星期四, 6月 02, 2005

The problem of Longevity in Economics --- As inspired by Irving Fisher's Theories

Hong and Shanghai Banking Corporation Group has revealed the report of a global study of “The Future of Retirement” around the world in early May and found that:

“H.K. people put health before wealth for a happy retirement and they are worried about their financial arrangements for retirement as 66% are concerned they will outlive their money in retirement. 93% think quality of life is far more important than longevity. 45% want to never work for pay again in retirement. 86% are seriously worried about becoming ill in old age. Actually, the lack of preparation will jeopardize the dreams and plans for retirement.”

The above disclosure was extracted from the report.

Hong Kong people do not want to work as part of a retirement. It differs from outlook to retirement life as found in most other countries that they think to have some jobs in their retired ages.

Reference Link: http://www.hsbc.com.hk/hk/aboutus/press/content/05may11e.htm

However, there are some clues to explain this social phenomenon as inspired by the Interest Theory which was invented by the famous Economist in last century ---- Irving Fisher.

Reference Link: http://cepa.newschool.edu/het/profiles/fisher.htm

Irving Fisher made numerous contributions to marginalist economics, especially on the theory of capital and investment and his well-known Separation Theorem leading to wealth maximization. He has a famous dictum: "Interest is NOT a part of income, but the whole of income. " It is up to the individual rational decision on the retirement age.

“Wealth” or “Capitalized value” is the discounted value of the present and a series of future income returns acquired. And, the source of wealth in a society is the activity of those involved in the production of goods and services. “Income” or “income stream” is a flow of net returns (pecuniary or non- pecuniary) available in different periods of time.

When people create wealth (capital asset) it means people are giving up a certain amount of present consumption in order to obtain the expected future income stream. Therefore temporal trading (exchange over time) is possible. That is "present consumption can be exchanged for future consumption" and vice versa. No matter people prefer early availability or later consumption through the saving and investment or the loan market, he or she is maximizing the wealth as well as consumption (income) over time. It is the time for an individual to reap on his or her retirement. The amount of provident fund received on retirement may be considerable.
Assuming "risk-free" and the market interest rate is known, a stable income stream could be assured for the rest of the life of a retired person. It is the“ perpetual annuity” if income stream is expressed as a flow of constant net receipts for infinite years. The stable income return ---“annuity”is the flow of the potential consumption without reducing or trenching on wealth.

In real situation, people adopt the strategy of a portfolio combining equities (stocks) with fixed-income instruments (bonds, savings plans, etc.) to hedge against economic downturns. In order to minimum the risk, a good investment strategy would be to buy stocks of the reputable companies (the blue chips).

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2 Comments:

Anonymous ka pui said...

present value discounting is a mathematical technique that finds the value at present of a future sum. people usually make a decision on choices between the present and future. if the amount is the same income, people prefer present income to future income, because they prefer earlier consumption to deferred consumption. this is the postulate of human impatience. if people don't consume your present income, you can invest it for a return. suppose the market interest rate is 10%, you can put the money to the most value use and at the end of the first year, you can get back $11000.people adopt the strategy of a portfolio combining equities with fixed-income instruments (bonds, savings plans, etc.) to hedge against economic downturns.

2:28 下午  
Anonymous retirement said...

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5:51 上午  

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