Investment is expenditure, purchasing activity.
Principal --lump sum or cumulative constribution-- invested is not necessarily guaranteed returned by these schemes in the event investor closes his/her account --s/he demands "deposits." At that point, capital is realized in the form of principal "deposited" for investment plus capital gains, if any, in currency.
Currency is (supposed to be) fungible; your $5 bill has the same value (or purchase power) as my $5 bill. Equities are not fungible. The transaction value (to currency) of each instrument varies by time and by demand.
Otherwise, investor holds interest/dividend bearing securities in perpetuity to benefit, to realize, distributions in currency. Sadly, those distributions are taxed. And, with the exception of costly preferred trust instrument, subject to termination or deflation in value at any time.
For these reasons, unions long ago lobbied the US government for pension insurance fund. 401(*) are not insured unless fund manager has purchased insurance (uh oh) on behalf of clients, probably with clients' capital rather than fund's OpEx. I really don't know "best practices" on fee structures.
(E.G. GOOG is my favorite poster child of the investment industry. This firm has never paid dividend. It's common share price floats around $400. To my knowledge, outstanding has never split (diluted); the firm has no new issues since IPO or buy-backs; there's no preferred stock outstanding, and employee compensation includes options. In order for "savers" to realize principal or capital gains, "saver" must sell GOOG equities. Perhaps to GOOG employees? At this point in time, profits are taken by earlier buyers, and volume trading by fund managers must be fractional.)
It is one thing to argue, as many financial advisors do, that the benefit of investment is forestalling tax obligation on capital. So the activity itself is a (temporary) "savings" (of tax). It is another argument altogether that investment activity saves capital. Diversity is the key to economic and political evolution.
This [loans sold at a loss] is not what the magic of compound interest promised. But it is where it had to end up, with mathematical inevitability. It was an advertising come-on for Wall Street money managers and promoters of "pension-fund capitalism" (or "peoples' capitalism" as it was called in Chile by the Chicago Boys working for General Pinochet's murderous regime, and Margaret Thatcher's Conservatives in England). The promise is that if people consign these funds to individuals who make much, much more than they do but have the survival-of-the-fittest advantage of being much, much more greedy, they will receive a perpetual doubling of interest. That is how retirements for American workers are still supposed to be paid - by magic, not by direct investment. Prospective retirees are supposed to ensure a good life by investing savings in loans to corporate raiders who fire, lay off, downsize and outsource these very workers. The trick is to persuade employees to hand retirement funding over to financial managers whose idea was to make money off the economy by extracting interest and dividends off workers, homeowners and companies being bought on debt leverage. In the final analysis it is debt leverage by itself that is supposed to fuel capital gains.
My metaphor at ET, some time ago, for this "magic" was financial cannibalism. (That was in the context of news on RE vulture funds.) I suspect, you still "believe in" "investment savings." It is difficult to shake off Friedman ideology. But time has come nonetheless to abandon that concept of financed property rolled into one.
One day, do yourself a favor. Fire up xcel and begin listing dividend and interest bearing securities (stocks and bonds) you would like to buy --on the basis of reported quarterly distributions per share only. List the price and income per share beside each ticker symbol. Then calculate how many shares you need to purchase in order to secure annual income of $20,000 a/o tomorrow. (That $20,000 constraint is what's known in the biz as defined benefit of contributions.) Compare the total minimum "investment" required to the total contributions you've made thus far to interest and dividend bearing securities. Diversity is the key to economic and political evolution.
I don't understand what you are trying to prove. I know the answer to your first question -you need for example around 13000-14000 France Télécom's shares to secure 20000€, so around 9000 for 20000$. That (9000) would cost 185000€, or about 275000$.
Now, what next? It's significantly more than the total contributions I've ever made indeed, but then I'm 32. On the other hand, that's pretty much the level I have now (compound interest and making maximum use of special prices for workers at the companies I've worked for sure helped ;-) ). That's far from enough to live off if my wife and I were to retire now, but I don't think you should have enough for retirement at our age (I know traders do but...).
So what exactly is the point? Maybe I'm missing it because in France we have a different retirement system. "Few can believe that suffering, especially by others, is in vain. - Galbraith"
"It's significantly more than the total contributions I've ever made indeed, but then I'm 32."
That's the proof. Thank you for your demonstration of the ubiquitous sell-sheet --8% "return" (on principal; was 10% in the '90s) over 30+ years --barring anomalous share price and asset price movements that guarantee an "annuity" that is in the US a federal poverty level of income for <2 person HH. And where, theoretically, one would need to commit additionally the same level minimum investment to secure health care insurance of one's dotage. Everyone, male or female, should be so happy to rely on a wife's investments at that time. In the US a wife, much less other beneficiary, is not guaranteed distribution of deceased spouse's SS "annuity"!
Now can you find for us median portfolio value of US (vs French, if you like). This document tell us that in the US the number of participants in defined contribution plans increased from 22% to 58%, 1978-2004; 401(k) Balances Generally Increase the Longer Participants Work but Still May Not Fully Fund Retirement.
The median (cumulative) asset value for "Families" of the bottom 80% income class was in 2004 $37,761. Is it reasonable to assume that value would have doubled (return roughly 200%) annually to obtain today's minimum required investment in a US federal poverty level "annuity"?
If your investment plan began in 1978, you may have contributed a total $131,873 a/o 2004. That is not to say your "annuity" is today worth $131,873 in unearned income. Although you will have continued to work (or hedge investment instruments) for another 10-death years to conserve or increase your HH income extracted from other's and your own diminishing labor input.
In short, any social security strategy cannot be funded by individual financing alone. Transfer payments are a HUGE component of a living wage, regardless of age. Diversity is the key to economic and political evolution.
It cannot work to rely on the individual if he spends too much indeed. But why would I need to have a retirement ready after only 7 years of working? My investment plan did not begin in 1978 -I was 2 at the time- but in 2001. Also, as I said I haven't contributed that much money, but my savings (that neglects my mortgage, admittedly) are around 185000€, so you don't actually need to contribute that amount to get it since you get compound interest. Also, in France we pay quite a lot of our salary to the retirement system -money that would have come on top of that otherwise.
Now, I am not typical in the least, as I have comparatively high income, and indeed my wife works (as in most households -that's how it should be). I realise that most people must manage on much less. But what makes it unsustainable is low salaries, not an actual impossibility. We tend to save 22% of our pre-tax income, because we don't believe in living on credit. My wife's parents have rather low salaries, but they save as well because when they started they had very little and know the value of things. They are both immigrants and at least my mother in law will not get a significant retirement because of that (the Laotian government will not send records of years worked before the revolution). But they will manage, because they saved.
If it were impossible to rely on savings, it would be impossible to rely on transfer. The wealth must be created somewhere. Where it must not be stored is in super volatile funds. Transfer protects you against poor management, and anyway it is terribly unfair not to have redistribution. But that does not mean it could not theoretically work, and the need for redistribution arises because some wages are too low. Reduce inequalities during the working years and the need will be much reduced. "Few can believe that suffering, especially by others, is in vain. - Galbraith"
