Permit me some really rough mathematics.
In my introductory course to basic personal finance and investing, one of the first things I have my students do is go to this website and calculate how much they need to save for retirement. It's a good exercise for everybody to go through, but the primary point is that (if you tinker with the calculator) you'll realize each person needs roughly $1 million in savings to retire.
With 6.5 billion people in the world that ads up to $6.5 quadrillion (the number after trillion) in required savings to invest.
Now, I'll grant you "retirement planning" and things like 401k's and RRSP's are really more of a western phenomenon and most people in 2nd and 3rd world countries don't have retirement plans, so let's just say the roughly 1 billion people in countries where they do have some kind of retirement program need to save up for retirement.
That brings the total amount of required savings down to $1 quadrillion.
Just one problem.
There isn't $1 quadrillion worth of stocks or bonds in the entire world. Matter of fact, according to the World Federation of Exchanges, there's only about $55 trillion in equity and $82 trillion in bonds, leaving us with $137 trillion in securities, only 14% of the total amount required to finance the retirements of 1 billion people (it is duly noted here there are other securities, however, bar commodities, things like mutual funds and ETF's are merely compositions of stocks and bonds. I admit we could throw in the commodities market and REIT's, but you'll soon see the point I'm trying to make).
There are some other problems as well.
First, the majority of the $137 trillion in securities is owned by the richer classes. It is not equally spread out across the 1 billion westerners. So the average 401k schmoe is less likely to have the $1 million in his account.
Second, though primarily held by 1st world nations, some of that $137 trillion IS held by 2nd and 3rd world countries. In other words, the above optimistically assumes all the stocks of the Shanghai stock exchange are held by westerners solely for their precious little 401k plans which simply is not the case (heck, foreigners hold most of our debt anyway).
Third, the bond market has a ton of debt that is, frankly, never going to be paid back and be defaulted upon. $16 trillion (intra government holdings duly noted) alone of which is the US federal government and roughly an equivalent amount in those kick-the-can-down-the-road socialist utopias in Europe that are currently already defaulting.
So of that $137 trillion, can we roughly assume only a third of it is going to go to help finance people's retirement plans? So roughly $46 trillion, i.e. 95% short of the amount necessary for people to retire.
Now there is one other variable I have not accounted for (and, truthfully, am having some difficulty figuring this one out, but I think I have it pegged, though would appreciate any criticism or thought on it)
Not everybody is going to retire on the same day.
As the 401k Clergy will rush to point out,
"See!!! See!!! The stock market goes up though! You're not assuming any growth! You're assuming everybody cashes in today when they will in fact amortize out and we all know the stock market will go up by the magical amount to pay for everybody's retirement! See!! See!!!"
And they're right. Not everybody is retiring today and the markets will grow. So let's do a little more (admittedly rough) math. The magical $46 trillion needs to grow into $1 quadrillion to pay for the current 1 billion westerners' retirement plans. And while these people vary in ages from new borns to nearly dead, assume 35 years for the markets to grow (half of people's life expectancy to roughly approximate the old and young). We'll also optimistically assume an 8% annualized growth rate, meaning the market will increase roughly 15 fold in those 35 years. Even with this idealistic scenario (where governments never default, corporations provide annualized returns of 12%, there's no inflation, and Obama's Magical Job Unicorn farts out jobs), the total global market capitalization for stocks and bonds will be....
$665 trillion.
Still about 35% short of the total.
Now, again, this was VERY rough mathematics and I'm sure somebody will find something wrong (and please do inform me if you do), but using this very rough litmus test it shows once again conventional retirement planning is flawed. The amount of growth necessary in the capital markets will not be sufficient enough to pay for everybody's retirement. And it is not even so much the rate of growth in the prices of stocks and bonds will be inadequate, but rather the increase in earnings, profits, dividends, and solvency of bond issuers will not be there to legitimize or rationalize current prices. In English, this means as people flood the market with retirement dollars P/E ratios will go up, dividend yields will go down, and financial deadbeats (in the form of most western governments) will continue to borrow money at low rates they will never be able to pay back.
People who are planning for retirement need to consider other forms of retirement beyond their IRA and 401k's. They need to look at skills, property, commodities or just working till they're dead. Not just because they didn't save up for retirement, but because the prospects for growth just isn't there.
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