Retirement: Savings Alone don't work

Democracy Forums ^ | August 16, 2011 | Truth

[TruConservative]

The great faith of Americans in their 401ks as retirement funding is misplaced. When push comes to shove and you retire, if you are like most Americans, you will find that social security provides more income for you than drawing down on your 401k balance.

Now, don’t get me wrong. I urge everyone to invest the maximum in their 401k. It is a great source of comfort and eventually a key part of retirement. But it is no substitute for social security. Those who would sacrifice social security so that you could put more into 401ks or other private savings accounts are flat-out crazy. The reasons are simple - human nature and life’s challenges (most won’t save the amounts that they think they will); downturns in the market when the vulnerable retiree is forced to sell at a loss; mathematics; and inflation.

And please remember, too -- just about the best way to get rich in America today is to convince other people to invest in your money market fund. There is a very large financial incentive to get people to invest, so that the money market managers can reap their 15% of your savings (that’s a typical overhead). That incentive means massive advertizing and opining on the wonderfulness of private savings accounts for reasons of Wall Street’s profiting; not for honest reasons of the public good.

Secondary article, same idea: http://www.msnbc.msn.com/id/44138332/ns/health-forbes_com/

[TruConservative]

To all my friends at FR - no time, no post (it's been 5 years for me). I would like to post 3 articles to get your opinions. The first is on the inadequacy of 401ks alone. The 2nd addresses social security; the third presents a serious and, I believe, credible and useful solution to both SS deficits and the national debt.

I quit posting here because I don't really enjoy the rough and tumble; I'm more solution-oriented than argumentoriented. I am posting here because, in 2004, this website changed history. I really believe that without FR, the Bush memo would have stood unchallenged, and Kerry would have won. I am reaching here in these three posts not to just have discussions, but to aim towards an idea that I think could once again change history - if you guys agree with me. Maybe you will shoot me down and I'll shut up and go away.

The subject article, written by me, is based on the personal experience I've had and witnessed. 25 years ago, my corp switched from pensions to 401ks. I was told - invest 15% of your salary, and you'll be a millionaire by 2011. I invested, but I only have $400,000, which is not enough to retire on. I feel a little cheated. So do most of my co-workers and people of my age. I'm being meant to feel that I am a failure for not chosing my investments wisely, but every expert said back then - stocks are the best in the long run!

Following the subject article are some good comments. A major criticism is that treasury bonds could have provided a better return than stocks did over the last 30 years. My response to that is (1) that's hindsight, and (2) treasury interest is paid by tax payers. We can't build our retirement system on treasury bonds because that is building our retirement on greater federal spending in the future. (I also want to point out - the DJIA was 11,300 back in 1999. Stocks, on average, have had zero return in 12 years! That's the main reason that our 401ks have been a big disappointment to those of my age.)

[mamelukesabre]

If stocks aren’t profitable, then how the hell do you expect SS to remain solvent? The two are both connected to the US economy. The difference is, stocks hurt when the US economy hurts, but SS goes broke when the US economy hurts...or you force the unborn to subsidize your SS.

[proxy_user]

It really depends on whether you listen to financial ‘advisers’, or use the common sense that you have.

Look at the example in the article. If you have $600K at 65, you don’t have to take anything until you are 70 1/2. Transferring the money to an IRA, investing in good stocks paying solid dividends, and reinvesting the income could increase the money to at least $800K by the time you have to make withdrawals. At that point, your minimum distribution is 3%, which should be less than what the account yields annually. The account should continue to increase in value until you are at least 80, and have to start taking larger withdrawals.

If you can’t do that, then you don’t have enough money to retire. It is better to be working in your 60s than run out of money when you’re 80.

[mathluv]

I rolled my 401K over into an annuity. It pays almost as much per year as my SS. I never thought SS would still be around when I was much younger. My 401K is from a job where I worked for 8 years. Even with the hit from 9/11, I have no complaints.

[TruConservative]

Thanks for the comment. I have a second article that defends SS, but the point of this one is that 401ks have been over-hyped. You and I and the rest of America need to keep SS.

The reason I am posting this is that I do have a solution to the national debt crisis that I’d like to post. The solution necessarily deals with SS because SS is a big part of our debt ($2.7 trillion out of $14.3 trillion), the number 1 thing we spend federal money on, and just about the biggest contributor to future deficits. But at the same time (I maintain), we need it, so if I can convince people that we need SS, then I hope I can convince people that the hard choices we need to make this year in the “supercongress” involves hard choices to save SS (at obviously lower benefits, but not zero — there is a way to save SS for all time with no chance that it will go broke).

[jnsun]

Certainly a good post in terms of the issue addressed, and for that thanks. That is, you do put the argument in concrete terms at least rather than Media Deceit.

As a part-time "retiree," and let it be said there is NO such thing as being "retired" from daily work, to the end of one's days; here are a few initial comments before a deeper discussion:

1) I am an avid Tea Partier, and I don't think there is any imminent Tea Party agenda to outright eliminate Social Security; at least for those who already are living within the "contract." There is every reasonable belief that that program can be gradually eased to something less than it is today, for instance no sixty-two option and no entitlement until 69 or 70 (viable ages in this modern world).

2) The forty thousand per year used in the spread sheet example is in no way necessary. An individual can live very comfortably in a decent area in the US with parks, tidal access, medical care, telecommunications, etc. on twenty four thousand dollars per year, given Medicare. An elderly couple only increases that comfort with the two incomes.

3) As one of the article comments expresses, taking the individual SS contribution during one's salaried years and diverting that into private investment is every bit as sound as a government Ponzi scheme. This begs the whole question of the productivity of centralized bureaucracy versus capitalistic enterprise. If there is NO free lunch then there is NO reason to trust in government Ponzi schemes over honest productivity.

4) Which brings up my initial point: you do, and should, work until you die. There is a matter of under what stress one wants to do that, but it is silly to believe it simply goes away, no matter how much one initially fools one's self.

FYI the Tea Party is so far ahead of the political elite in terms of understanding, and being sensitive, to human nature, that many of those politico's have come to genuinely hate the revelation. They live on BullCrap.

The US can be entirely prosperous, internally, across its entire population (with elimination of illegals) when that population abandons its phoniness, and faces the realities of civilized life on Earth.

Johnny Suntrade

[TruConservative]

Hi mathluv - I am in the same situation as you. My 401k will be worth about enough to buy an annuity that would actually be a little better than SS. However, I could not live on just that 401k-funded annuity. I need the SS money as well. I am arguing in favor of having both a 401k and SS, which I think the vast majority of people on this board plan on and need. That requires saving SS for us, and for everyone else who follows us.

[TruConservative]

Thank you Johnny for your kind words. I’ll respond to this: “taking the individual SS contribution during one’s salaried years and diverting that into private investment is every bit as sound as a government Ponzi scheme.”

In my life, I contributed 15% religiously to my 401k (counting company contribuions) and 15% to SS (counting employer contributions). At the end of my working life, I am seeing my SS as $1400/month, or about equal to a $300k annuity, while my 401k is $400k. So my investment in 401k did work out better, but not extraordinarily better. And I had the benefit of the 1990s when the stock market was soaring.

The problem with the idea of diverting the 15% we (together with our employer) put into SS into a new, interest bearing account, is that it strands the people now in SS. That’s what makes the solution to this problem (SS insolvency) so very difficult. If we could go back in time, we could fix it from the start, but we locked ourselves into this program that cannot be easily halted. If those in SS are to continue receiving their checks, we workers need to continue to pay into the system, or we need massive additional borrowing by the federal government. I can’t see any other option, and I can’t see renegging on the promises to our retirees, who paid into it for their parents decades and expect to receive the same from us.

[mathluv]

I would not want to try to live without both. I could survive, but that is about it. Right now, I can do a little to help my daughter and her kids. My son has a good job, and does not need my help - yet.

[p. henry]

These are interesting issues. A rule of thumb used to be that you could invest roughly evenly in bonds and blue chips and safely remove 4% a year. That plan would preserve your capital and protect you against inflation. Well . . . that may no longer be the case for the following reasons:

1. First and most importantly, the market crash of 08-09. Most investors had never experienced anything like that before. Some still had a memory of the recession of 73-74 and the crash of 87, but even for them, the crash of 08 and 09 seemed much more fundamental and therefore unnerving. Those that suffered most of the losses and took their money out before the rally that began in March of 09 will probably never fully recover. Even those who stayed the course and therefore recovered most of their losses are less likely to stay in the next time there is a significant downturn in the market. I believe this lack of confidence has contributed to the volatility we have seen this month.

2. Second, we face uncertainty as to whether we are in a period of deflation or inflation. Quantitative easing should lead to inflation but will not in the absence of velocity. You can lower interest rates to zero and in effect fund federal borrowing with newly printed money and still not have inflation, and indeed have asset deflation, if no one is borrowing and spending.

3. The traditional safe havens for retirement funds offer little in the way of returns, and some of them are subject to more than normal risk these days. To get any kind of yield from such investments these days, you have to go bonds rather than insured deposits and longer term bonds at that. If inflation does kick in and interest rates go up, you know what will happen to the principal value of those longer term bonds.

So, what is person to do? One of my clients has just been downsized. He is single, 60 years old, and in good health. It is possible, although not likely, that he will again be employed at the level to which he has become accustomed. He has no debt. He has approximately $250,000 invested in securities outside of his IRA's, approximately $1,500,000 invested in securities in his IRA's, and approximately $150,000 invested in real estate which throws off approximately $12,000 per year. Assuming that Social Security is still available to him in two years, he should receive about $22,000 per year from it. He is willing to live today on $70,000 per year pretax - $12,000 from the real estate and $58,000 from the securities in his IRA's and his non-IRA account - approximately 1/3 of his predownsizing income. The question he faces is how to invest the non-real estate assets to protect principal both from losses and possible inflation and to return approximately 3% per year. Ten years ago the answer would have been obvious. Today, not so much.

And if folks like my client are puzzled and unsure about how to proceed, that's a pretty clear indication that our economy has a ways to go before those of us less well-off than my client can feel at all secure in our possible retirements.

[SaxxonWoods]

Social Security is a minimal backstop, and so are retirement accounts, unless one is very expert at using self-directed accounts. Your real money gets made in the real world, not in controlled govt accounts. Live well below your means, and don’t work for someone else, start your own business. Or work for someone, plus have a business on the side. Take chances in your investing rather than in your lifestyle.

Your first 40 hours a week pays your immediate bills, and funds your retirement accounts. Your work after that goes into investments and the management of same. Very few people can earn/save enough in 40 hours a week to attain financial independence.

I semi-retired at 60, my wife retired at 53. It can be done, but you must live below your means for many years.
Our estimated SS payments will not be high as we didn’t make huge incomes. We increased our wealth by investing in real estate. We also got out of most real estate in 2007, when it became obvious what was going to happen. We sold some, and paid off what we wanted to keep.

When Obama got elected, we knew it was time to take early retirement (quasi-Galt). We are conserving resources and waiting for America to throw off the chains so we can go back to investing. We can wait for as long as it takes.

40 hours a week and sitting in front of the TV the rest of the time won’t cut it for the vast majority of people. If you didn’t start early, you really have a problem. You must go into emergency mode, though all them same rules still apply.

[RFEngineer]

“You and I and the rest of America need to keep SS.”

The problem is that we cannot keep SS and Medicare for everyone. We don’t have the money to do it.

I know you said you prefer to be solution oriented, but there is no solution to this. We cannot pay everything that everyone expects out of these two programs as they stand now.

If they live on, it will be in a drastically reduced version.

[marktwain]

“so that the money market managers can reap their 15% of your savings”

If the managers of your 401K are charging 15%, you are being riped off. The top 25 low cost funds charge less than 1/2 of a percent per year:

http://www.theskilledinvestor.com/wp/best-money-market-funds-259.htm

[DaveArk]

http://www.cato.org/pubs/policy_report/pr-ja-jp.html

[marktwain]

I think you are putting forward a false choice. You do not really have a choice between a “pension” and a 401K. The “pension” depends every bit as much on the productivity and profits of companies as the 401K does. The difference is that the “pension” used to depend on just one company, the one you worked for. If it went bust, your pension went bust. If you left the company before you received the pension, to bad, you lose everything. With a 401K, you can take it with you, and you can diversify by investing in mutual funds. If you want to do better than the U.S. bonds, put it in an index fund.

Over time, the government can not do better than an index fund, because it depends on the productivity of companies for its taxes, directly or indirectly.

[mamelukesabre]

I also believe SS is important and I believe it should be preserved. However, I do not pretend to believe that scumbags in congress can be depended on to do the right thing. They’ve been screwing up royally for about 40 years now, and screwing up minorly for 40 years before that. They won’t suddenly change.

If I was king of america with supreme power, I would save SS. The solution would be a combination of pension, IRA, 401k, SS, and other personal savings. People who retire on SS alone should NOT live a comfortable life.

[Bryanw92]

>>If the managers of your 401K are charging 15%, you are being riped off. The top 25 low cost funds charge less than 1/2 of a percent per year:

When do they charge you that 1/2 percent? The stock market is programmed through computer trading to go up and down with great regularity. The fund managers tell us “little people” to “stay the course” while the big boys have their own pet brokers to take advantage of every dip and rise. Do the fund managers take 1/2 percent off every rise but not give it back during tomorrow’s (or next week’s) inevitable decline? Or do they charge their fees based on your actual annual balance increase?

Not trying to be argumentative. I really want to know. Over the entirety of the last 12 years, my interest-bearing checking account has had a higher rate of return than my 401k.

[marktwain]

Remember that 15% of your salary went to SS. If you had not been required to put 15% of your salary in SS, you could have placed it in your 401K, and your 401K would have been twice its size, probably three times its size, because my guess is that you were paying SS long before you were putting 15% of your salary into your 401K.

Not only that, be we are at a low spot in returns on 401K because of the uncertainty imposed on the economy by the current administration. If we return to a stable system with the rule of law, I expect that 401K investments will soar.

[proxy_user]

My model portfolio that I use for myself is 60% dividend-paying blue-chip stocks, 15% preferred stocks, and 25% short-term bonds (1-3 years). If you apply this model to a $1.5 million portfolio, you would have

Stocks: $900K, dividends $35K
Preferreds: $225K, dividends $15K
Short-term: $375K, interest $5K

Total yield would therefore be about $55K or so, but there is a big upside if inflation increases and interest rates go up. If that happens, the common stocks will be worth more and probably pay higher dividends, and the interest from his bonds will go up substantially. The preferreds will decline in principal value, but continue to pay the same income. You can also invest in variable-rate preferreds tied to the LIBOR, but you sacrifice current income.

[marktwain]

The fees that we are talking about are charged annually (once per year). If you look at the link that I gave the annual rates for those 25 funds vary from

#1) Gabelli US Treasury Money Market Fund – GABXX

Annual Money Funds Management Expense Ratio ____0.08%
Total Money Fund Portfolio Assets ($B) ___________$1.1
Annualized 3-year Money Market Yield ____________4.2%
Minimum Money Market Account Investment _______$10,000

to

#25) Fidelity Select Money Market Portfolio – FSLXX

Annual Money Funds Management Expense Ratio ____0.39%
Total Money Fund Portfolio Assets ($B) ___________$6.7
Annualized 3-year Money Market Yield ____________4.4%
Minimum Money Market Account Investment _______$2,500

I conservatively said that they were less than 1/2 of one percent. As you can see, they actualy range from .08% to .39%.