Why We Will Work Forever If We Follow The Rules

If we step back and look at the blueprint for Western Society and ask “Why?” a few times, we will find that no only is the American Dream a farce, but that it was instilled for a singular purpose, to control the masses into trading all of their time to work while ignoring what the actual ruling class is doing.  This covers everything including our tax code, our education system, our retirement system, our sports, and other cultural norms.

Overview:

When we think of wealth most people view cars, houses, piles of gold and cash…tangible things. But what is money?  Money is a claim check for labor.  Money is exchanged for the goods and services of others.  Real wealth is therefore time.  Your own time is the first real big component of wealth, but the time of others is the real wealth comparison. Big business and big government want control of your time and creative energy. The true goal of the government and large corporations is for people to work forever.

Our entire country is based on debt.  Our official national debt at this moment is 34.7 trillion.  That is 34.7 thousand billions. This debt will need to be paid eventually and the backing of it is the labor of the American people.  It is issued based on the income of future tax collections from the American people. Even if the debt is never paid, the interest on the debt must be paid. The government and big business need you to work forever and systems are in place that are designed to ensure that happens.

Birth through 5 years old:

Children are raised in daycare by strangers at a large financial cost to dual income parents, who, due to the high cost of living, especially housing, are in a spot where they both need to work.  As these parents are burning out, there is a light at the end of the tunnel.  A free baby sitter.  The government will watch the kids for free, pick them up from your house and drop them back off in exchange for being able to fully shape their child’s brain for the next 13 years.

Ages 6 – 18 K-12 Schooling:

The K-12 schooling system was designed on purpose from the Prussia model and advocated by America’s wealthy industrialists. The Prussian model was specifically designed to make docile citizens and obedient soldiers.  American Industrialists saw K-12 schooling as a way to prepare the masses to work in their factories.  Widespread adoption of K-12 schooling was completed in the late 1800s. Think about this. Our school system was designed to create factory workers; factory workers who effectively pledge their time to the ruling class.

Currently our school system serves to NOT teach.  Children graduate from 13 years of K-12 schooling with no knowledge of how to live.  They don’t know how to start a business, to file taxes, or even that hundreds of different jobs exist.  They certainly don’t know that going to school for 20 years followed by 45 years of work and 10 years of retirement is a peculiar way to live.  One of the primary goals of K-12 schooling is to send children on the path to college.  Schools heavily market college degrees.  College prep is pushed down everyone’s throat.  The children take standardized tests to get into college, they are lied to about the return on investment of college degrees, and given false statistics about how much they will actually earn.  They are told that student loans are worth it, and then sold on “the college experience.”

At the same time these teens working is often looked down upon.  People will say that working is “stealing their childhood”, without the thought that K-12 schooling is stealing 18,750 hours of childhood, without counting travel time and extra curriculars. We ensure that the vast majority of our young adults leave high school with no work experience, no skills, and no money.  I’m a strong believer in getting kids started in the work force as young as possible. 

Further Reading: The Underground History of American Education – John Taylor Gatto

Ages 19 – 22(ish) College:

After 13 years of programming by the K-12 school system we enter college at an average in state cost of $125,000 for 4 years…except only 33% of college students graduate in 4 years, many take 5 years if they graduate at all, increasing the total cost to closer to $150,000.  By 6 years only 57% have graduated. Meanwhile the median recent college graduate in Michigan earns $47,000 a year.  This is only $12,000 more per year than my son earns straight out of high school working at Walmart.  The college degree would take over a decade to breakeven, and that is if we ignore the opportunity cost of working vs. going to school.  5 years of working at Walmart would yield a total income of $175,000, meaning the true cost of this degree was actually $225,000 in order to earn an extra $12,000 per year. The average person who buys a 4 year degree will never economically recover and financially overtake the person who entered the workforce straight out of high school. 

Most students take out student loans and the total value of all student loans in this country is over $1.7 Trillion.  Student loans are an interesting product because they have no collateral and are not subject to bankruptcy, thanks in large part to Joe Biden. Student loans also don’t require repayment while still attending school.  This means that the cost of the loan is not seen by the student on a regular basis, all while interest is compounding.

Student loans also require very small repayment plans, with many of them having minimum payments that do not cover the interest being accrued.  This means that despite making minimum payments, a student can pay on their loans for decades and owe more money than when they started.

Student loans are effectively a form of government insurance to ensure the population will keep working.

Further Reading: The Case Against Education – Bryan Kaplan

Ages 23 – 67 Work:

The work culture in the United States is also bonkers.  When you meet someone what is generally the first question asked?  “What do you do for work?” Our identities are woven into the work we perform for the system.

The 40 hour work week:  The 40 hour work week was designed by Henry Ford roughly 100 years ago in 1926.  When Ford instilled the 40 hour work week into his factory he was able to attract the best workers.  Competitors took note and so did Congress.  By 1940 overtime pay was required for any hours worked over 40, which made 40 hours the standard work week. 1940 was 86 years ago and we still work the same hours.

Prior to Ford’s 40 hour work week, hours had been declining since the late 1800s. Work hours peaked at around 70 in the height of the industrial revolution and then a steady decline took place from roughly 1850 to 1930, at which point we hit 40 hours and it froze, despite productivity greatly improving.  My point is that the 40 hour work week is an arbitrary number and is nothing great to be strived for.  We absolutely could be at the 15 hour work week that Keynes theorized in 1930. 

In the 40 hour work week we also have the M-F dynamic of “Ugh…Mondays :(”  “It’s Wednesday…gotta get through hump day” and “Thank God it’s Friday!”. We then spend the weekend spending money to recover and give ourselves treats for spending the week working.

The 45 year career:  The next part is working until age 67. For someone who graduates college at 22, this is 45 years of working.  The average life expectancy is 76 years.  This results in going to school for 17 years, working for 45 years and being retired for 9 years.  This system makes little sense, especially when we are supposed to give those 45 years working for a company instead of working for ourselves.

Further reading: How to kill the job culture before it kills you – Claire Wolfe

Housing:

The 30 year mortgage is a product designed to keep banks rich and to keep the American people working.  If most first time home buyers are in their late 20s, then they will pay off their home in theirs late 50s.  This of course isn’t how people live though.  Most people move about every 7 to 10 years.  Each time they move they get a new 30 year mortgage.  Then they can not afford to retire because they have a $2,500 house payment.

30 year mortgages are an insidious part of the plan because they are so heavily front loaded with interest payments.  They sell the 30 year mortgage as a tool to make housing more affordable, but what they actually do is get people to buy bigger and more expensive houses.  Very few people actually understand how an amortization table works and how much money is being paid in interest relative to the purchase price of the home.

Beyond the 30 year mortgage our country has instilled housing policies that make it more likely for people to work forever as well. We have made it illegal in most areas of the country to build affordable housing.  Mobile homes are not allowed.  Mobile home parks are not allowed.  Multifamily houses are not allowed.  Houses under X square feet (usually something like 1,200) are not allowed. Permits that cost tens of thousands of dollars must be taken out.

A major reason for housing costs being so high is our density per household metric.  Currently we have 2.51 people per household, compared with 3.33 in 1960.  We have culturally come to a point where having room mates is looked down upon, as is multi-generational households.  We have far more people living alone today than at any point in history.  If we have fewer people per household, we need more houses for the same amount of people, and we have not built the houses.

Retirement:

Here is where they really get you.  The basis for retirement savings, which I personally strongly bought into for the last 20 years, is this:

• Use your company’s 401K plan to lower your tax bill
• Invest the 401K money in stocks through mutual funds in order to own small pieces of thousands of companies
• Follow the 4% rule, which means only withdrawing 4% of your retirement balance per year in retirement in order to ensure it will last forever, which means you need 25 times your annual spending in retirement savings.
• Save 10% for retirement
• At retirement pull out that money and pay taxes on it as ordinary income.

Sounds familiar right?

Okay, let’s analyze this:

401K:

The 401K plan is tax deferred, not tax free, which means the individual gets a tax break now, but pays tax on the full amount later. The investments grow over time, so in the future withdrawals of money are taxed, and now there is more of it to tax.  As an example a 30 year old invests $1,000 and by 60 it has grown in value to $16,000.  If the tax rate is 20% when it was earned and when it was withdrawn, Rather than paying $200 in taxes at 30, he pays $3,200 in taxes at 60.  But it is worse than this, because in the future tax rates will likely be higher.  Rather than 20%, they may be 35%.  The new tax bill at 60 would be $5,600.

Capital gains are also taxed differently than earned income, and gains on stocks are considered Capital Gains.  Using the same example, under our current tax laws, that same individual if they paid the $200 in tax on their income like normal, then bought $1,000 of stock and let it grow for 30 years, then sold it for $16,000 at age 60, they would be taxed under “Long Term Capital Gains”.  LTCG tax is currently 0% for people in the 22% tax bracket or less.  Meaning $0 of tax would be owed on this transaction.  For high earners who are above this bracket Capital gains rates top out at 20% for individuals earning over $518,000 a year.

Effectively, we get lured into using retirement accounts to delay taxes so we pay more total taxes AND so that we change the taxes being paid from the lower long term capital gains rates to the higher earned income taxes.

With Roth accounts taxes are paid in the now and the money grows tax free.  The 30 year old pays $200 in taxes and at 60 owes no tax bill withdrawing the entire $16,000. In most situations the Roth is far superior than traditional retirement accounts, and alleviates the concern that LTCG taxes could increase in the future.

The 4% Rule

I’ve written exhaustively on the 4% rule.  The 4% rule is insanely conservative. The 4% rule comes from the Trinity study which looked at the performance of a 75% stock 25% bond portfolio over every 30 year period dating back to 1926, and found that someone starting with a lump sum of money could withdraw 4% of that amount each year, adjusting for inflation, and never run out of money in the course of that 30 years, in each time period.  This includes the start of the great depression.  If we exclude the great depression a 6% withdrawal rate becomes successful 100% of the time.  This may not sound like much, but this reduces the amount of money needed for retirement from 25X spending to 16.6X spending.  For someone planning to spend $50,000 a year in retirement this means rather than needing $1.25 million, they only need $830,000, a difference of $400,000.  For people following the 4% rule, they are likely to work an additional 7 years more than someone following the 6% rule.

Mutual Funds:

Mutual funds have a major advantage over investing in individual stocks, and that is diversification.  This provides massive risk reduction for investors.  It also makes investing easier.  Rather than needing to select different investments each month to build a balanced portfolio, the algorithm automatically invests a weighted average of the money across thousands large and small stocks with the individual investor having to do nothing.  Great right?

Well there are some problems that arise from mutual fund investing.  This includes corporate governance, manual stock pickers, and PE ratios.

Corporate governance is a huge issue.  The way publicly traded companies work is that all the shareholders have voting rights in proportion to the amount of shares they own.  With these voting rights the shareholders elect the board of directors and often vote on major issues like mergers and electing the CEO.  When you own fractions of shares of a thousand companies, you are unlikely to vote your shares.  So what happens to those votes?  Your brokerage account votes for you.  So if your account is with Vanguard, and you don’t vote your shares in these matters, Vanguard votes them.  What happens when most workers in this country are blindly investing in mutual funds and there are only a handful of large companies that manage them? Well essentially Vanguard, Blackrock, and State Street become the primary voting blocks of most major corporations.   Meaning that these investment companies that don’t actually own the shares, become in charge of the companies that their clients invest in.

The next major issue is P/E ratios.  A P/E ratio is the price to earnings ratio of a company.  This number states the value of the shares compared to the earnings of the company, expressed in years.  So if a company has a PE ratio of 15 it means that the stock is trading at a valuation 15 times what its current earnings are.  When we have tens of millions of people consistently investing in the stock market blindly, PE ratios will tend to rise.  PE ratios before widespread adoption of the 401K tended to fluctuate between 10 and 18.  In general PE ratios for the S+P 500 over the last 20 years have fluctuated mostly between 18 and 30. The current PE ratio for the S+P 500 is currently 27.8.  This means the S+P 500 is trading at 27 times it’s current earnings. Paying 27X earnings is a massive valuation and long term is not sustainable.  When John Bogle started the first index fund with Vanguard in 1975 the PE ratio of the S+P 500 was 8.3, roughly 1/3 of what it is today.

The whole idea that we base retirement off of stock market valuation vs. actual earnings is a major problem.  What happens when the younger generation doesn’t continue to buy these assets either because they can’t afford to or finally realize that just like with college, the ROI is no longer there.  The owners of these assets will only have access to the dividends the companies pay, which is even lower than the 4%. The current dividend yield of the S+P 500 is only 1.32%.  This is also done on purpose.  Most company boards (who are elected by the mutual fund companies), prefer to keep profits inside the business for reinvestment, rather than distribute to their shareholders through dividends.

The entire concept of index fund investing and investing in publicly traded companies has become largely inflated.  At the same time, small businesses that require no owner involvement in the day to day running of the business often sell at a PE ratio of 4 to 6. This is largely because of the perceived high barrier to entry of the purchase price.  Sellers of businesses will often do seller financing and the business can be purchased largely with money the business will make.  This also gets magnified, as the owner can decide to reinvest profits or to distribute them.

Our entire culture has trained us to view index investing in 401Ks as the tried and true only path to retirement, while simultaneously convincing us that starting a business or buying an existing business is extremely risky.

Save 10%:

10% is an interesting saving target, and this is the most commonly referenced amount for people to save for retirement.  Saving a flat 10% for retirement will ensure that most people will work forever.  This is because of how compounding interest works.  If we always save the same percentage of our income this means that in early career years when earning less money we are investing less total money, and then in later career years where we are likely to be earning more money we are saving more total dollars.  We are getting the benefits from compounding on a lower amount of total money, and then when are are earning more money we are not increasing the percentage to save more.

Let’s look at 3 scenarios, in each scenario we start with $30,000 of income and receive 2% annual raises, and earn 7% annualized returns

Scenario 1:

Follow the 10% saving rule for 35 years.

Start investing at age 30, save 10% per year and retire at age 65.  In this scenario you would end with $714,000.  Using the 4% rule this nest egg would provide an income of $28,560 per year, or 37.5% of our final salary of $76,090 per year. Using the 6% rule, this would generate $42,840 per year, or 56.3% of our final salary.

This results in a situation that is very much not ideal.  While this is far short of what a retirement goal should be, it is still over 3 times the average savings people actually have entering retirement, and 10 times what the median person entering retirement has.  That’s a scary thought!

Scenario 2:

Use a graduated rate:  Each 5 years increase the savings contribution by 5%, capping out at a 25% savings rate. Everything else is the same from Scenario 1.

Start investing at 30, save 10% from 30 to 34, 15% from 35 to 39, 20% from 40 to 44, and 25% from 45 onward.   In this scenario you end with $1.3 million, enough following the 4% rule to have an income of $52,000 in retirement, or 68% of the total final salary. Using the 6% rule, this nest egg would generate $78,000 or 102% of final salary.

Scenario 3:

Use a graduated rate like in scenario 2, however rather than starting to invest at 30, save 50% from age 18 to 21 while living at home, then pick up at age 30 with 10%.

This would result in a total nest egg of $2,650,000 at age 65.  This is enough using the 4% rule to spend $106,000 per year in retirement, which is 140% of final salary.  You could also retire at age 59 using the 4% rule with this method, as earnings would be $67,000 per year and total nest egg would be $1,679,000.  Going a step further and using the 6% rule rather than the 4% rule, retirement would be possible at  age 52 with $960,000.  At this point in time total income would be $58,800, and the $960,000 would generate $57,600 per year, or 98% of current income.

Social Security:

Social Security is the primary income source for most retirees.  The median 65 year old only has around $70,000 in total retirement savings, this will not be a major source of their retirement income.  These people will primarily be living off of Social Security.  Social Security benefits are based off of the top 35 years of wages.  Social Security has also been underfunded.  We have always known that Social Security was not sustainable and would not make it through the Baby Boomers.  Currently the trust fund will be depleted by 2034 and retirees will only be able to receive 78% of promised benefits.  The Average Social Security check today is $1,767, so this would be cut to $1,378.

It is fair to reason that most people who are reliant on Social Security to be their primary source of income in retirement will also need to be working because for most people Social Security will not pay enough to live off of.

Fake Money:

To make matters worse, we are all subject to the largest theft in world history; the destruction of the American dollar.  We have a FIAT currency, which is backed by nothing…except for the government’s ability to extract work and taxes from its populace.

The Federal Reserve (which is not federal and does not have reserves) prints money out of thin air, then uses that money to buy US Treasuries.  They have recently began buying other debt products, including mortgage backed securities.

Printing money of course causes inflation.  Inflation is a tax that is most directly levied against the poor and the working class.  This is because wages lag inflation and inflation destroys the value of cash savings.  The forces of inflation tighten the budgets of workers and make it much more difficult to get ahead.

So The Fix Is In…What Do We Do About It?

“The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion” – Albert Camus

Some overall ideas to break the cycle and buy freedom for yourselves, your children, and your grandchildren:

• Don’t use government schools. Assist your children with drop off, pick up, and homeschooling to the best of your ability.
• Start your own businesses, and perhaps purchase existing businesses from retiring boomers
• Employ your children at a young age. If that isn’t feasible have them work once they are 14 for an employer and save 50% of their earnings.
• If you choose to invest in the stock market, invest in individual stocks.  Still diversify across multiple companies and sectors with this.
• Buy existing smaller houses on 15 year mortgages.
• Get your investment rate up to 25%+ as soon as possible.
• Invest in hard assets.
• Minimize the amount of cash and money in savings accounts.
• Work businesses or jobs that can be done from anywhere in the US to take advantage of geographical arbitrage.  It is much less expensive to live in Kokomo, IN than Chicago, IL.
• Every quarter take a week off to analyze your life and how to become less trapped.
• Consider running for local boards in order to influence housing policy.