Arriving from New York to Los Angeles amidst turbulence on Wall Street, it is not surprising that the conversation with James P. Smith, a senior economist at Rand Corp., quickly turns to the decline in the Dow Jones industrial average over the previous nine months, the longest downturn in stocks since the early 2000s.
Being an economist, Smith has a long view and sees no need to panic.
"If you look at any time chart of stock market performance, anything that spans a period longer than a couple of decades, you won't even notice this decline," he observes calmly. "The only drop in the Dow that is clearly visible on a long-term chart is the Crash of 1929 and the Depression."
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Who: James P. Smith, Senior Economist, Rand Corp.Where: Rand Corp. Cafeteria, Santa Monica, Calif., April 8, 2008On the Menu: Sushi, salad and intergenerational asset transfers
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Since we're unlikely to witness a calamity of such proportions this time, Smith sees this as a mere temporary blip. Otherwise, he points out, the rise of the stock market over time has been steady and relentless. His approach to retirement savings, therefore, is common-sense. He emphasizes the importance of staying in the market and — more to the point — putting aside a portion of your income regularly. This is how he approaches retirement savings both professionally and in personal finance, and it's an approach that has paid off in his case, Smith maintains.
Saving 5 percent to 10 percent of what you earn over a period of 30 years or so provides for an adequate retirement income, replacing close to, or even more than 100 percent of your pre-retirement income.
An Optimistic ViewIt may seem a fairly unexciting bit of advice. After all, advocacy of the apparently vanishing American virtue of thrift goes back at least to Ben Franklin. Smith, for one, practices what he preaches. Even though Research is paying for his lunch, he opts for the moderate prices and modest offerings of the Rand cafeteria. Rand Corp.'s Santa Monica headquarters is the kind of ideal setting for a sage or a philosopher reminiscent of Ancient Greece, a sheltered Ivory Tower from which to observe the foibles of humanity. Even though Smith had an outside meeting later in the day, it's hard to blame him if he is reluctant to face the wider world.
Perhaps because of his Arcadian vantage point, Smith, who is a Rand Chair in Labor Market and Demographic Studies, has a generally sanguine view of the world. Unlike many of his colleagues, moreover, he is upbeat even about labor market and demographic trends.
For example, based on research conducted by Smith and his group at Rand, thrift may actually not be in such great danger of extinction in America as we have been repeatedly told by other economists. Those Americans who are now in retirement are replacing around 80 percent of their pre-retirement income, on average. This is quite adequate to maintain a high standard of living — and it is also remarkably similar to how much retirees in major Western European countries are currently replacing.
The difference is, however, in the composition of retirement income. In Europe, particularly in the U.K., government pensions play a much greater role than private savings in providing retirement incomes. Americans typically get pensions from three sources, which include Social Security and corporate pension plans. However, the difference in the quality of life in retirement is provided by the private savings of American retirees and the incomes they generate.
The current generation of retirees, argues Smith, has a very nice lifestyle, much better than the average senior person has ever enjoyed in the past. The problem, however, is the future. It is no secret that government lacks adequate resources to continue paying generous pensions indefinitely. Based on Smith's analysis, Western Europe will have a more difficult time of it. However, the United States will not be immune to future difficulties either.
"Our biggest problem is medical care," he observes. "Our health care system is much better than what they have in Europe, but there is no way around it: It is expensive."
