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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: bwtidal who wrote (6949)	11/19/2002 9:56:28 AM
From: JBTFD	Respond to of 306849

Thanks for that clarification. I was wondering where they got that number from.

To: bwtidal who wrote (6949)	11/19/2002 11:39:24 AM
From: yard_man	Read Replies (1) \| Respond to of 306849

but does it make sense to assume those historically low rates in perpetuity?? A short disclocation, I can see, but extrapolating that very far forward (or even current price inflation for that matter) doesn't make sense to me ... what am I missing??

To: bwtidal who wrote (6949)	11/19/2002 12:01:18 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 306849

indeed, yours seems to be correct based on Scowcroft's response to ild. put in that perspective, -173K seems to be a very large number. especially when that number is the result of assumptions that are probably still too rosy. one obvious assumption that will change is that people will be forced to live on less than 75% of current income (the AARP assumption used by Scowcroft). if they live on 50% of income, then maybe their net worth balances out. of course, that means they spend less, which is bad for the economy. on the other hand, they will probably work longer, which is good for the economy and also good for them (the workers). the other assumption that will probably change, or which i would consider highly unrealistic in general (i don't know Scowcroft's in particular), is the returns assumption. basically, return models should assume that 2.5-3% of portfolio value can be taken out each year in real terms. but instead they rely on things like 5% or 6%, or in the case of pension funds living in lala-land, 9-10%. higher assumptions than that, which are common among "individual investors"? let's not even go there. but if you want to lock in a real return from the government, you might buy TIPS, which are yielding well below 3%. so if you use the TIPS return as an assumption, say 2.5%, then $55,000 in real income requires an investment of $2.2 million, in contrast to the $1 million-1.375 million you showed for nominal rates of 5.5% and 4%. (of course, the average person will be relying on Social Security and such as well, so they probably don't need the whole $55K from private assets, but still, this assumption change could make the -173K figure appear a lot worse.) i believe 2.5% real annual return is also a generous assumption for the SPX over the next 30 years. however, i think corporate bonds should do better unless we get nuked. as you are familiar with Bernstein's site, you may be interested to note that he was recently quoted in the WSJ saying that a real return assumption of around 3% is prudent. last year he also had an interesting article about the relationship between return probability assumptions (like "this plan with such-and-such assumptions has a 97% success probability") and outlier events. like us getting nuked by terrorists. interestingly, that article appeared in the fall edition of EF, and came out before 9/11 as i recall. rather prescient. here's the link for those interested: The Retirement Calculator from Hell, Part III: Eat, Drink, and Be Merry efficientfrontier.com

To: bwtidal who wrote (6949)	11/19/2002 12:40:57 PM
From: the_wheel	Read Replies (1) \| Respond to of 306849

cat food? Let them eat cake!

To: bwtidal who wrote (6949)	11/19/2002 7:02:27 PM
From: GraceZ	Respond to of 306849

Ha! Unfunded pension liability, that's a good one. I doubt seriously that those two old bears did that exercise back in 2000 when everyone and their brother was planning on early retirement and even cashiers at Walmart had million dollar portfolios. You have to love the way people choose time frames that suit their own personal prejudice when making these kinds of assessments. It always has been and always will be mathematically impossible to save for a retirement that is equal to your present lifestyle when you are investing in assets that yield close to treasury yields....unless you are willing to live your whole life on half your income and save the other half. This is why if people aren't willing to live on half their income they have to put some of their assets into an investment that engages risk, with the higher risk comes higher yields. One of the most serious mistakes people make is to exchange safety of principle for return. The other dumb mistake is to look at the near past and assume rates of return will match that of the preceding few years instead of looking for them to revert to the mean. Right now real estate and bonds look like great investments but the chance of them looking like great investments over the next three years is highly unlikely....while other investments which have been beaten down in the previous three years or previous twenty years (as in the case on gold) may be looking a whole lot better ten years down the road.