Macopinion

Consumer Electronics Upgrade Addiction vs. Your Retirement Security

I try to resist, with mixed success, the consumer electronics upgrade treadmill. I've often lamented the depreciation curve of personal computers and other electronic gadgets, which resembles the trajectory of a falling rock. Nevertheless, over the past 15 years I've purchased five brand new Macs and at least that many again used and refurbished ones. It's kind of ridiculous when viewed rationally.

Even cars seem like blue-chip investments compared with consumer electronics. The speed with which equity in these items evaporates would be considered outrageous in almost any other type of consumer commodity.

For example, if you paid $2,799.00 (plus applicable taxes and so forth) for a new Revision A 17" MacBook Pro a year ago, you've seen $1,000 or more of a capital depreciation in 12 months, and it's gone for good. No chance to recoup. It's a dead loss. Of course, at least if you use the MacBook Pro as a tool for making your living or in a course of study, that can be considered a business expense or an investment in the future, but the question is begged as to whether whatever computer you were using before that could not have continued doing an adequate job. I'm typing these words on a nearly 7 1/2 year old Pismo PowerBook that still acquits itself remarkably well in accommodating my daily requirements.

Meanwhile, lets say you're 30 years old and still had that $1,000 you've lost in depreciation on your MacBook Pro over the past year, and instead had invested it with a conservative projection of it earning 5.5% after inflation over the next 35 years, your money will have grown to $6,514 by the time you reach retirement age at 65 according to RBC Royal Bank's handy online compound interest calculator:
http://www.rbcroyalbank.com/RBC:RND4bo71A8YAAYtaPaE/cgi-bin/retirement/c3.pl

What got me thinking along these lines was a column last week by The Street's Brett Arends, who argued that the true cost of a new 8 GB iPhone is not the nominal $599.00 (plus applicable taxes), but rather a whopping $17,670. Arends points out that the up-front price of the iPhone is just the jumping off point, since in order to use it you need a service plan, the minimum one offered by AT&T hosing you for $60 a month over two years - or $2,039, but if you can't write it of your income tax as a work-related expense, the penalty if you're in a 25% tax bracket is really more like $2,720.

Consequently, Arends calculates the real cost of your $2,720 dead-loss overhead expenditure on an iPhone, compared with investing the same amount in a tax-sheltered 401(k) retirement plan at an average 5.5 percent ( a reasonable, conservative expectation) return over 35 years, is $17,670, or if you paid with a credit card and take a year to pay it off - more like $19,000.

Now, if you can write all this off as a business expense tax deduction, all well and good, and of course if you're rich, these concerns are irrelevant, but few of us are rich, and most of us should be making more prudent preparations than we likely are for retirement. When we're in our 20s and 30s, retirement seems like a distant abstraction, but speaking as one who will turn 56 in a couple of months, it sneaks up on you.

According to Employee Benefit Research Institute stats. cited by Arends in his article, fewer than half of Americans between 25 and 34 have saved more than $10,000, and fewer than one in three has $25,000 in a germinating retirement nest-egg. In the 35-44 age bracket, still fewer than half have $25,000 saved, which is cause for considerable alarm.

When I was 25, $25,000 seemed like a lot of money, and even after the ravages of 31 years of inflation, it's still not chump change, but in terms of what it costs to live in the context of even 20 years of retirement, it amounts to a spit-in-the-ocean, as is the average [2004] U.S. 401(k) retirement plan balance of $57,000.

My fellow Canadians are even worse-prepared for retirement than Americans. Almost 70 per cent of Canadians have no financial plans for retirement, and no financial advisers, and the average Canadian Registered Retirement Savings Plan (RRSP) - the Canuck equivalent of the 401(k) - contains Can$37,000, enough for the average person to live on for maybe one year. Maybe. In typical years, about 65 per cent of Canadians make no RRSP contribution at all, and even among Canadians aged 45-plus who do have an RRSP and are still working, 39 percent have less than Can$50,000 saved.

There is also a troubling reality-disconnect between retirement expectations and the sober facts. A Decima Research survey found that 41 percent of Canadians intend to retire before age 60, but more than half that number had no idea how much money they would need, while, a survey by COMPAS Inc. revealed that 38 percent of retired Canadians lack sufficient savings to maintain the lifestyle they had anticipated for their retirement years, and that an astonishing eleven percent of not-yet-retired Canadians are betting that some of their retirement income will come from winning the lottery.

By 2015, more than half of the population will be over 40 for the first time in history. By 2020 there will be four times as many 70 year olds as there are today. By 2030, there will be nearly twice as many senior citizens, and projections suggest some 750,000 Alzheimer's Disease cases - up from about 300,000 today. By 2040 there will be a whopping 500 percent more people over 85 than there are now.

Because of projected inflation, if you're in your 40s, some maintain that you'll need an estimated $600,000 and $1,000,000 in invested assets to maintain a modest, middle-class lifestyle if you retire at 65 and live another 20 years.

So how much money do you really need for a comfortable retirement? Projections and prescriptions vary widely, as do of course individual circumstances, pension status, and so forth, but if you start with the assumption that you will retire at 65 and live to 90, with an average annual rate of return on your investments (before inflation) of eight percent (probably optimistic) and inflation of three percent a year during your retirement, it is estimated by some experts that you’ll need savings equal to 15 times your income, or to put it another way, for every $10,000 in income you'll require from your retirement fund, you’ll need to build a nest egg of $150,000 to $220,000 by the time you clock out of the employment world. For most folks, an income of $30,000 to $40,000 will be necessary to maintain a modest but comfortable middle class lifestyle, so you're looking at the necessity of having $450,000 to $880,000 saved by the time you're 65. Others maintain that you should have $1,000,000 invested at retirement to ensure a sustainable $30,000 retirement income and $2,000,000 if you'll be needing $60,000 annually. Viewed in that context, 35 years doesn't seem very long at all, although if you end up retiring without adequate savings, your sunset years could seem very long indeed.

The good news is that the sooner you start to save for retirement, the less money you will need to invest, or to put it another way, the earlier you start saving seriously, and the more regularly you save, the faster your investment will grow. (An investment earning ten percent compounded growth annually will double every seven years.).

It takes discipline and the resolve to defer gratification, unfortunately not qualities typically characterized by the age cohort that could benefit most from the advice, and the siren song of iPods, computers, iPhones, stereos, game consoles, and so forth is beguiling. However, it's definitely in your best interest to carefully consider whether your really need a new computer or that iPhone, and to count the true cost before taking the plunge. I don't know about you, but $17,670 seems pretty steep for a mobile phone-cum-music player, however cool.




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cmoore@macopinion.com


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