58% of assets resulting in a gap of 141% of GPD (or $98 trillion). On the liability side longevity and low interest rates are the main components to drive a higher level of savings to retire; the lower is the interest rate (discount rate) the higher is the asset (investments) required to fund an individual retirement. Pay-as-you-go system, or the also known pact of generations, imposes a real threat to economic growth and financial stability giving that aging populations with low fertility rates are imposing a much higher burden to younger generations. Another discussion brought on this book is the conversion of Defined Benefit (DB) to Defined Contribution (DC) plan, a conversion that has swift the funding risk to individuals from companies and rise the question whether individuals will be prepared to make a decision on managing their savings to have enough during retirement. As successful case of retirement plan conversion was the adoption of a private and mandatory Defined Contribution model in Chile during the 80's under General Augusto Pinochet regime. As the author has mentioned, private pension system in Chile is the "tree of life in this [economic] ecosystem". The book concludes the discussion with the following suggestions: 1. Keep your expense nut manageable 2. Save early and then manage well; compounding interest is the main driver in wealth accumulation. In a 40-year accumulation horizon, most of the accumulated wealth will be a direct result of compounding interest 3. Get a professional money manager, or at least just invest in index funds and let it stay there 4. Consider where you are in the lifecycle 5. Evaluate the location where you want to retire regarding state tax, cost of living, and state pension solvency.