It's the number you multiply your year's expenses by — expenses you would incur when you stop earning. This is the amount of money you need to save up to still afford the life you want after you stop earning. The idea is that you invest this pot. Certain assumptions kick in that boil down to the pot earning at least 4 per cent a year. This means you can withdraw up to 4 per cent every year, without depleting the principal.
This is why I call it the number that doesn't stop giving. I will now state the obvious — because so many people I talk this through with bring up the same sorts of issues: the number you multiply by 25 is not what you spend today , it is what you would spend in the future , when you don't go to work. So for example, I would assume there would be no school fees to pay out, or commuting costs to work to include. Most people are terrified, when they see the number that comes up once they multiply by How much you need depends on how you live.
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We apologize, but this video has failed to load. Try refreshing your browser, or tap here to see other videos from our team. Email Address There was an error, please provide a valid email address. Thanks for signing up! David Rosenberg: Our ranking finds Canada second frothiest housing market in the world. So the truth is, economists can't offer a thorough explanation for why the full-employment rate has risen, as many of them will admit. It is worth noting, however, that since the postwar Golden Age ended with the arrival of stagflation in the mids, NAIRUs have risen significantly in most developed economies.
And just because economists can prove it, that doesn't stop them having theories - rival theories, naturally. Economists of a neo-classical disposition incline to the view that the full-employment rate is higher these days because a combination of increased interventions in the economy - minimum wage rates that are too high, unemployment benefits that are too generous and unfair dismissal laws - have stopped the labour market functioning as efficiently as it used to.
Limits on employers' freedom to dismiss unsatisfactory workers have made them more reluctant to hire those workers at the bottom of the barrel, it's argued. Or, unduly high minimum wages effectively price unattractive workers out of a job, while generous unemployment benefits reduce the incentive for people to find work. There may be other reasons why people don't try as hard to find work these days: because the stigma of being unemployed has declined, because dual-income households reduce the pressure on one partner to find work, which may be particularly true of married women.
But these arguments aren't terribly convincing. Relative to average income, our dole payments are very low. And while it's true our minimum wage is quite high relative to average income, our NAIRU isn't that much higher than America's, even though its minimum wage is terribly low. So economists of a more Keynesian disposition try to explain the higher full-employment rate more in terms of how the structure of the economy has. When you get down to an unemployment rate of 5 per cent, most of those who have been unemployed for any length of time are unskilled, with a chequered work history.
It may be that the kind of jobs suitable for such people no longer exist to the same extent they once did. If unemployment falls rapidly, you may hit the NAIRU at a higher level than if growth is more sedate and it takes a lot longer to get unemployment down.
Sorry, but all this is about the best explanation economists can offer. There is a lot economists do not know.
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