How are people dumber than us going to make out with their 401(k)s?

[Parabolica]

How well do you expect most people are going to make out with a 401(k)? How much does the average person know about investing, and how effectively will they invest their money? Is the average Joe or Jill going to be able to match or beat the results of the professionals who manage large defined benefits programs? Do they know how bond pricing works, how to allocate assets, or the difference between monetary and fiscal policy? I am skeptical.

A colleague once asked me to look at his 401(k) plan. It was riddled with fees and overpriced junk, sold to him by his ‘advisor’. I explained this to him, and suggested that he might want to look at cheaper alternatives with index funds, but he lacked the knowledge (and courage) to dump his ‘advisor.’ This was a person in a profession with a good education, and he wasn’t up to it.

To my way of looking at it,the switch from defined-benefit plans to 401(k)s are, was, for most people, like handing someone an umbrella, kicking them out of a plane at 32,000 feet, and wishing them good luck. It’s worked out well for the corporations, though.

Of course here we are all smarter and more successful than that sort, and would scoff at a defined-benefit plan were it offered to us.

But what do the simple folk do?

[HLS]

Twilight Zone scenario OR Reality ??

The 401K system is the largest Ponzi scheme in the history of the world, only 2nd to the US housing bubble that was engineered to occur.

It is naive to believe that generation after generation can benefit from the stock market yet tens of millions of people are counting on it 100% because *GASP* the govt condones/approves/suggests it, and makes it foolishly attractive with ‘pre tax dollars’

The reason that defined benefit plans were done away with is because it wasn’t possible for professionals to manage money with solid returns decade after decade for many thousands of people, yet it is now ‘expected’ that amateurs will have a better return.

Just as real estate ‘professionals’ were cheerleaders for the housing bubble and many were sucked in by their ignorance,(because houses never go down) those whose incomes rely on the financial markets are cheerleaders for the 401K system and convinced of its success, blinded by their income.

As long as leverage and derivatives exist, it is likely that the scheme will go on in one fashion or another for a long time.

The wake up call will be when something REALLY big happens and *ONLY THEN* 99%+ of the people will say that nobody could have seen this coming AND ‘poor me, just like everybody else’ and EXPECT a govt bailout.

The govt will not have the resources to bail these people out and perhaps it will be game over at that time.

Good luck to those who are COUNTING on this system.

[Anonymous]

[quote=HLS]The 401K system is the largest Ponzi scheme in the history of the world, only 2nd to the US housing bubble that was engineered to occur[/quote]

You really need to understand what a Ponzi scheme is before you say stupid stuff like that.

[quote]As long as leverage and derivatives exist, it is likely that the scheme will go on in one fashion or another for a long time.[/quote]

Leverage?

What is it you do for a living again?

(BTW: Please stop sending me emails about refinancing. I’d prefer to work with someone capable of rational thought.)

But please – just for entertainment value – do tell us how we are supposed to save for the long-term without using the investment markets.

[desmond]

There are that many people for you to worry about.

[Coronita]

If I were to do over, I would say diversify….
I wish I got started with buying property much earlier, instead of just tucking things into a 401k

I don’t think 401k’s are bad, but they shouldn’t be an end all/be all for one’s retirement plan.

In as much one shouldn’t bank on retiring strictly all based on a investment property

Also, I’m not so sure tax rates for a deferred investment are going to be a good thing…As I said before, I think some people’s folks tax bill is going to end up being bigger by deferring the pain until they are in their 60ies

[jimmyle]

So what is your proposed solution? Social Security and Pension funds have already failed miserably.

Most near retirement people in my company who saved at least 10% in their lifetime already have $500k to $1,000,000 in their accounts. With your house paid off, some social security, plus pension (yes, we have a pension at our company) one should retire nicely.

[ltsddd]

[quote=flu]
Also, I’m not so sure tax rates for a deferred investment are going to be a good thing…As I said before, I think some people’s folks tax bill is going to end up being bigger by deferring the pain until they are in their 60ies[/quote]

I think this is why it’s a good idea to consider the 401K Roth (or something like that). Pay the taxes up front and not worry about the higher tax rates down the road.

[poorgradstudent]

According to one random website I googled, the average baby boomer *with* a company sponsored retirement plan has $88,000 saved for retirement. Although older boomers do seem to be in slightly better shape than the youngest, which does make sense. So, most people have done a pretty terrible job of planning for retirement.

[bearishgurl]

[quote=HLS]Twilight Zone scenario OR Reality ??

The 401K system is the largest Ponzi scheme in the history of the world, only 2nd to the US housing bubble that was engineered to occur.

It is naive to believe that generation after generation can benefit from the stock market yet tens of millions of people are counting on it 100% because *GASP* the govt condones/approves/suggests it, and makes it foolishly attractive with ‘pre tax dollars’

The reason that defined benefit plans were done away with is because it wasn’t possible for professionals to manage money with solid returns decade after decade for many thousands of people, yet it is now ‘expected’ that amateurs will have a better return.

Just as real estate ‘professionals’ were cheerleaders for the housing bubble and many were sucked in by their ignorance,(because houses never go down) those whose incomes rely on the financial markets are cheerleaders for the 401K system and convinced of its success, blinded by their income.

As long as leverage and derivatives exist, it is likely that the scheme will go on in one fashion or another for a long time.

The wake up call will be when something REALLY big happens and *ONLY THEN* 99%+ of the people will say that nobody could have seen this coming AND ‘poor me, just like everybody else’ and EXPECT a govt bailout.

The govt will not have the resources to bail these people out and perhaps it will be game over at that time.

Good luck to those who are COUNTING on this system.[/quote]

HLS, I totally agree with this. I’m planning on shlepping by on 3 small pensions and collecting rent. I’m considering buying and fixing up rental houses with an “equity partner” in a couple of years and collecting rent on them. I’m working on my DRE “PM” designation as I write this.

I can’t imagine how the most vocal young “worker bees” on this forum are going to “retire” with $2-$3M and still keep their families’ lifestyles at the level they have been “accustomed to.”

I have recently come to the conclusion that rental income is the way to survive, IMHO. Unlike the stock market, this income stream is totally under one’s control. Admittedly a pragmatic “control freak,” I’m attracted to that. Those young Piggs on the current “retired cop under 60” thread who are prognosticating whether they will need $2M or $3M to retire are using the rarest and most “grandiose” examples of unclassified executives as the VAST majority of gubment retirees have monthly pensions between $350 and $1800. I believe in saving for retirement if one is able to but in my mind, it’s wacky to assume you will need $65K to $100K annual income in retirement. You’re supposed to have your principal residence paid off by then (or live in subsidized senior housing or a senior mobile home park if you do not have any assets).

That’s the way its always been.

[no_such_reality]

LOL, I can look at the Controller site and see W2 incomes. W2 incomes will translate directly to retirement income. It even tells you their retirement plan.

Or just look at CalPERs numbers and compare total retiree growth to growth of retirees with $100K payouts and see what percentage of ‘new’ growth it is.

[bearishgurl]

[quote=harvey]. . . But please – just for entertainment value – do tell us how we are supposed to save for the long-term without using the investment markets.[/quote]

A suggestion was made earlier here (AN?) to do “CD laddering.” That’s one way. Another way is rental houses. I’m not talking about highly-encumbered ones (HOA/MR). I’m talking about buying a fixer-upper, spending 30-60 days in your off hours to clean it up and then leasing it. Got $150K?? There are plenty of places in SD County where one could buy a house which, after fixed up a little ($5-8K + elbow grease), one can make a steady $1300 – $1600 mo off $160K ($150K purch + closing costs + fix-up $$). Know anywhere else you can do this??

Afraid of getting off the fwy and looking around? Bone up on your “people skills” a bit, pri ;=]

It’s doable.

I wouldn’t have thought so just a year ago.

[no_such_reality]

http://taxdollars.ocregister.com/files/2012/03/annual-benefits-service-retirees1.jpg

Yep, only exalted executive types…

[Coronita]

[quote=ltsdd][quote=flu]
Also, I’m not so sure tax rates for a deferred investment are going to be a good thing…As I said before, I think some people’s folks tax bill is going to end up being bigger by deferring the pain until they are in their 60ies[/quote]

I think this is why it’s a good idea to consider the 401K Roth (or something like that). Pay the taxes up front and not worry about the higher tax rates down the road.[/quote]

For most people who don’t know what they are doing (inclusive), I think the trick is to spread the risk.
So in as much as I’d like to believe the government will honor their commitments. They probably won’t….Government can just as easily add fees/taxes to a Roth401k if it really wanted to… Then again, it can also add additional penalties for excessive withdraws from traditional retirement plans, etc etc etc.

I’m just curious why some folks think “401k” is such a bad thing. 401k is a plan, with funds. The picking of the funds is a personal choice. Granted some employers have really shitty plans, but in at most, some have either self directed or passive investment options without all ridiculous management fees.

I wouldn’t completely empty out a 401k for the same reason why I wouldn’t put everything in there too…

[kev374]

I plan to retire outside the United States. I don’t think retiring in the US is possible anymore given the unstable nature of the job market and deflation in wages and high inflation making saving enough for retirement just a fantasy.

Take the typical student graduating today with $50,000 or more of student loan debt and faced with buying entry level homes for $350,000 and up… between paying student loans, saving up for emergencies, paying for kids, skyrocketing health care costs, skyrocketing gas and commodity prices, dealing with unexpected emergency expenses, dealing with unexpected layoffs where exactly are they going to get the money to ALSO save the $2 or 3 million it will take to live the 30 years of retirement?

One extended layoff and everything will be wiped clean and then they start over? How many times will they start over?? It’s a vicious circle…

And, this generation cannot count on Social Security at all! And who knows what will happen to Medicare, that may not exist too!

The problem with the previous generation is that they preach everything, the fact is that they have just been RIDICULOUSLY lucky to have SOLID jobs with pensions, low costs of living throughout their earning lifetime, a super stable job market relatively speaking, low cost for housing and all entitlements intact – SS, Medicare etc. That is not the situation for the current generation.

[Coronita]

[quote=bearishgurl][quote=harvey]. . . But please – just for entertainment value – do tell us how we are supposed to save for the long-term without using the investment markets.[/quote]

A suggestion was made earlier here (AN?) to do “CD laddering.” That’s one way. Another way is rental houses. I’m not talking about highly-encumbered ones (HOA/MR). I’m talking about buying a fixer-upper, spending 30-60 days in your off hours to clean it up and then leasing it. Got $150K?? There are plenty of places in SD County where one could buy a house which, after fixed up a little ($5-8K + elbow grease), one can make a steady $1300 – $1600 mo off $160K ($150K purch + closing costs + fix-up $$). Know anywhere else you can do this??

Afraid of getting off the fwy and looking around? Bone up on your “people skills” a bit, pri ;=]

It’s doable.

I wouldn’t have thought so just a year ago.[/quote]

Confused here…

A few weeks ago when were talking about Mira Mesa, I recall you were telling folks how horrible idea was to be buying rental property in Mira Mesa or investing in Mira Mesa at this point because prices were so high.

But now you’re suggesting folks pick up rental property, right now… when inventory is close to 0, when multiple people are bidding on rental properties and pushing the cash flow-ability(I know not such a word) up and up?

Or suggesting a CD ladder right now, at a time when interest rates are at a historic low, for which people are going to be locked in for some time….

I don’t get this….

I think there is one fundamental point that’s not being grasped here.

No risk = shitty returns…

[Author]

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