Politics & Current Events
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Re: Are 401ks a failed experiment?
Ok, obviously I'm not as familiar with the specifics of the 401K, but up here we have RRSPs and they work quite similarly, so I think I can make a few comments.
The book "The Wealthy Barber" should be mandatory reading for high school kids, and college kids, and just about everyone. Because it really focuses on saving no matter what income level you are at, and working past the instant gratification and building your savings for the future.
I read it when I was still living with my parents, in a low income household, and decided to put away 10% of my income as a high school student for long-term stuff. I also got serious about saving for college, whereas prior i was more 'i will get a loan and worry later."
It really focused on making budgets and distinguishing between needs and wants, which *most* people have an extremely skewed view of.
DH (financial planner) says that about 85-90% of his low-middle income clients COULD save enough for retirement if they honestly planned for it, but they don't. He acknowledges that there are still 10-15% of the lower income families who couldn't save enough no matter how hard they tried unless they earned more $. But for the large majority, people make poor choices. And he works with people across a spectrum of incomes, so he's pretty knowledgable about saving on various income levels.
He says often the single biggest hurdle to a successful, moderately funded retirement is people's lack of knowledge and planning as to how to get there, and how much they will need. Its not just their income (or lack thereof).
Yes, the assumption is that your costs will be lower in retirement. No debt, probably no mortgage, and you will no longer be contributing to savings. So you can live on 60-80% of your pre-retirement income.
That still doesn't solve the problem that 20% of $60k is $12k, which knocks your income down to $48k/year before taxes, which will likely leave you with under $40k/year in actual income.
40/112
Often I feel this is a chicken and the egg argument. I can't save because I make poor choices. I make poor choices because I don't have any financial knowledge. Even if I can save, I gotta choose between eating cheese sandwiches, paying my utilities and retirement that is 50 years away. I'm gonna take the cheese sandwich because I need to eat and the water to wash my azz so I can go to work.
I think it's very easy to point fingers at people and say you make poor choices. But, we don't acknowledge that the system that is currently set up is flawed. Let's look at all the people who played by the rules and watched their saving disappear in a puff of David Copperfield smoke.
The game is broken. We need to acknowledge it and figure out how to fix it. We also need to get people to be better managers of their own funds, but we also need to recognize that 30K a year isn't a living wage and folks are struggling to wash their azzes and eat cheese sandwiches.
I don't know what the answer is, but I know it needs to be a combination of different methods that can help everyone.
But the problem with the safety net is that SS won't be enough.Gen Xer's, Gen Y, and the Millennials are screwed because of all the old boomers who will suck the dayum system dry. We can't even begin to count of a saftey net because it won't hold the weight of those who retire before us. Which again means that everything is a giant azz game and we're getting killed here.
I agree with that, but only for probably 10-15% of the population. There are always going to be people who will never make enough $ to save any. I said that in my post. I strongly believe in SS and a good safety system.
For the rest of the people who DO make enough but don't SAVE enough, we need to do better. But how? You can't force people to take classes, read books, pay attention, etc.
My question is, why do we expect every person in America to have the investing know-how and savvy to understand how to take their savings and invest it wisely? Because it's not just about saving money. You can be a great saver, put away 20% of your income every year, but if you put it in a savings account that pays 0.05% interest, it's definitely not going to get you through retirement.
Why do we just assume that everyone knows which investments are high-risk and low-risk? Why do we assume everyone knows what diversification means and how to do it? Why should we expect someone who reads at a 7th grade level to understand the fine print that comes along with their mutual funds?
And what about luck? What about people who have the misfortune to hit retirement when the market tanks?
Not everyone can afford a financial advisor, not all financial advisors know what the hell they're doing in the first place, and frankly, every citizen shouldn't *have* to hire a financial advisor just to be able to not eat cat food in their old age.
I don't think we expect everyone to know what to do. But I think the majority of people can CERTAINLY do far better when it comes to educating themselves as to what they need to do to save enough for retirement. Its not just about hiring fancy financial planner, its about paying attention to the stock market, asking friends and family for help, reading books (Wealthy Barber and Gail Vaz-Oxlade's books are great), etc. Staying and keeping informed.
Most GOOD financial advisors will sit down with clients for free and do a basic plan at least. They will also explain how they get paid (if its front-end or back-end on a fund, for example, or they get paid by teh fund company directly) and so on.
I dont think people should have to hire a financial planner. But I think people need to take more personal responsibility for at least knowing their financial picture, good or bad. A huge issue is that people just have no idea where they stand.
Paying attention to the stock market in what way? Most people, even educated people, have a hard time understanding the stock market. What hope is there for someone with barely a high school diploma?
Asking friends and family for help - for many people, their friends and family don't know anything more than they do about investing. Or they might have terrible advice.
Reading books - there are a million books out there, some of which have contradictory advice.
I just don't think it's that easy for people, particularly lower- and lower-middle class income people to become educated or informed about investing, let alone get good enough at it to make enough money to fund their retirement. Even wealthy, educated people lose lots of money at investing, after all.
The bottom line is, I don't believe that personal investing is what the majority of people should be relying on in order to survive during their old age. It's an inherently faulty system.
Mandated by the gov't, because otherwise we're all going to be on gov't assistance anyway. I don't disagree that it's a pipe dream, especially considering the difficulty of saving at lower incomes, but there it is.
It's not Social Security because it's private investment. Social Security is a trust fund that the feds use as a piggy bank. A mandatory 401(k) would exist as capital investment in the economy.
On another note, financial literacy should NOT be a barrier here. I've had some pretty bare bones non-match 401(k)s, and they all offered a targeted date fund. You don't have to know what investments are what, you don't have to change it as you get closer to retirement, you don't even have to pay a financial adviser.
You are lucky that all of your choices have targeted date funds. My 403(b) does not currently offer a target fund choice, and I have an excellent match (dollar for dollar up to 7%).
My H also works for a huge and well respected university in the Boston area that does not offer a target fund.
Trains Across America
Would you like to buy my condo in Salem?
Anyone who ever thinks one thing is THE solution is an idiot. Its never just one solution. But on the flip side, because it doens't solve everything doesn't make it a failure, either.
I agree.
I also think that just because SOME people have barriers to financial literacy, doesn't mean that more people can't take personal responsibility for educating themselves.
I know a lot of people with the means to educate themselves (or hire someone who can help) who just don't because they are either uninterested or lazy.
Again, I'm not talking about bootstraps here, I'm talking about knowing your financial picture, good or bad.
True. And again, 401ks/investing can be terrific for the right people. But there's been a huge push to make them the primary or only means of retirement funding in this country (remember the campaign to privatize social security?). Looking at how well they've worked for the first generation to retire on them, they've been an utter failure as a retirement plan for the masses.
I distrust people who say this anyway, that they're still down from the crash. It's been four years and the Dow is now up from 07. If you stayed the course and didn't take any money out of your funds, which is the most basic advice given to all but sophisticated investors, you should be up now too or at the very least back to where you were. Most should be up though because of continuing to contribute. I wonder if people who toss this kind of comment out just haven't checked their balance in a while.
I agree with snapple. Targeted funds outperform those who choose their own funds, who outperform those who choose their own stocks. Actually I think the problem is not that people don't know how to invest, it's that they THINK they do.
Also, I fundamentally disagree with the premise of comparing a mandatory/fixed program like a pension with an optional one like 401(k).