Why I can't afford to retire

My previous, actually rather dry, post on nutritional optimization attracted almost fifty times as much interest as its predecessors. This leads me to believe that:
· EITHER people are very interested in the mathematical nuances of dietary optimization subject to budget and nutritional constraints
· OR, that nudity gets hits.

The latter seems more likely. And given this universal law of the internet, I was weighing up the value of festooning this post with videos of kittens doing adorable things. I concluded that it might distract from my main message, but I retain the right to revisit this important debate later.

So be on the look out for:
Dumpster diving – With kittens!
Preparing pinto beans – In underwear! Surrounded by puppies!
Thrifting for cute t-shirts – Gangnam style!

Obviously the price of my dignity along any of these dimensions is a function of how much good we can do for the kids. :)

Back to serious stuff.

A few weeks ago I concluded that I couldn’t really afford health insurance on a minimum wage salary. Some friends helped me think through the consequences of this, and we decided that the best strategy was to buy a minimum level of health insurance – essentially tail-risk insurance that stops me dying, but doesn’t help much if I’m sick. At high levels of coverage I didn’t have enough money left to eat.

Here’s another question. Assume that I’m a good worker, working a minimum wage job until retirement and contributing to society. Because I value self-sufficiency and want to ensure a good life for my family, I try to plan for my own retirement without depending on government support. After all, I am in my early thirties and cannot guarantee that social security will still exist in 30 years.  Can I actually afford to do this?

Right now, an annuity that guarantees a 65 year old a monthly payment in retirement of $1495 (the current SF minimum wage net tax) costs around $350k. (This calculation assumes an inflation-rate of 2% a year, a liability profile that grows with inflation, and a 25 year maturity annuity).

Today, if I buy a 30 year US government bond, I can get a return in excess of inflation of 0.35% a year. If I invest money at this rate every month, I have to invest $835 a month in order to get $350k (in inflation-adjusted terms) by age 65. This is over 50% of my monthly income, and after housing and utilities it leaves only $3.50 a day for ALL other spending.

Even if I assume that I can get a real return of 5% on my investments (and it is taking me all the willpower i can muster to avoid advertising my mutual fund here) I still need to stash away $350 a month.

The conclusion seems to be this: Excepting exceptional circumstances, on a minimum wage salary you cannot hope to fund your own retirement at 65. At this level of income, retirement security must depend on the continued existence of social security.

And kittens are adorable.