401ks and IRAs are they enough?

[jazz4cash]

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Originally Posted by chinaco I agree that a company match is good... what I do not like is the way the plans are managed. (limited fund choices and high fees).

It's ironic that the Employer loves the lack of long term liability/responsibility for DCB participants yet retains so much control (in selecting key provisions of the plan that include fees, options, etc.) It's more reasonable IMO to consider 401k as an ongoing experiment. It is being used in a way that was not foreseen and is afterall a clever manipulation (loophole, accident, whathaveyou) of the code.

Recent developments incl Target funds, automatic signup, etc. are improvements, I believe.

It's important to consider this IS the worst financial market in 60-70(?) yrs and not overeact.

[Architect]

Quote:

Originally Posted by jazz4cash It's ironic that the Employer loves the lack of long term liability/responsibility for DCB participants yet retains so much control (in selecting key provisions of the plan that include fees, options, etc.) It's more reasonable IMO to consider 401k as an ongoing experiment. It is being used in a way that was not foreseen and is afterall a clever manipulation (loophole, accident, whathaveyou) of the code. Recent developments incl Target funds, automatic signup, etc. are improvements, I believe.

Well said! I'm skeptical of 401k's - about 1/3 of my net is in mine, and it hasn't worked out well. Initially we had crummy funds and I was an uneducated investor, and it did terribly. On other other hand I did eventually save 1/3 of my net worth, but you're right, it's an ongoing experiment.

It's a wee better now, they actually junked the Fido lifestyle funds and went to Vanguard, amazing they broke the Fido stranglehold.

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It's important to consider this IS the worst financial market in 60-70(?) yrs and not overeact.

Goddamn brilliant.

[W2R]

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Originally Posted by SteveL Despite high fees etc. if a 401k provides a match of half or 3%, then even a person making $10/hour for 40 years could end up with a significant accumulation. The challenge, is that a person making $10/hr can't afford to save 6% via a 401k, and still eat.

I am skeptical about that, although it is obvious that a person living on that amount would not be living up to the standards of past workers in similar jobs.

$10/hour is $400/week which is $400*52/12 = $1733/month. Minus 6%, it is $1629/month. As I recall, at this income level and low tax bracket my take-home pay was about 80% which would be $1303/month take-home pay.

This is enough for a single person with no dependants to eat. If food costs $300/mo, and if the individual shares the rent for a $700/mo apartment with one other person, that leaves $653/mo to pay for other expenses besides food and rent. This is not a life of luxury, or a life in San Francisco or Manhattan (neither of which is affordable for many of us who have higher salaries, either) but it is not true that it is not enough to live in most U.S. locations and still eat.

Now, the difference in take-home pay using the above assumptions and no 6% contribution would be $83/month - - $1386/mo take-home vs $1303/mo take-home with a 6% 401K contribution.

Neither of these salaries are enough for an individual to support an entire family nicely. The days in which even low income families could support a non-working spouse seem to be over. And sadly, single parents with low paying jobs are having to moonlight. But I don't blame the 401K for these economic problems, because I think most people would have difficulties in making ends meet while supporting a non-working spouse or being a single parent even without paying into a 401K.

[samclem]

Just to be clear: What we are saying is that people, in general, are not capable of taking care of their financial lives. The electorate (composed of those who fail and those who do not) has decided that those who fail should be taken care of by those who are successful (or at least those who have not yet failed). So, we all have an interest in assuring no one fails, even if this results in reducing the chances for others to succeed (by confiscating their money at higher rates, forcing them into approved "safe" investments with lower yields, etc). This may all be a good thing, I just want to strip off the bark and see what we are talking about.

Social Security and welfare programs can perform a valuable function. By providing a minimum stipend that allows the poorest to keep body and soul together, they reduce the motivation for rioting, mob action and other socially/economically disruptive events. Taxpayer-funded retirement benefits above the subsistence level don't help accomplish this goal, and they reduce the vital link between work and reward. Right now Europe is cutting their cradle-to-grave welfare state benefits because these economies can no longer compete in the world market--it's not the time for the US to discover the beauty of socialism.

401Ks and IRAs are not enough, but they are a start. They could be simpler.

Maybe we can benefit from some type of additional account that has training wheels and handholding (more nanny-stateism, but better than some alternatives): A small government (taxpayer) match, a slate of investment options that is bounded, and withdrawal options that include a set of private or even government-sponsored single-premium annuities for those who want them. I'd rather do this than have some more "everyone throw their money into the big pot with everyone else and we'll all get something out later."

[NW-Bound]

SS as it is right now is a form of welfare. Person A who puts in twice as much as person B, whether by contributing twice as much or working longer will not draw twice the benefit.

In the current system, SS subsidizes low-wage earners with contribution from higher earners. You can go to ssa.gov to download the benefit calculator, enter in different hypothetical salary histories to see for yourself. For me, if I continue to work till I am 65, vs cruising until then, the difference was only a few percent in payment.

That said, same as samclem, I believe SS provides a safety net for most people. However, despite the problems with the incredible shrinking 401k accounts, expanding SS and taxing workers more will not work, unless fundamental changes are made. How about personalized accounts, with additional contribution encouraged?

It is sad that efforts to have truly personalized SS accounts failed. People will save more if they know additional contributions mean more money for them later on, and not being diverted to spendthrifts who later complain of being among the have-nots.

[Independent]

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Originally Posted by samclem Just to be clear: What we are saying is that people, in general, are not capable of taking care of their financial lives. The electorate (composed of those who fail and those who do not) has decided that those who fail should be taken care of by those who are successful (or at least those who have not yet failed). So, we all have an interest in assuring no one fails, even if this results in reducing the chances for others to succeed (by confiscating their money at higher rates, forcing them into approved "safe" investments with lower yields, etc). This may all be a good thing, I just want to strip off the bark and see what we are talking about. Social Security and welfare programs can perform a valuable function. By providing a minimum stipend that allows the poorest to keep body and soul together, they reduce the motivation for rioting, mob action and other socially/economically disruptive events. Taxpayer-funded retirement benefits above the subsistence level don't help accomplish this goal, and they reduce the vital link between work and reward.

I agree with what (I think) Sam is saying here. We already have one gov't mandated retirement income program. It provides an income floor for everyone. There is no reason to go any further. Whenever we give a tax incentive to DB pensions, 401k's, IRAs, etc. (or start talking about mandatory savings programs) we set ourselves up for more gov't intervention in the name of protecting us from our own foolishness. This involves trade-offs that aren't attractive to me.

I'd say that all the attempts at revising our retirement system are chasing the same rainbow. We want to work for 40 years then spend 25 years retired with an income close to our income when we were working. But we aren't willing to part with enough of our working income to make the numbers work. So we are constantly looking for the pot of gold.

[Independent]

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Originally Posted by kyounge1956 However, if by "private" you just mean "non-governmental and non-employer", I think that might work, and be a way out of the impasse. Some of the ideas proposed toward the end of the article are interesting. I also wonder if it would be possible to set up cooperative, defined-benefit pension funds through various organizations that people affiliate with, such as their church, labor union, service club, alumni association or similar, or through credit unions. I think at least some insurance companies originated as mutual assistance societies of various sorts...why not pension funds? These cooperative pension funds could be professionally managed, as corporate or governmental defined-benefit pension plans are now, and offer the same type of benefits for the lifespan of the employee, with options such as a survivor benefit for spouses, possibility of getting a lump sum payment etc.

As often happens, this type of thing has been available in the past. Most life insurers started as mutual companies or fraternal benefit societies. They offered retirement annuities that required you to pay a fixed, annual premium, and guaranteed a fixed monthly benefit at retirement age. They had options for survivor benefits and different retirement ages. They did not index benefits for inflation, and hence these products faded away when inflation became a fact of life.

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I'm not enough of an economic analyst to know whether it would be feasible to allow employees to redirect the social security tax they now pay into one of these funds, or to split it between SS and a cooperative pension plan.

Unfortunately, SS benefits payable over the next 17 years are approximately equal to the projected taxes. So if we want to "redirect the social security tax" we need to reduce benefits to current and soon-to-be retirees or come up with some other source of funding.

[ziggy29]

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Originally Posted by Independent Unfortunately, SS benefits payable over the next 17 years are approximately equal to the projected taxes.

Perversely, if this economy and the state of many 401K plans leaves many Boomers in the work force longer than they planned, this might not be *as* bad as planned.

Though at some point in the future, if the markets "fix" enough defined-contribution retirements, there could be a sudden exodus. Same could be true if major health insurance changes take place. I suspect that a government program to sever employment from health insurance took effect, a LOT of 50-somethings and early 60-somethings would be looking to bail, as I'm sure more than a few are only working for the health insurance...

[jIMOh]

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Originally Posted by chinaco I can't vouch for her. But I can say with certainty that the 401k program is lacking in two obvious ways. It is not an adequate replacement for a professionally managed pension (looking at just the company contribution... if they do). The money I contribute is saddled with extra fees and funds that do not beat the indexes (hardly ever). I could do better on my own. I am sure others have the same problem Then the nature of the thing having built-in fragmentation (trying to manage money in multiple 401k/IRA accounts.

What makes you think the professionals managing a pension will do better than the professionals managing a mutual fund? Does one group have a different knowledge set or different goal (or different set of rules) which suggest they have an advantage?

Your 401k is giving you a tax break, and I bet even with the fees the tax break and match still trumps the fees.

I am on 401k #4, and have been working for 11 years (2009 will be 12).
401k #1 was T Rowe Price
401k #2 was Vanguard with a fee wrapper- still low
401k #3 was Vanguard without fee wrapper
401k #4 are institutional funds with ERs lower than most funds (managed large cap fund is .29%, managed small cap .63%, managed foreign .45%, emerging markkets .75%).

My wife is on 401k #3 and her funds are good. I can piece together an asset allocation of
45% large cap
15% mid cap
15% small cap
15% foreign large cap
10% foreign small cap/emerging markets

in each, with maybe one or two asset classes missing (for example if mid cap is missing, I can bump small cap up to 30%, or if emerging markets is missing I can bump foreign large cap to 25%).

Just because a 401k does not give the specific funds with the lowest expense ratios on the planet does not make the 401k bad. Expense ratios are one of three direct variables most people control. Of the 3 variables (asset allocation, savings % and expense ratio), expense ratio has the least significant impact on overall return.

Turning retirement planning over to government is bad- look what they did with the SS surpluss.
Privatizing SS is equally bad- look at what happened when other countries did this (their markets collapsed).

The bext solution is to lower the SS tax from 6.2% by .2% every 5 years, while also raising the minimum retirement age 3 years each time. What this will do is eventually push SS payments to retirees to around age 75 or 80. This will keep the program solvent and index payments based on increasing life expectancies without reducing benefits. It will also force anyone wanting to have a long retirement to do as most on this board do, which is increase the savings rate one contributes to retirement.

[ziggy29]

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Originally Posted by jIMOh What makes you think the professionals managing a pension will do better than the professionals managing a mutual fund? Does one group have a different knowledge set or different goal (or different set of rules) which suggest they have an advantage?

It's not a given. But even so, it's a question of who bears the risk.

If I invest my 401K prudently for my age -- even if I make reasonable and age-appropriate asset allocations and keep them over time -- if the market sucks, I bear all the risk and my retirement can be blown up if the 401K underperforms reasonable long-term expectations because of bad market conditions.

In a pension plan, the participant bears relatively little risk in most cases. Much of the risk is shifted to the company (or worse, the taxpayers) if there is a chronic shortfall caused by a terrible market. They'll (most likely) get what was promised to them or close to it.

Believe me -- I would MUCH rather have another deep-pocketed entity bear the risk than me. But many of us don't have that luxury.

[jIMOh]

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Originally Posted by ziggy29 It's not a given. But even so, it's a question of who bears the risk. If I invest my 401K prudently for my age -- even if I make reasonable and age-appropriate asset allocations and keep them over time -- if the market sucks, I bear all the risk and my retirement can be blown up if the 401K underperforms reasonable long-term expectations because of bad market conditions. In a pension plan, the participant bears relatively little risk in most cases. Much of the risk is shifted to the company (or worse, the taxpayers) if there is a chronic shortfall caused by a terrible market. They'll (most likely) get what was promised to them or close to it. Believe me -- I would MUCH rather have another deep-pocketed entity bear the risk than me. But many of us don't have that luxury.

AGREED. On all points except the red one.

But the COST of the risk you transfer is
a) more restrictions on when money is accessible (age or years of service)
b) reduced or controlled benefit (meaning you cannot take a large payout from pension the first year of retirement to travel the world like you could from a 401k)
c) the pension is subject to corruption by others (Pension could be underfunded, have bad leadership or similar), the 401k is subject to the fund you invest in and yourself.
IMO because a fund and the company which manages the fund has a reputation riding on their actions, there is more accountability with Vanguard than there is in a GM, Xerox or other megacorp pension.

But each individual needs to assess that risk for themselves.

[ziggy29]

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Originally Posted by jIMOh AGREED. On all points except the red one.

If pension funds made guarantees based on a fairly sober (and realistic) long-term rate of return, I would feel differently. But many of them are making pension promises based on returns of north of 8%.

If I could get someone to manage my 401K with a virtually guaranteed 8% with little to no risk for me (because another party bears almost all of the risk), you bet your boots I'd take it.

If they offered something more realistic like 5-6%, then I'd reconsider that. But based on the prevailing assumed ROIs pension participants are being promised, yeah -- in a nanosecond I'd take an almost sure-thing 8%.

[NW-Bound]

Quote:

Originally Posted by ziggy29 ... In a pension plan, the participant bears relatively little risk in most cases. Much of the risk is shifted to the company (or worse, the taxpayers) if there is a chronic shortfall caused by a terrible market. They'll (most likely) get what was promised to them or close to it. Believe me -- I would MUCH rather have another deep-pocketed entity bear the risk than me. But many of us don't have that luxury.

Can a government be too big to fail? After the collapse of the Soviet Union and the Eastern block, their retirees were left sucking air... I am not saying we are anywhere near that, but one should be aware that there is never a free lunch.

Quote:

Originally Posted by jIMOh The bext solution is to lower the SS tax from 6.2% by .2% every 5 years, while also raising the minimum retirement age 3 years each time. What this will do is eventually push SS payments to retirees to around age 75 or 80. This will keep the program solvent and index payments based on increasing life expectancies without reducing benefits. It will also force anyone wanting to have a long retirement to do as most on this board do, which is increase the savings rate one contributes to retirement.

Recently, I read that China also abrogated the promise to its senior citizens. Hence, the Chinese now have the savings rate of 45%, the highest in the world. They make the Japanese look like spendthrifts. Their government has to tell them it's OK to consume more.

Still, a problem remains. If everybody saves, we do not automatically find ourselves in paradise. There have to be some workers, someone who produces to support the retirees living off their investments. So, I will stop badmouthing the "spendthrifts". They make my early retirement possible.

[jIMOh]

Quote:

Originally Posted by NW-Bound Quote: Originally Posted by jIMOh The bext solution is to lower the SS tax from 6.2% by .2% every 5 years, while also raising the minimum retirement age 3 years each time. What this will do is eventually push SS payments to retirees to around age 75 or 80. This will keep the program solvent and index payments based on increasing life expectancies without reducing benefits. It will also force anyone wanting to have a long retirement to do as most on this board do, which is increase the savings rate one contributes to retirement. Recently, I read that China also abrogated the promise to its senior citizens. Hence, the Chinese now have the savings rate of 45%, the highest in the world. They make the Japanese look like spendthrifts. Their government has to tell them it's OK to consume more. Still, a problem remains. If everybody saves, we do not automatically find ourselves in paradise. There have to be some workers, someone who produces to support the retirees living off their investments. So, I will stop badmouthing the "spendthrifts". They make my early retirement possible.

45% savings rate is too high. That is not what I was suggesting is needed (it might become part of the law of unintended consequences).

If every American put aside 10% of gross pay into a retirement plan, they would be set to retire after working close to 45 years (age 25-70). Basic compounding would take over around year 25 or year 30 of working (meaning the gains of the portfolio would be 10X larger than the 10% contribution).

[NW-Bound]

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Originally Posted by jIMOh 45% savings rate is too high. That is not what I was suggesting is needed (it might become part of the law of unintended consequences).

I wouldn't want to live such an ascetic life, would you?

About savings, it only makes sense if society "knows" how to invest it wisely. For example, a country cannot stockpile its savings in gold and hope to finance its retirees later with that gold. What works for an individual might not work for society. I am not an economist, so do not know how the US should invest our savings as a nation. But I think putting it in McMansions that require more resources for maintaining will not cut it. But then, what do I know?

[kyounge1956]

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Originally Posted by Independent Quote: Originally Posted by kyounge1956 (snip) I'm not enough of an economic analyst to know whether it would be feasible to allow employees to redirect the social security tax they now pay into one of these funds, or to split it between SS and a cooperative pension plan. (snip) Unfortunately, SS benefits payable over the next 17 years are approximately equal to the projected taxes. So if we want to "redirect the social security tax" we need to reduce benefits to current and soon-to-be retirees or come up with some other source of funding.

I should have said, but didn't, that with such an alternatative pension plan, my Social Security benefit should be reduced proportionate to how much of my Social Security tax I redirect. If I pay full SS tax I get full SS benefit; if I redirect half the tax I get 50% of the payment, etc.

[Dennis]

20/20 Hindsight for Babyboomers..?

> Prior to 1995, most of us (Babyboomers) didn't have PC's , let alone know much about Financial Websites
> And many Didn't even WANT a PC !
> We were Sheep.. led by our employers to Put our $ into their #401k's that had Load Funds and Excessive Fee's ...and who knows, Kick backs even to the Employer..in some form or another..
> Obama's and the Dems Idea for Converting #401/#403 plans Into SS would have been the best.. Since most would be getting at least 50% more SS in return..( $30+k vs $20k) now...

> For Our Kids and grandkids? Eventhough they have Alot better PC Experience and knowledge? Their still is way too much Influence by WALL STREET hyping and conning them to Invest in Stocks to get Big gains!
> And maybe Covnerting their #401k/#403's into SS is A good Idea for most of them too...
> And With States & Cities /State & City employees Pension plans Devistating their Budgets? This Conversion could be A Solution as well...

of course, WALL STREET and Insurance Co.'s will fight this to the Death.. and understandably so.. but none the less..

Putting a Couple of Thousand a Yr in my #401k and IRA gave me Very Little in relation to the Whole Picture, come retirement time..Seeing as only made abuot $30k yr in my last 10 yrs and less earlier..

If i hadn't listened to my Dad and Got a 15 yr Mort. and paid it off and just let that House Accumilate in ave 8% APY for the next 20 yrs? I'd be alot Poorer for my retirement today..( Got over $500k on the house when Sold and downsized) and had over $400 k extra + My Retirement Place.. to boost my Retirement savings.. by 300%..

I stressed to my kids to (a) Get a Home and 15 yr mort and (b) invest in nothing more than a 50/50 Bal. Portfolio..

Keep upgrading into a Bigger Home as you can afford..just have it paid for 5-10 yrs before you want to retire and then Get a retirement place, rent it out and fix it up the last couple of yrs before you move into it..

This Forced them To Have to save more and Live on less...ie: Live with-in their means...

Of course they are all 'College Kids' and make 3-4x as much as I ever did, but it's all Relative.. They all have $500k-$1 Mill. Homes, 15 yr mort and doing just fine.. In 20 -30 yrs from now? Those Places will be worth more than enough for them to Sell and retire comfortably ...

and it has and is paying for for them now...and are alot happier they did..

[Dennis]

Well, maybe.. but If you had a Balanced Portfolio in all equities during the last Bear market? you would have been going into 03' being down over 16%

a 70/30 = Dwn -3%
a 60/40 = + 4%
and a 50/50 = +8%

Worse 08' market in 70+ yrs? and doubtfull won;t happen again?

Maybe, but Me thinks with all the Newer methods for "playing and Manipulating" the market now, btwn Hedge Funds, Shorting/Inverse Funds and alot smarter ,but devious people having access to High Credit/margins?

Their will be More 08' markets in the decades ahead, not less..

This 08'market has a Silver Lining.. A Reality Check if you will..
for most Investors to reduce their Expecations and Be alot more Conservative and inturn, it will force them to have to save more to achieve their Goals ...

Now Businesses and retialers Won't like it, but the fact remains..If we cannot or will not Save More? Then Our Gov't has to force us to do this, like they do with other Countries and their retirement plans.

And give us the Option to Opt out is not an option either.. If it is? Then those who decide to Opt out? Suffer the Consequences.. including being homeless and Not be bailed out either..Once their kids see their parents Living in Poverty, they will learn, like our parents did in the Depression days...

To save alot more and Live within one's means..

especailly if your son has to have his Mother-In-Law live with them...

[NW-Bound]

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Originally Posted by kyounge1956 If I pay full SS tax I get full SS benefit; if I redirect half the tax I get 50% of the payment, etc.

SS is a progressive tax. Right now, if you pay 50% into it, you actually get more than 50% out, compared to someone who pays 100%.

You can go to ssa.gov to use their online calculator, or better yet a detailed calculator that you download and install on your PC. I believe the latter is the same that SSA employees or agents use to compute your actual benefits. Have fun.

Choose A Benefit Calculator

[samclem]

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Originally Posted by NW-Bound SS is a progressive tax. Right now, if you pay 50% into it, you actually get more than 50% out, compared to someone who pays 100%.

Just to clarify: the SS tax itself isn't progressive (everybody pays the same rate, up to the income cap). The benefits are highly progressive. For lower income workers, SS is a great deal--they will withdraw, on average, far more money than they put in. Higher income individuals get a far worse deal--they often average a payback similar to having earned less than 1% on their "contributions."

Example (from the SS calculator here). An individual retiring this year at age 66 who earned $15K per year for the last 25 years would get a check of $819 per month. An individual of the same age who retires this year and earned $60K per year for 25 years would get a SS check of $1803. The second individual paid 4 times as much in SS taxes, yet his check is only 2.2 times as large.

SS is a double-axis wealth transfer: from the young to the old, and from the middle-class and wealthy to the poor.