Why You Won't Have Children

I read somewhere recently that an upper-middle-class worker needs to have around $2 million in savings when he retires, less if he owns a house.

I ran some numbers, and here is roughly how much you would have to save each year to hit $2 million, assuming you get the specified rate of return.  I am assuming you simply save $x every year from your 25th birthday to your 65th birthday, and that your rate of return is constant across those years.  (Needless to say, these are unrealistic assumptions, but I don't think it affects my point.)  I guess these should be viewed as real rates of return, since the point is to have $2 million in purchasing power when you turn 65.

If your rate of return is:

10% you must save a little over $4,500/year

7% you must save a little over $10,000/year

4% you must save a little over $21,000/year

0% you must save $50,000/year

-2% you must save a little over $72,000/year


Bear in mind these are real returns, so if inflation runs at 2% then each of these would need to be 2% higher in nominal terms.

So what I think this shows is how changing perceptions of the economic environment can have huge consequences for personal behavior.  If you earn $100,000/year, then a 3% change in your expected rate of return (7% to 4%) would require you to save an extra 11% of your income in order to have the same amount at retirement.  That is a huge reduction in spending, and if you extrapolate it across the economy, it could help explain the big swings in aggregate demand we have seen.

Meanwhile, if a saver earning $100,000/year thought his real rate of return were -2%, he would have to devote over 72% of his budget to saving in order to hit $2 million on retirement.  Assuming he pays 15% tax on his income, that leaves $13,000.  It would be very tough to raise a family in NYC on $13,000.  In fact, I think it would be tough to raise a family on $13,000 in most cities.  And yet $100,000 is well above median income, even in Manhattan.  (Manhattan seems to have median household income in the neighborhood of $65,000.)

Of course, historically many investments have yielded more than -2% returns, but there is no guarantee that this will be the case in the future.  And some people think that Chinese savers get a rate of return even worse than -2%. This all makes me think that we have built a society that is too expensive to sustain itself, and that we will all go the way of the Japanese. That is, we won't be able to afford to raise children (I probably can't, and I earn a pretty good salary—though of course there are other reasons I can't/shouldn't have children), and so our population will inexorably shrink and our society will fade away.