The Magic of Your 401(k)
What drives the attitude towards investing on the left? First of all, in a paternalistic way, the left thinks it’s trying to do what’s best for Americans. We need to be encouraged from playing with these dangerous stocks. “No, baby, dangerous.”
However, like the overbearing parents whose efforts to keep you super-safe make you super-miserable, the anti-risk crowd keeps your money safe, but there’s far less of it when you’re done than if you’d been able to invest it as you see fit. For example, proponents of the plan cited earlier say that you can have a 401(k) (minus any tax incentives). However, the idea of investing more is impractical for most workers. As it is, 7.65% of a worker’s income is eaten by Social Security and Medicare payroll taxes. If we add 5% more for government-funded “safety funds,” the federal government will have consumed more than an eighth of a worker’s pay before they’ve even paid normal taxes. This makes investing hard (if not impossible) for your average worker, which means that when stock markets come back and boom, Joe Average will be left with nothing more than a measly 3% return, as he has no extra money to be able to invest more in the stock market.
The second thing that must be understood is that the concept of the investor class represents a threat to liberals. Labor unions have shrunk and most Americans wouldn’t want to be part of one. Unions partially brought their fate on themselves by negotiating impossible to sustain long-term retirement and health benefits. This stands in contrast to the concept of the 401(k) and IRA. Unions made short-sighted deals with management that hurt the overall company and its future, because shareholder value wasn’t their concern. What’s happening with 401(k)s is that the future retirement of America’s middle class and the future of America’s businesses are becoming interlocked. When it comes to self-interest, it make sense for those with retirement accounts to consider themselves investors rather than just consumers who buy products or laborers who will spend retirement sucking corporations dry through unsustainable benefits packages.
It’s this type of thinking that can turn political paradigms on their head, and the left is trying to stop it through legislative and cultural means at its disposal. The greater the populace’s dependence is on government, the greater the power of liberals.
The bad news for the left is that even in the midst of the economic downturn, their mass cultural efforts to stigmatize investing aren’t working. A survey conducted by Deloit Consulting showed that even with the recent declines, the percentage of people planning to increase retirement savings outnumbered those cutting back by a 33-4% margin. Hardship withdrawals are not increasing significantly. Yes, some workers are planning to work a few more years before retirement, and they’re going to be smarter about asset allocation and have more balanced portfolios, but they’re not getting out altogether. While some people are pulling money out, there’s no run on the 401(k)s; there’s not even noticeable reductions in contributions. The investor class is voting with its wallet and is here to stay.
The left’s only hope to stop this historic shift is through legislation that illustrates the legal axiom, “Hard cases make bad law.” As someone who is investing for my retirement, I accept the risks. I read the legal disclaimers that tell me my assets aren’t FDIC insured and may lose value. All I and tens of millions of small investors across this country ask is to be allowed to make this decision for ourselves — and that this not be sacrificed for fear-mongering paternalism.
One addition to this post–
I’ve heard that the Left claims that individual accounts, 401ks, etc, are too volatile for the average citizen. Yet we also hear that they don’t earn enough. Which is it? Surely something cannot be volatile downwards only. Additionally, something that gets absolutely 0 media exposure is that Social Security provides, for most taxpayers, negative return on the pay-in. That is, for most earners (everybody above female payers in the lowest tax brackets), real returns on SS range from -5% to about -30% if not a little more.
Detailing this: http://www.heritage.org/research/socialsecurity/CDA98-08.cfm
It’s not the original set of numbers that I recalled above, as I couldn’t find my original reference; but compare it to a hypothetical average of 6% RoR over time to individual stock-holding accounts.
Point being– Government managed retirement accounts are a bad idea. Power to the people!
Union membership is declining in the private sector ONLY! Government is awash in union membership, where there is an endless supply of funding for lucrative early retirement.
401(k)s need the following tweaks to be the perfect vehicle for any worker:
1. A “target-date” fund that meets strict asset allocation guidelines based on empirical market returns data as the default option, into which everyone is autoenrolled with autoescalation of contributions
2. A guaranteed income annuity option which can be purchased over time at different points in the interest rate cycle. This annuity can be either a straight fixed annuity or a variable annuity with a range of relatively limited investment choices based on risk tolerance.
3. Better and more transparent fee disclosure that enables true apples-to-apples comparisons of fees versus value-add by administrators.
4. Ability of plan sponsors to provide objective advice via automated means such as software packages that are not compromised by conflicts of interest. Financial Engines is a good example of the type of software I mean, but if I recall correctly, they were under scrutiny for conflicts of interest with investment managers, which undercuts the value of the advice.
After 30+ years of 401(k) plans being in existence, I’d say those are the key limitations that have emerged. All that noise about putting retirement planning in the hands of the government is just stupid.
Gee, I dunno…they can’t seem to manage anything else…so why not give them the chance. What could go wrong?
The arguement that 401k’s have failed is tied to the crash in the stock market which is tied to the crash in the credit markets which is tied to…the Community Reinvestment Act and Fannie/Freddie buying subprime loans to promote their issuance…which came at the insistence of Congress…which now proposes to manage your retirement money for you due to the loss in value of 401k accounts.
So we are supposed to hire the people who denuded our retirement accounts to “fix” them?
Why not just get one bullet, a Smith + Wesson and do the “honorable” thing?
A triumph of hope over reality. Or delusion.
Government has proven unable to ‘invest’, seeing any funds under government control as ‘sources of revenue’ for it. If an act of congress can make it, so can one take it later on. Just look at how cities, counties, municipalities and States raided pension funds… or how the government through FICA funds effectively into general revenues and not a ‘lock box’. If there was a ‘lock box’ Congress holds the keys so it isn’t a ‘lock box’ for you, it is a future goodies fund for Congress.
About 5% of my retirement account went into government bonds in my working years, and the increase on them has not been great just ‘ok’ compared to everything else. Even after the massive problems, my other investment in retirement accounts have *still* earned more than the government bond portion… and I have a restricted set of funds for that working time and they are still pretty decent investments. Basically I’m back to where I was in 2005… so long as the government doesn’t CF the economy, which is now becoming the question, my investments will recover. And if the economy collapses due to government ‘help’, then there is very little in the way of a safe haven from it. Which is why I prefer to let the American people screw up as they tend to have cumulative sense… Congress has a cumulative echo chamber that makes them senseless.
It never ceases to amaze me how so many can be duped into believing that the only people that can save us from ourselves are the very power grabbing MORONS that screwed us in the first place.
If you don’t know who I am talking about then that ought to tell you something in itself.
I’ve “invested” over $200,000 in Social Security over my lifetime, and the system is almost insolvent. If it were anyone but the government running it, it would be illegal and they would be in prison.
I put far less into my 401K over a shorter period, and it is worth more, even after the recent beating I took. Why? Because I diversified.
Letting the government have more of my money is the worst idea I have ever heard in my life. When they balance their budget and pay off their debts, come back and talk to me.
I’ll trust the government with my investments when they show me that they’re able to manage them (which will be never). In the meantime, we can keep reading about the bankrupt social security, bankrupt medicare, and all the other failed bankrupt government programs. If our government was a private business, they would have been put out of business decades ago.
Keep the government out of my money and out of my life. I don’t want another government program. I want the government to guard the border and maybe build freeways (and I’m negotiable on this).
Hearing stories like this makes me crazy. It is a terrible thing to lose your retirement in this fashion. Especially when it can be avoided so easily. Every investor MUST learn to identify uptrends and downtrends and move to cash when the latter appears. There are a million ways to do it, pick one and stick to it for the rest of your life. I suggest using something based simply on price such as a long term moving average. Just take a look at a chart of the Dow Jones and plot a 200-day moving average. Buy when price is 1% above it, sell when 1% below. Look how you could have avoided getting killed in 2008. Now follow this system for the rest of your life and you are set. You never have to worry again!!
You write “As it is, 7.65% of a worker’s income is eaten by Social Security and Medicare payroll taxes.” The correct number is a 15% cost to the employee. Language matters.
The reason for this is the amount the employer “pays” is really the employee paying. The taxes that the employer “pays” is considered compensation by the employer.
The employer looks at the total cost of employing a person and just divides it into two categories, wages and fringe. The total of those two is called the compensation that needs to be paid.
You can call the individual categories taxes, fess, or grasshoppers, if the employer has to pay it it is considered compensation.
To test what I am writing, do you think that anyone’s take home pay would increase if the 7.65% being paid by the employee was all of a sudden paid by the employer?? Or do you think that the employer would just as quickly reduce all of their employees pay by 7.65%?
Next to Global Warming, this Government takeover of 401k’s is the biggest act of piracy ever conceived.
What is really going on is the scum in DC figured out that they are losing out on about $88 billion they could be spending on things like new “urine crucifixes as art” for their favorite museums, building monuments to themselves, and paying off the friends and family. Not to mention putting money into their solar-panel-and-windmill slush fund as a trade for the carbon they are emitting by having their entourage ride around in Gulfstream G-5′s and a parade of Escalades.
In addition where do you REALLY think they are planning on getting the money to pay for all this damn stimulus? There is around $5 trillion in the 401k system and if it was funneled back into Social Security it could be IOU’d out just life the rest of the money they robbed from the fund to pay for BS.
WJ, take home pay would increase temporarily if they did that, because contracts would prevent people’s pay from being cut, but soon inflation will eat up your pay while your wages don’t keep pace.
One problem that I have seen with how people invest in their Company sponsored Thrift plans and 401(k)s is that they think that they are too busy to monitor the investment selections they have made.
I started in 1980 with CONOCO who offered both a stock investment plan and a Thrift plan. I maxed out the matching funds every year. I pretty much ignored the investments for years. I had everything in Magellan in the Thrift plan and made a ton of money until the 1987 mini crash. That was a wakeup for me. It quickly bounced back. I started monitoring my investments on a daily basis after that.
Now the internet lets anyone monitor their investments in near real time. If you have a Charles Schwab account you can get real time pricing on demand. For charting, BigCharts is tops:
http://bigcharts.marketwatch.com/markets/indexes.asp
You don’t need to log on or pay for the basic service. They also offer Options chains, for those who know how. I have used Options for years to capture a Buy/Sell price.
If you are going to invest in any stock or ETF, you really need to learn simple charting signs and have a strategy to enter and exit the market. I use EMA and Bollinger bands to visualize the trends.
Use the 6 Mo time frame for the general trend and the 5 or 10 day for entry timing.
I am now a half or 3/4 millionaire at 65. I got out of stocks when the market got iffy and into the gold ETF (GLD) when gold was $350/oz. I cashed out at over $900. Use the charts, or learn to use them.
Hope this helps someone.
Marc
My add on comment to the above.
I suffered no losses in the ongoing market mayhem because I was listening to the market, Investment commenters, and the charts. In other words I was paying attention. I also got out of Magellan when Peter Lynch got out. Seems it made good sense. It got way too big.
Marc
Good article. The liberal vision is that you give 15% of your salary to the government as a pension contribution and then hope that they will treat you fairly when you’re 65 years old and completely helpless. Yet, the social security fund is empty and has been for years, despite the promises of a “lockbox” and an expected future obligation in the tens of trillions of dollars. It’s shaping up to be the greatest moral failing the world has ever seen, and if you’re in the generation behind the boomers then you’ve been thrown to the wolves. In fact, Obama has greatly accelerated the social security crisis by busting the budget while throwing the brakes on future economic growth, so maybe the younger boomers will be living in the Obamavilles too.
As long as the government is handing out bailouts, why don’t they return to Social Security, the money they took from the ‘lockbox’?
We spent our 401k already [dental work]. The hubby and I figured we might as well spend it now before it’s gone on things we’ve put off.
I think Mr. Graham got the 401k end of it correct, but he did not include in the equation the debt that many have incurred during this the march to 14,000. If you factor in the interest paid on credit cards, car loans and home loans the 401k plan may not look as attractive as diverting (in the least) some of the 401k contributions for paying down your debt, or staying out of debt.
Many just pay the minimum. When money becomes short, you have the distinct possibility of losing much of your non-401k investments (car, house, furniture, wife/husband/children etc.) investment because you cannot maintain the debt.
A 401k strategy is just part of the picture.
You never really own what you have until that last payment is made. Better yet, pay cash when possible.
EURO SOCIALIST STATISM DESERVES A TEA PARTY
Tax and spend never fixed a strained economy. Prosperity lies in the opposite direction.
http://greensrealworld.blogspot.com/2009/04/obvious-path-back-to-prosperity.html
Would we really be better off letting the government manage our money?
Is there any entity in the world further in debt than the U.S. Government? Enough said.
There is one gotcha about 401k’s…
When you take the money out, it is taxed as ordinary income, even if it grew as capital gains.
Since taxes may go up substantially in the future, IRA’s and 401k’s can be a tax trap. This is especially true if you plan to retire at a comfortable income, in the not to far distant future.
Very encouraging. Thank you writing this.