The formula reflected not just the earning power of stocks and bonds but also the market’s uncertainties and the differing abilities of stocks and bonds to keep pace with inflation. If you had $1 million, you could safely take out $40,000 the first year, keep that draw up with the cost of living and have a pretty good chance of not outliving your assets. The old rule of thumb for a withdrawal rate was 4%. So you can turn a portion of asset price inflation-a small portion-into pocket money. To continue the analogy with houses: It’s as if you were downsizing a little every year. If you’re 67 now, you only need for your savings to last 30 years. But your wealth, measured by how well you can live, has not doubled.Ĭalculating the fraction of your assets you can safely spend each year is a complicated affair, because a retiree’s portfolio does not have to emulate an endowment and last forever. But its earning power, generated by warehouses and factories and patents, is only a little higher. If in 2011 your stock and bond portfolio was worth $1 million, now it’s probably worth $2 million. They are trying to live off a stock of capital without depleting it. For one group of people, though, it matters a lot. Your brokerage statement says that your bonds are worth a lot more than they were a few years ago-but you’re getting the same old coupons.įor most people, the price-equals-wealth fallacy is only an economic abstraction. The Amazons are outnumbered by the beneficiaries of bidding wars: the mediocre companies trading at double their historical multiples, the GameStops, the bitcoins and the special purpose acquisition companies.īond prices, too, are much higher than they used to be in relation to interest payments. Over the past decade corporate earnings, as measured by the S&P 500 index, are up 37%, while stock prices have tripled.

But a large part of the change in the national net worth is only a price illusion. So its price gain reflects in some measure a wealth gain.

Amazon has twice as many warehouses, twice as many satisfied customers and twice as much revenue as it did a short while back.

Appeal to wealth fallacy