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Casey Aldridge ?@CaseyJAldridge
PBS Drops Another Bombshell: #WallStreet Is Gobbling Up Two-Thirds of Your 401(k)
http://wallstreetonparade.com/2013/04/pbs-drops-another-bombshell-wall-street-is-gobbling-up-two-thirds-of-your-401k/
… #ows #mayday #ResistAusterity
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BlueStreak
(8,377 posts)Are they talking about a person invested in mutual funds, and the total of mutual fund management fees and IRA custodian fees make 2% ??
That is certainly on the high side. There are very few funds that have management fees well above 1% and the custodian fees should be far less than 1% -- often a fixed annual charge.
If you have a no-load funds, and include some index funds in the mix, your total management cost should be under 1/2 of a percent.
That is still a whole lot of money, and there is an argument how fair that is, but it seems to me this "bombshell" is mostly hyperbole.
What am I missing?
Warpy
(113,130 posts)in aggressively managed funds, the charges mount up quickly and it takes a lot of work to discover where they've all been hidden.
The Frontline program suggested indexed funds rather than aggressively managed mutual funds as a way to preserve equity for small investors.
BlueStreak
(8,377 posts)This article claims the "average" is 1.6%.
I just did a Morningstar search for mid-cap growth funds that have a 5 star rating. As top performers, one would assume they are the most likely to justify high expenses. The average expense rating was 1.36% and one-third of them had expenses of 1% or less. Only one of them (RYCKX) had expenses of 2% or more.
And that is a category that has among the most aggressive management. When you look at index funds -- and everybody who is invested in stocks should have some of their money in a broad index fund -- the fees are much, much lower. See this article:
http://www.smartmoney.com/invest/markets/best-and-worst-sp-500-index-funds-by-cost-23549/
Once again, Rydex is the most expensive -- sounds like a ripoff outfit, and the exception that does fit the PBS thesis. 2.25% for an SP500 index fund is criminal. Those people should be in jail. But the normal fee load for an S&P index fund is more line 2/10 of a percent.
Let the buyer beware. People who don't understand management fees should not buy these products.
Anyway, the PBS report is mostly hogwash.
Major Nikon
(36,900 posts)Those that are paying higher fees should be aware that those fees do have the potential to significantly erode their investment compared to other options. So for that, the piece has soom value. However, the implication that everyone who has a 401k is getting ripped off is pretty far afield from reality.
BlueStreak
(8,377 posts)a) xxx millions of Americans are trapped in captive 401Ks that have extraordinarily high fees, and it is defeating the purpose of retirement planning. (My belief is this is a rather small number, but maybe I am wrong)
-or-
b) xx% of Americans have put money in the stock market through high-fee mutual funds and they have no idea what they are doing, ergo, we have an education problem.
I don't often defend Wall Street, but this was a cheap shot, and totally unnecessary considering there are so many really criminal things happening routinely on Wall Street that do deserve attention. The whole thing about insider trading has 10,000 times more impact than the management fees. And we get around to prosecuting a couple of those each year ???
progree
(11,463 posts)then I'd blame the employer. See post #11 where Xcel Energy pays the management fee, offers several funds with expense ratios between 0.10% and 0.20%, and matches employee contributions up to 5% of wages / salary.
If the employer is paying a high-cost 401k plan management firm that offers only high-cost mutual funds, then I'd say with probability approaching metaphysical certainty that the employer is getting kick-backs in one form or another.
BlueStreak
(8,377 posts)Last edited Mon Apr 29, 2013, 02:54 PM - Edit history (1)
throughout my career.
Rule #1, whenever you have the option to roll that into a self-directed IRA, don't lose a minute doing that. Do it immediately. You can always do that at the end of your employment with the company, and there may be other times you can get your money out of the 401K.
None of the 4 plans ever forced me to invest in the stock of my employer. That is the most abusive of all. There is one huge employer in my city. For decades, it was seen as the best place to work, but I know a lot of folks who ended up with half of their retirement money in that stock. Fortunately it never completely cratered, but it did have its ups and downs. Rule #2, never put a cent into the stock of your employer. You already have enough of your life tied up in the fortunes of that company. Don't add to the risk.
All of my 401Ks had a limited number of investment options -- typically 8 different funds. None of them had fees so high that I suspected the company was getting kickbacks, but they might have been. It probably isn't so much an actual under-the-table kickback. It is more likely that when they went out to bid for 401K processors, the ones that had the best deal for the company "coincidentally" happened to have high fund management fees charged to the employee. Is that crooked or unethical? I'd call it borderline. And that is why you want to get the money out of the company 401K just as soon as you have the opportunity.
In my experience some employers will listen to their employees. If you don't like the fund choices in your company 401K, see if other employees share that concern. If many employees make a request of HR for additional options, they might be able to get that into next year's plan. If you can be more specific about what you would like to see, that makes it easier for HR to act on the request.
Eleanors38
(18,318 posts)But I still have all of it.
Major Nikon
(36,900 posts)...by offering only options that charge high fees.
I think they could have done a much better job finding out to what extent, if any, this is happening. If it is, there should be government regulations which insure other options.
CountAllVotes
(21,067 posts)This was last year and oh was he ever disappointed. He said he got less than 2% for the year; year before he lost/broke even almost.
I've had mine out of the stock market since the dot com boom pretty much went belly up.
It has been in CD's since and is tied up in one for another 5-1/2 years.
This is just fine with me for now. I do not have to worry about it or think about it and it is growing every month slowly but most surely and I have not lost a cent on it.
I hate the stock market personally. I know of too many people out there that have lost a lot in it and have never recovered from what happened in 2008, nope.
Major Nikon
(36,900 posts)Large gains over a short period are possible, but it can always go the other way. I've been invested in equity investments for the last 25 years and I've averaged a 9% yearly return. There have been years where I've lost a boatload of money, but some years go the other way. You have to be prepared to take the bad with the good.
Lifelong Protester
(8,421 posts)my spouse says "NO MUTUAL FUNDS, EVER!!!!!"
NYC_SKP
(68,644 posts)Copied from your link:
By Pam Martens: April 25, 2013
If you work for 50 years and receive the typical long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost two-thirds of your account will go to Wall Street. This was the bombshell dropped by Frontline’s Martin Smith in this Tuesday evening’s PBS program, The Retirement Gamble.
Frontline Chart Showing Impact of 401(k) Fees Over 50 Years of Saving for Retirement
This is not so much a gamble as a certainty: under a 2 percent 401(k) fee structure, almost two-thirds of your working life will go toward paying obscene compensation to Wall Street; a little over one-third will benefit your family – and that’s before paying taxes on withdrawals to Uncle Sam.
To put it another way – you work for Wall Street. You are their slave, their lackey and as long as their toadies dominate in Congress, nothing is going to change on the legislative front to stop the looting. Wall Street seized millions of homes through illegal foreclosures and stripped the equity from the owners. They got away with it. Some Wall Street firms further enriched themselves making bets that the housing market would collapse, using their inside knowledge of the bogus loans they had made. They got away with that also. Now Wall Street is busy asset stripping the retirement plans of the working class in America while President Obama proposes to cut Social Security benefits through a discredited calculation called Chained CPI – conveniently causing people to save more in their 401(k) plans to make up for the potential loss. But the more you save, the more Wall Street asset strips.
On the Road
(20,783 posts)but as it is written, the claim is not supported by the data and is frankly ludicrous:
This is not so much a gamble as a certainty: under a 2 percent 401(k) fee structure, almost two-thirds of your working life will go toward paying obscene compensation to Wall Street; a little over one-third will benefit your family – and that’s before paying taxes on withdrawals to Uncle Sam.
'It also assumes that the return between a managed mutual fund and other investment options is equal. That is an assumption that is not supported by the article. PBA is really lowering their standards by putting out this stuff.
BlueStreak
(8,377 posts)Clearly the main premise (the 2% business and the resulting nonsense arithmetic) is crap.
But two things:
1) Are there many people trapped in IRAs where they are forced to invest in the highest cost funds? I don't know, but maybe that is possible.
2) Despite the BS math, the fact remains that an enormous amount of money goes into these management fees. A half percent on a billion dollar fund is still 5 million bucks a year. That's a lot of money for what is essentially bookkeeping.
Look at VFAIX, for example:
http://www.marketwatch.com/investing/fund/VFIAX
That has fees of 1/20th of a percent -- which is extremely low. But they have $66 BILLION in that fund. That is 33 million a year in fees for no management (i.e. stock research and picking) at all. Is that fair? For that money, they do have to pay for a lot of computers, customer service people, and auditors. I really don't want them to cut corners on that.
On the Road
(20,783 posts)and that a 2% fee is only justified by higher performance that offsets most of the difference.
I just don't think poorly representing a real statistic is helping to address what might be a real issue.
I don't know why businesses would restrict their retirement options to high-fee, indifferent plans. Maybe they do, but the executives who make these decisions rely on the same retirement plans. Seems like the CFO would have a personal incentive to get good options.
BlueStreak
(8,377 posts)came through stock options, and that is entirely outside of the normal HR systems.
It is abusive -- even criminal tax evasion, as I see it. But that is the state of the art in white collar crime.
progree
(11,463 posts)VFIAX = Vanguard S&P 500 Index Fund, Admiral shares ($10,000 minimum investment required) -- 0.05% expense ratio. Wow. Didn't know it was that low. http://www.marketwatch.com/investing/fund/VFIAX
I tend to follow VFINX - Vanguard S&P 500 Index Fund, Investor shares ($3,000 minimum investment required) because of its longevity -- inception 8/31/76.
Per thestreet.com http://www.thestreet.com/quote/VFINX.html
VFINX since inception: 10.75%/year average annualized return (last update 4/26/13 547p ET) inception = 8/31/76.
Unfortunately, it doesn't show the cumulative return, but that's easy enough to calculate:
It is 36.65 years between 8/31/76 and 4/26/13, according to Excel. So...
1.1075^36.65 = 42.19, i.e. a factor of 42.
Meaning, $1,000 put in in 8/31/76 is now worth $42,190 now, i.e. a 42-fold increase plus change.
Now this is all after expenses. This is not an investment in a theoretical index. This is not Wall Street's take. It is an investment in a real-world fund. It is what Joe six-pack would have gotten for his $1,000 investment on 8/31/76.
It is also not cherry-picking some best-performing fund, although, no doubt it is one of the best because of its low expense ratio and that index funds outperform just about any actively managed fund over the long haul. Similar results would be found if one invested in a growth index fund. Or a value index fund. Or a small cap index fund. Or a mid-cap index fund. Or another large-cap index fund. Or even an international index fund. Unfortunately few (if any?) index funds go back that far. Its not like the S&P 500 has outrun all other sectors of the market.
There was the famous Peter Lynch / Fidelity ad that I remember seeing. Well I googled this and found this from 2001:
http://www.rbcpa.com/peterlynchcommentary20010920.pdf
I just can't understand how some DU types can complain about how corporate profits are an ever-bigger share of the economy (while wages/salaries are an ever-declining share). And how profitable the corporations are blah blah blah. And then in another post they will say I'm way too smart to invest in the stock market.
Well, the stock market is investments in corporations, and earnings (profits) drive share prices and provide dividends.
brooklynite
(96,882 posts)I'm sure there are funds that charge higher fees than others, and some are probably less clear than others about fees, but I don't know that you can argue that "Wall Street" in toto is eating up the value of everyone's 401(k). My 401(k) has been doing nicely, thank you, perhaps because I pay attention to what I'm investing in.
Dan de Lyons
(52 posts)I have my retirement fund in an IRA at S------ade and do all my own trading. Sometimes it's been a costly experience, but after a few years you find what works for you. I tested my theories on Yahoo Finance, using their free stock screener. Watched my test portfolios on My Yahoo. Found what works.
You can do it better than them. In a year or two. If you invest when the market cycle is at its bottom, then bottoms again just a little higher, and if you get out when "Happy Days Are Here Again," you may be able to build a kitty.
BlueStreak
(8,377 posts)In fact, most "professional fund managers" don't do substantially better than unmanaged index funds, and very few fund managers consistently outperform an comparable broad-based index fund on a sustained basis once you factor in the fees.
If a person wants to be in the stock market, index funds (or ETFs of indexes) are the lowest risk, but that is not "low risk" by any stretch of the imagination.
If a person is looking for ultra-low risk, certainly they can purchase a diversified mixture of utility stocks, top-grade corporate bonds, and tbills on their own. But for 2/10 of a percent, you can diversify 100 times more than an individual is likely on their own account. That seems like a good deal to me.
CountAllVotes
(21,067 posts)Presently, 70 percent of Americans who have any kind of retirement plan at their place of employment have a 401(k) plan. Not everyone is paying 2 percent fees. Some are paying more and others are paying less – sometimes much less if using passively managed index funds. But, historically, Wall Street has preyed on the least informed and the least educated, which tends to be the poor and middle class.
*************
Wall Street, Wall Street oh Wall Street.
They make so much and you get taxed on that when they do.
When you lose, well, you lose.
Over and over again this cycle repeats itself.
Those whose parents were teenagers and young adults during this time (c. 1930 ... ) cannot ever forget either.
progree
(11,463 posts)where the expense ratio is about 0.10%. And where the employer paid the 401k management fees and provided a match.
========================================================
The "it ate up 2/3" is based on a theoretical calculation like so:
Assume that without expenses, a dollar invested 50 years ago would have gained 7%/year:
Ergo, that dollar would have grown without expenses to 1.07^50 = $29.457 in 50 years. (the "^" is exponentiation)
With 2%/year expenses, the after-expense growth rate would be 5%/year ,
so the dollar would have grown with expenses to 1.05^50 = $11.467 in 50 years.
So yes, in this scenario, 29.457 - 11.467 = 17.990 is lost to expenses, which is 17.990/29.457 = 61% or very roughly about 2/3.
===========================================================
But I very much doubt that most 401ks have anywhere near 2%/year expenses.
And, also, if you do a more realistic calculation, where the worker contributes a certain amount every year, the percentage lost due to expenses is much less than looking at a lump sum made at the beginning of the period. (What worker makes his/her entire lifetime contribution to a 401k all in one year -- his first year on the job?) And even that overstates the problem, in that, due to inflation, workers contribute more in their later years than in the earliest years.
Also the percentage lost to expenses is much less if you look at a shorter period like 20 or 30 years.
And it doesn't include an employer's match to an employee's contribution.
Xcel Energy's plan: 25 choices http://www.myplaniq.com/LTISystem/f401k_view.action?ID=1049
Click on the "Show All Funds and Details" gray button below the bottom right of the table.
Then when the new page appears, Click on the "Show More Fund Parameters & Ratings" blue button just above the table to see the Expense ratios. The index funds are around 0.10% expense ratio. The target date retirement funds are all 0.16% to 0.19%.
If your employer is only offering you choices that all involve 0.20% or higher expense ratio, you need to get your coworkers together, with pitchforks, and raise holy hell, because yes, you are getting screwed. Not by Wall Street but by your employer.
No Vested Interest
(5,196 posts)progree
(11,463 posts)
pansypoo53219
(21,722 posts)
AtheistCrusader
(33,982 posts)
JDPriestly
(57,936 posts)I didn't have the numbers, but as you get older, you can see this happening.
And at the end, you pay those deferred taxes that you were told would be so great . . . . But "nobody could have known" that the stock market would crash just as baby boomers were about to retire.
The 401(K)s are an obvious scam. They are the reason that hedge fund manager (or former hedge fund manager) Pete Peterson hates Social Security so much.
If Wall Street weren't robbing us blind on our 401(K)s, a guy like Pete Peterson would not be so anxious to destroy Social Security.
The anti-Social-Security cabal doesn't want seniors to compare when they retires. Because Social Security is reliable and secure compared to the stock market and banks.
progree
(11,463 posts)Last edited Mon Apr 29, 2013, 03:18 PM - Edit history (1)
[font color = blue]I didn't have the numbers, but as you get older, you can see this happening. [/font]
The OP doesn't "have the numbers" either. You can see what happening?
[font color = blue]And at the end, you pay those deferred taxes that you were told would be so great . . . . [/font]
Tax deferral saves a lot of money. Using the 50 year and 7% return example of the OP:
Say your tax rate is 20% combined state and federal (a low-ball number).
A. No tax deferral. You pay 20% taxes every year.
====================================
Thus your annual after-tax rate of return is 7% * (100-20%) = 5.6%
A dollar invested over 50 years grows to 1.056^50 = $15.247 after taxes
B. Tax deferred growth:
====================================
A dollar invested over 50 years grows to 1.07^50 = $29.457 before taxes.
Then you pay 20% taxes on the gain: 20% * (29.457 - 1.00) = $5.691 in taxes
Leaving after taxes: $29.457 - 5.691 = $23.766
Summarizing, after taxes:
=========================================
A. No tax deferral: Your after tax amount is $15.247
B. Tax-deferral: Your after tax amount is $23.766
I'll take B.
And at higher tax rates, the advantage of tax-deferral grows. And if one's tax bracket in retirement is lower than in one's working years (which is usually the case unless one manages to pile up a large nest egg), the advantage of tax-deferral increases.
[font color = blue]But "nobody could have known" that the stock market would crash just as baby boomers were about to retire. [/font]
Hmm, why did I keep reading last month that we were setting new all time record highs for the DOW and S&P 500? And as of Friday 4/26/13 close, at 1582, we're within 0.7% of setting yet another new high on the S&P 500 -- an index of about 75% of U.S. stocks by market capitalization.
[font color = blue]The 401(K)s are an obvious scam. [/font]
How so -- did you read post #11 where Xcel Energy pays the management fee, offers lots of funds with expense ratios between 0.10% and 0.20% and matches employee contributions up to 5% of wage/salary? If that's getting fucked, I'm gurgling in ecstasy.
That said, I don't doubt some employers are screwing their employees by using a high-cost 401k management firm that offers only high-expense ratio funds, and getting a kick-back.
[font color = blue]They are the reason that hedge fund manager (or former hedge fund manager) Pete Peterson hates Social Security so much. If Wall Street weren't robbing us blind on our 401(K)s, a guy like Pete Peterson would not be so anxious to destroy Social Security.
[/font]
Huh? Fill me in. What's a 401k got to do with Social Security? 401k and IRAs are ADDITIONAL to Social Security. I hadn't heard that he wants to destroy Social Security, my understanding is that he's saying that without changes, it will not be able to meet promised benefits after 2033. The Social Security Trustees say the same thing. And they've been optimistic in recent years -- they have been advancing the trust fund exhaustion date each year for the last several years (for example in the 2002 report they projected trust fund exhaustion in 2041. Now they are forecasting exhaustion in 2033).
[font color = blue]The anti-Social-Security cabal doesn't want seniors to compare when they retires. Because Social Security is reliable and secure compared to the stock market and banks.[/font]
So long as Congress goes along and makes the necessary changes (And I hope they do. My favorite: raise the fricking maximum earnings cap so that the wealthy pay the same rate on all their income as we small fry do).
Just to be clear, I think Social Security is the foundation of our retirement security. I am absolutely and totally against privatizing Social Security or any part of it, even as an individual's choice to make.
JDPriestly
(57,936 posts)Because the income of an ordinary person falls so drastically after retirement. And that sudden crash in income means you have to prepare in more meaningful ways than putting money into a 401(K).
I know that housing prices fell. But for those who paid off their mortgages before retiring, it wasn't such a big problem. It's the folks who put money into their 401(K)s and lost it right when they needed it to pay off a mortgage that got hurt.
Better for working people to pay off their mortgages than to set aside "savings" in a 401(K). You do not want to have to take rent money out of your Social Security. And most people can't do both on their average incomes.
Everyone should save, but having a roof over your head when you no longer have income is far, far more important. I know lots of people in their 50s who lost their jobs and homes and are trying to start over again. It would have been better for them to pay their mortgages and forget their 401(K). Balance is best, but if you have to make a choice, the mortgage and property insurance should come first in my experience. That is particularly true for people who have paid a lot on their mortgages and are almost at the end.
But "nobody could have known" that the stock market would crash just as baby boomers were about to retire.
Fact is, it did crash just as baby boomers were about to retire. And if anyone trusts what is going on now with the unknowns about the outstanding derivatives in default and the computerized trading, I still have that bargain on a bridge.
Fact is when you are 25 you can afford to wait for the stock market to rev itself up to its highs once again. But when you are in your 60s, your financial advisers will tell you to invest conservatively. If you retired or were fired right at the beginning of the financial crash, those with 401(K)s probably moved their money into conservative investments. Do you know what the interest rate is right now from a conservative investment like a bank account? And that is where the money of seniors who put in their 10% of $50,000 or less per year are. They could not save in the hundreds of thousands. Their 401(K)s will not be sources of income. They will be forced by rising prices to spend down their capital and take what they need to cover extra medical costs like dental work, eyeglasses and hearing aids from the capital in their retirement funds -- until that is gone. A hearing aid, not covered by Medicare, can cost $3,000.
The overpriced stock market may offer hope to people with pension plans managed by professionals -- people like public employees or union members -- but they are no solace to the individual investor trying to pick stocks or mutual funds in between kids baseball games and visits to mom in the nursing home. For most people, managing investments is a sure way to lose money. And that is what the average 401(K) "investor" faces.
The growth in the market is wonderful for the trust fund kids, but not so good for the waitress at McDonalds. What the stock market does is relevant to rich people but for the rest of us it is just a confusing maze of tricks and devious charts.
How so -- did you read post #11 where Xcel Energy pays the management fee, offers lots of funds with expense ratios between 0.10% and 0.20% and matches employee contributions up to 5% of wage/salary? If that's getting fucked, I'm gurgling in ecstasy.That said, I don't doubt some employers are screwing their employees by using a high-cost 401k management firm that offers only high-expense ratio funds, and getting a kick-back.
Management fees are a terrific problem. The problem is that most Americans do not want to read and cannot understand financial documents. I don't want to stereotype. I used to do the budgets for a company I worked for and was deeply insulted when a prospective employer sat me down and advised me (in my 50s) that I just didn't look like a person who could read a corporate financial statement.
Unfortunately, most people can't read them. I know enough about them to know that what you see is often not what you get. The banks would never have begged for a bail-out if you could trust their financial disclosures. You needed to be able to read code to understand the financial statements of the retirement funds in the months prior to 11/08. For most "investor," suddenly there is a crisis -- and the folks with kids on the soccer team and new babies and heart problems and cancer will be the last to know.
And that gets us to a big flaw in the 401(K) system -- aging. I know a woman in her 90s who is blessed or cursed, depending on how you look at it, with a certain amount of financial independence and a brilliant mind. She panics every time she has to make a minor financial decision. She cannot understand why, when she sends a check to New Jersey, she gets an answer from someone in Philadelphia. And why was the bill mailed from Texas? You try explaining that to her. It's perplexing.
Forget sending seniors their statements via the internet and e-mail. How in the world are an elderly person's children supposed to know all of mom's passwords for her accounts. And many, many elderly people do not use the internet. Many don't know how to use it. 401(K)s are not flexible enough to deal with the needs of the elderly or disabled.
What does Social Security have to do with 401(K)s. 401(K)s are a good approximation of what we would get if Social Security were privatized. And that appears to be the dream of folks like Pete Peterson, George W. Bush, Erskine Bowles and Alan Simpson to say nothing of the younger crop of Republicans and Wall Street hedge fund managers.
When we (today's younger retirees) were first working in the 1950s and 1960s, an annual salary of $12,000 was considered really good. I was well paid at $7,000 per year and willing to work for far less. I remember a minimum wage of $1.25 somewhere in there.
Inflation since that time has been tremendous. A house in the Southwest in an unremarkable location and city that was worth a little over $13,000 in the 1960s is now worth $170,000 plus. It's worth 13 times what you bought it for, and, extra bonus, you can live in it rent-free. You have maintenance and taxes, but you pay them even when you pay rent to a landlord. If your retirement income is based on amounts saved during those years and laundered, rinsed and hung out to dry by who knows how many young and clever hedge fund managers since, hard to say how much of the stock market growth will profit you.
Overall, there are better investments than a 401(K). It is not an accident that Pete Peterson's own Blackstone Group is buying foreclosed properties.
But if you take your money out of your 401(K) before the official date, you pay a penalty. And many people have needed to cash out their retirement funds early in recent years thanks to the mismanagement of our banks and Wall Street and job losses.
The "recovery" on Wall Street is a slap in the face, a terrible affront to the many people who lost their homes in the Wall Street mortgage fiasco.
Sorry to go into such a rant, but I have seen people who have suffered in the past few years from the irresponsibility of the banks and Wall Street investors. I do not trust them for 10 seconds. It is unbelievable to me that virtually none of the banks and managers of the people's money on Wall Street have had to answer personally for the fact that their salaries have burgeoned while ordinary savers in their senior years receive almost no interest on their conservative accounts.
The issue here is how 401(K)s fit in with cuts to Social Security and whether seniors should have to accept those cuts in order support the bonuses and bail-outs of Wall Street brokers. I favor Social Security. Wall Street is full of talented mathematicians who should be working on problems of more social benefit than enriching themselves with other people's money.
Raising the cap on payroll taxes is a great idea for Social Security provided that the limits on maximum benefits remain in place. Social Security is an insurance plan. There should be a maximum pay-out regardless how much you put in. Otherwise raising the cap is not a solution.
And back to the 401(K)s, what concerns me the most is the simple fact that if the baby boomer demographic bulge is likely to create a future shortfall in Social Security funds, what is it going to do to the stock market?
What happens if baby boomers actually have to start withdrawing and spending their savings? What happens to the value of stocks? Will the hedge funds and computer traders continue to manipulate stock values so that they appear higher than the material values and investment returns they should reflect?
I'd like to see the conversation turn from the dangers the baby boomers pose to the solvency of Social Security to the dangers that same generation proses to the solvency of our banks and Wall Street.
progree
(11,463 posts)[font color = blue]Why does the tax deferral look so good on paper?
Because the income of an ordinary person falls so drastically after retirement. And that sudden crash in income means you have to prepare in more meaningful ways than putting money into a 401(K).[/font]
Please see my example in #21 again http://www.democraticunderground.com/12527227#post21. It assumed the same tax rate in retirement as when working. And in that case, the tax-deferred account, after withdrawal and paying taxes was 23.766/15.247 = 1.56 X larger than the regular not-tax-deferred account. So it doesn't require that taxes be lower in retirement to work out. It is just plain math. (As you indicate and as I said in #21, tax deferral works even better if one's tax rate in retirement is less than when they were working)
[font color = blue]But "nobody could have known" that the stock market would crash just as baby boomers were about to retire.
Fact is, it did crash just as baby boomers were about to retire. [/font]
SOME baby boomers. And it recovered most of its value in 3 years, and is now setting new all-time highs 6 years after the crash.
When people with significant nest eggs retire, they don't take all their money out and put it in a mattress or a bank CD, unless they are very poorly advised. They keep their money pretty much where it was, withdrawing only living expenses. (People with a 401(k) should roll it into an IRA, in my opinion. It's not rocket science).
[font color = blue]And if anyone trusts what is going on now with the unknowns about the outstanding derivatives in default and the computerized trading, I still have that bargain on a bridge. [/font]
Perhaps. When I started out in the early 1980s, I remember seeing a handout listing about 2 dozen reasons not to invest in the stock market (and instead to invest in gold). The doom and gloom gang has been around forever.
[font color = blue]I worked for and was deeply insulted when a prospective employer sat me down and advised me (in my 50s) that I just didn't look like a person who could read a corporate financial statement. [/font]
I wonder why that was. Actually, I never read a corporate financial statement. Yet I've done quite well with investments. Mostly because I invest in diversified mutual funds and ETFs so that if one company (or even a whole sector) goes down the tube or performs poorly, it doesn't have much impact on me.
[font color = blue] Inflation since that time has been tremendous. A house in the Southwest in an unremarkable location and city that was worth a little over $13,000 in the 1960s is now worth $170,000 plus. ... Overall, there are better investments than a 401(K). [/font]
I bought a townhouse in 1980 in a nice suburb of Minneapolis. 33 years later, it is now worth $1,500 less than when I bought it. And it has nothing to do with any particular problem with my townhouse -- it’s the same story for all the townhouses in the complex. And it's not any overall problem with location or some other factor either, other than, for some reason, townhomes aren't popular right now (a few years ago, in 2007, it was worth about $100,000 more than what I bought it for, a near tripling). So it's not a sure-fire investment.
I also don't think successfully owning rental property is any easier than owning an IRA or 401(k) for 90-year olds or busy soccer moms.
By the way, you don't need the Internet to have mutual fund investments. It still works just fine by phone. My father did quite well with investments with just the phone and snail mail into the early 2000's. Having an account with Vanguard and buying the Vanguard 500 index fund isn't any harder than having a savings account, and a lot lot more lucrative if one doesn't listen to the doomers and gloomers.
[font color = blue] But if you take your money out of your 401(K) before the official date, you pay a penalty. And many people have needed to cash out their retirement funds early in recent years thanks to the mismanagement of our banks and Wall Street and job losses. [/font]
It's not any easier selling rental property in a down market, especially like the one we have had. And a 10% penalty is not the end of the world. After a 42-fold increase, like the S&P 500 index fund had since 1976 (http://www.democraticunderground.com/12527227#post29 ), I think I could afford to give 10% of that back. (The 42-fold increase doesn't represent my performance, I might hasten to add. I don't have a clue, frankly what my overall return has been since the early 80's other than a several-fold return).
I could do more tax deferral examples where after only a few years, one is better off withdrawing and paying the 10% penalty and the taxes than he/she would have been sticking to a regular non-tax-deferred account.
[font color = blue] The "recovery" on Wall Street is a slap in the face, a terrible affront to the many people who lost their homes in the Wall Street mortgage fiasco. [/font]
Or perhaps a reason to invest in equity mutual funds instead of real estate?
The recovery of my equity mutual fund investments sure doesn't feel like a slap in the face to me. It consoles me for the loss of value in my townhouse.
[font color = blue]Sorry to go into such a rant, but I have seen people who have suffered in the past few years from the irresponsibility of the banks and Wall Street investors. I do not trust them for 10 seconds. It is unbelievable to me that virtually none of the banks and managers of the people's money on Wall Street have had to answer personally for the fact that their salaries have burgeoned while ordinary savers in their senior years receive almost no interest on their conservative accounts. [/font]
I agree wholeheartedly.
I also don't want people to be hurt by the doom-and-gloom advice that tell people not to buy mutual funds, or to not take advantage of tax-deferral and tax free investing (through Roth IRAs and Roth 401k's) and miss out on the historical doubling - every - 7 or 8 years - on average returns since WW II.
[font color = blue]And back to the 401(K)s, what concerns me the most is the simple fact that if the baby boomer demographic bulge is likely to create a future shortfall in Social Security funds, what is it going to do to the stock market?
What happens if baby boomers actually have to start withdrawing and spending their savings? What happens to the value of stocks? I'd like to see the conversation turn from the dangers the baby boomers pose to the solvency of Social Security to the dangers that same generation proses to the solvency of our banks and Wall Street. [/font]
Good points. I've been shifting some of my investments more to international funds and particularly towards countries with younger populations. But I also consider that lots of young investors overseas are and will be investing in the U.S. stock market too. So I think the concern of some on this issue is excessive. I'm more into diversity than into shunning U.S. stocks.
[font color = blue]Will the hedge funds and computer traders continue to manipulate stock values so that they appear higher than the material values and investment returns they should reflect? [/font]
Any reading of Wall Street history is that they've been doing this since the stock market began, yet it keeps doubling and quadrupling and 64-tupling in spite of all the doom and gloom we've been subjected to all of these ages. http://www.democraticunderground.com/12527227#post29
JDPriestly
(57,936 posts)But had we encouraged people to pay off their mortgages in their 50s rather than move up or put money into 401(K)s, the financial crisis would be a lot less difficult for people. It's one thing to be out of work and have to pay rent. Quite another to own your house and lose your job when you are in your 50s.
I do not believe in the "recovery" of the stock market. I think it is not for real.
Look at Main Street. The jobless figures and even more so the real jobless figures that you don't see because people don't report that they are looking for work indicate that business profits cannot last.
Investing overseas is OK if you are young and invest in different things early on. But that was not an option when I was young. And any overseas investment, especially in the third world, should be made with great caution. Many of those countries do not have a legal system that respects private property in the way ours does. And some countries can simply nationalize industries in various ways not necessarily directly if they want to.
I stand by the fact that Wall Street is manipulating stock values. ETFs are safer than some other things. But still when you think about Main Street you wonder how businesses can claim profits when no one has money to buy things.
The defense industries, of course, keep going and showing profits, but they rely on tax money for income. So that choice also does not have the kind of positive outlook that warrants the current market. That's my opinion.
I did a lot of reading on the stock market crash of 1929. We have gone back to the unrealistic expectations of that era. That's my opinion.
progree
(11,463 posts)Last edited Wed May 1, 2013, 01:36 AM - Edit history (1)
Given how my little lousy townhouse is valued at less than what I bought it back in 1980, 23 years ago, and given that the freaking mortgage payment (PITI) is only like $400/month for a property that could easily rent for $1,000/month, I think it's a nirvana for investing in rental real estate. I wrote a special note to myself to put a priority on increasing my investment in rental real estate. Thank you for the reminder.
[font color = blue]I agree that rental properties are not an alternative.
But had we encouraged people to pay off their mortgages in their 50s rather than move up or put money into 401(K)s, the financial crisis would be a lot less difficult for people. It's one thing to be out of work and have to pay rent. Quite another to own your house and lose your job when you are in your 50s. [/font]
Actually, I think rental properties at today's prices are a once in a lifetime opportunity -- see above.
As for people who lost their homes but had a hefty 401k: They could have taken their gains from their 401 k's to make their mortgage payments. 9 - 11%/year gain in the stock market is a lot better than what you get paying down a 4% or 6% mortgage.
[font color = blue]I do not believe in the "recovery" of the stock market. I think it is not for real. [/font]
That's what I thought. But I was too lazy to move my money out of stocks. And then we got some black Kenyan for president and the stock market has almost doubled.
Again, with corporate earnings growing an average of 9%/year per share (please see the Peter Lynch quote in #29), it is inevitable that stock prices will follow. Sometimes prices will lag earnings growth for a long time. Sometimes prices will get ahead of themselves with high P/E ratios. But over the long term inevitably prices will follow earnings growth.
[font color = blue]Look at Main Street. The jobless figures and even more so the real jobless figures that you don't see because people don't report that they are looking for work indicate that business profits cannot last. [/font]
Hmm? I haven't heard before that people don't report that they are looking for jobs.
By the way, there's a crapola meme out there that people who have exhausted their unemployment benefits are not counted in the unemployment rate. That is not true. http://www.bls.gov/cps/cps_htgm.htm . People's unemployment benefit status has nothing to do with the official measurement of the unemployment rate. The unemployment rate is based on a household survey asking if they are not working, and if not, then have they looked for a job in the last 4 weeks. Whether or not they are receiving unemployment benefits is not a factor in the official unemployment statistic.
[font color = blue]Investing overseas is OK if you are young and invest in different things early on. But that was not an option when I was young. And any overseas investment, especially in the third world, should be made with great caution. Many of those countries do not have a legal system that respects private property in the way ours does. And some countries can simply nationalize industries in various ways not necessarily directly if they want to. [/font]
Yup. Only a small part of my money is in emerging markets. Maybe 10%. I hear you. But from what you say elsewhere, the U.S. stock market is rigged, blah blah. Considering all these factors and 10%/year average annual increase in earnings and stock prices, I have deployed my investments accordingly.
[font color = blue]I stand by the fact that Wall Street is manipulating stock values.[/font]
So why not join them and double your money every 7 years on average, rather than telling your fellow progressives to hide their money under a mattress? Why do you suppose that the wealthy have so much money in the stock market? I am forever baffled, how, in one post, progressives here can talk about how corporate profits are exploding, how profits are gaining as a share of the economy at the expense of wages. But then these "progressives" tell us not to put our money where the wealthy put their's???
That my contributions to progressive campaigns are near a thousand in an election year rather than in the tens is because I ignored the doomers and gloomers and invested in stocks. Something to think long and hard about. For other progressives, do you really think that hiding their money under the mattress or putting it in 1 - 2% CD's is fair to them, compared to doubling their investments on average every 8 years or so in the S&P 500?
Interestingly, the example in the OP -- the difference in a 5% vs. a 7% return is a 61% difference (on a lump sum over 50 years) -- applies too to people that accept lower returns in the pursuit of safety. If someone accepts 3% in bonds rather than say 7% in stocks in the hopes of being "safe" are giving up 85% to the God of Safety, i.e. ending up with only 15% of what the stock investor ended up with:
Investing in 3% bonds: 1.03^50 = 4.384
Investing in stocks that return 7%: 1.07^50 = 29.457
29.457 - 4.384
-------------- = 85%
4.384
4.384 / 29.457 = 15%
29.457/ 4.384 = 6.72 -- the stock investor has 6.72 X the bond investor.
[font color = blue]ETFs are safer than some other things. But still when you think about Main Street you wonder how businesses can claim profits when no one has money to buy things. [/font]
I do have money to buy things, and so do plenty of other people. Links please on "when no one has money to buy things". That's a new one to me. If true, I certainly would be in a dither too.
[font color = blue]The defense industries, of course, keep going and showing profits, but they rely on tax money for income. So that choice also does not have the kind of positive outlook that warrants the current market. That's my opinion. [/font]
I think the defense industry is a great investment, though I don't target it. Just my opinion.
[font color = blue]I did a lot of reading on the stock market crash of 1929. We have gone back to the unrealistic expectations of that era. That's my opinion.[/font]
OK. I also think of the tremendous gains of the stock market since then, like well over 10%/year, i.e. a doubling every 7 years (ON AVERAGE). Do you really want to advise your fellow progressives and Democrats to forego that?
progree
(11,463 posts)
Laelth
(32,017 posts)-Laelth
progree
(11,463 posts)Laelth
(32,017 posts)I will read the OP carefully. Thanks.
-Laelth
progree
(11,463 posts)Last edited Tue Jul 11, 2023, 09:57 PM - Edit history (1)
Edited changed #19 to #11 in the subject line.