19 April 2013

Greg Mankiw Still Out Of Touch

By the way, exceeding $3 million in such accounts is not very difficult for an individual who is financially successful and frugal. Under current law, a self-employed person can put about $50,000 a year in a SEP-IRA. If he does that every year for 40 years, and his savings earn a return of 5 percent per year, he will retire with about $6 million.
From here quoting economist Greg Mankiw.

Call me hopelessly plebian, but in my book, putting away $50,000 a year in retirement savings every single year for forty years and then earning a return of 5 percent per year on that investment, is damn hard.

Even if you are saving the current maximum 25% of your income each year in a SEP-IRA (the limit is 20% for self-employed individuals), you need to be making $200,000 a year essentially from the moment you join the work force after graduating from college (in addition to paying off your student loans).  Even U.S. Supreme Court law clerks taking entry level positions of large New York City law firms, newly minted M.B.A.'s working for investment banks and major management consulting firms, and first year out of residency specialist physicians very rarely make that kind of money.

The median net worth of an American household is about $50,000.  This is also within 10-20% of the median household income.  To make that much of a contribution every year for forty years would be pretty much unprecedented, in addition to being impossible under the law up to the present.  SEP-IRAs were added to the tax code in 1978 with much less generous contribution limits which didn't reach $50,000 until 2012.

Also, the average equity investment return over the period since I graduated from law school in the mid-1990s has been something like 1%-2% per year, or less, not 5%.

So, actually, it is horrendously difficult to mangae to get $3,000,000 in such accounts.

But, Mankiw, apparently, has a different threshold for "difficult" than the average guy.

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