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May 04, 2013

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rjack (Mr. Asset Allocation)

"Seems to me, despite the many flaws of our 401(k) system of retirement, we are really our own worst enemy. And that part, we can do something about."

I agree. The average person has no idea how to invest his money so that he can earn a decent return. He also panics when the stock market crashes instead of rebalancing and, as a result, buying more stock.

I'm not sure what the solution is. Maybe we need more education or a different retirement system.

Banjo Steve

Which is a partial justification of the Social Security system. While not perfect by any means, it does provide a modicum of retirement income via required "savings".

The irony also is that there is SO MUCH information about sane investing on the web and other media (like your CBS tape mentioned), but still so many people choose to bury their heads in the sand, replete with a "what's the use?" attitude. To use an agricultural phrase, too many people are eating their seed corn.

deegee

I watched the PBS show and have read a lot about it in an early retirement forum and in Bogleheads. The main points in both places is that people don't save enough for retirement which is a separate issue from high fees. But that being said, it was great watching those fund managers squirm when asked some pointed questions about fees.

Cathy Severson

First of all, I love the title of the blog. Great!
There were a number of points made in your piece. The reality is the majority of people are not going to have the income that financial experts think they should. Unfortunately, I think the financial industry has contributed this in a number of ways, least of which is the fees. I also know people are more resilient and creative than we give them credit. Between cutting expenses, finding interesting ways to earn money, many people will figure out how to move into retirement. Housing and healthcare will continue to be the biggest issues. It's amazing what people are doing with housing. Healthcare is a total disaster without any good solutions that I've seen.

New at this

Good post. It reminds me that there really are two types of people in the world, call them D's and R's for lack of more creative naming.

The D's seem to believe that the world should be "fair". And if they had the good sense to be born in America, they are entitled to certain things like free housing, cell phones, healthcare, and yes, even a work-free retirement - all paid for by some guy (or gal) standing behind a tree.

The R's on the other hand seem to believe that if they want things like retirement, a luxury that has really only existed in this country after the 1950's, then they better figure out how to earn it. Part of earning it is learning how the system works.

As pointed out by Banjo Steve, its really not that difficult to learn. The info is free and ubiquitous on the internet. All one has to do is apply just a modicum of effort and they will quickly understand that the mutual fund industry, just like the Casino industry, is selling a facade of easy riches to anyone who is simply too lazy to look behind the curtain.

P.S. The next charade being sold, which really wasn't highlighted in the PBS show, is the "Bond fund". Anyone putting money in one of these today, a moment in time when interest rates are near zero, will be among the next populist movement to elect someone to "punish" all those other people who wisely avoided this glaringly obvious trap.

retireby40

That's why I think people who complain about the $3 million IRA cap is crazy. There is no way an average worker will save that much in their retirement fund.
Most of my retirement portfolio is in Vanguard funds so at least I don't have to worry about high fee.
Thanks for sharing those shows. I'll check them out.

Retired Syd

New: I think for the most part, you are giving people too much credit. I don't think people even think about it as much as you indicate (factoring in whether the they think they are entitled to "free stuff" or whether they have to figure out their retirement plans.) I frankly think the vast majority of people just don't think about retirement at all. It's such a distant, far-off venture. They are busy thinking about raising kids, saving for college educations, saving for a house, that kind of thing. The immediate stuff is just more pressing. I think that's pretty understandable.

I've often wondered if, like rjack mentions, we should be addressing retirement planning, investing, just basic personal finance, in our education system. I learned biology, geometry, English literature, American History, and a whole bunch of other things that were, I guess, important in school. But most of that stuff is stuff I never used again. Personal finance--I use that all the time. And if we're expecting everyone to take care of their own retirements, wouldn't it be a good idea to give them the basic tools in school to be able to approach that without getting freaked out about it later in life?

Who knows. But it does seem like I get a high proportion of emails and comments from early retirees that were CPA's. So rather than divide the successful retirees between D's and R's I think it might be more like the A's and O's (accountants and others).

Retired Syd

RB40: I've read a lot about that $3M "cap," which, by the way is not law--it was included in Obama's budget proposal which has about a negative million percent chance of getting passed anyway . So I don't really know why so much airtime is being spent on it.

But most people misunderstand that provision in the first place. It doesn't actually cap the amount you can have in retirement accounts, it simply takes away the tax subsidy (deduction) for your future contributions after that point. I'm not sure why people think that is a bad idea--why should I be subsidizing the retirement accounts of someone that has that much already. They are free to save more if they want, they just have to use all their own money at that point (instead of mine or yours).

Like I said, I'm not too concerned about this one anyway, for one thing it only affects .11% of our population and has no chance of passing anyway. Interesting how they can get the rest of the 99.89% of folks so lathered up on this.

Retired Syd

deegee: Yeah, didn't you love when they asked that woman (I think she was from J.P. Morgan) about the studies showing the majority of actively managed funds underperforming the index funds, and she said she has never seen any such research? Makes you think she's really informed, right?

New at this


I think providing a basic financial understanding is the most obvious thing in the world to teach in school....And I can't think of any reason, other than one laced with conspiracy theories, why we don't correct it....But note that the Federal government sets our schools curriculum, controls teachers unions, and most importantly, controls the purse strings....And the way they maintain this power is ensuring that at least 51% of the population continues to be dependent on them for "free stuff" - so they continue to vote for them. (This phenomena has repeated itself throughout history, in virtually all cultures.....Kings have always been careful to keep their subjects needy and dependent)

But as far as giving people too much credit, I know an awful lot of people, from all walks of life, and few of them ever seem to be as dumb and incapable as the media and politicians like to portray them to be....In real life, people have an amazing ability to exploit whatever system we put out in front of them....Just look at the way welfare gets exploited - those who receive it seem to have no problem learning the intricate details of how best to get as much as possible from these programs (including understanding who to vote for in order to keep the goodies flowing)....

As for the A's and O's, if your a king (or Queen), you like the O's a lot better.

Retired Syd

New: I don't totally disagree with you on learning to game the system--a lot of folks do it at the other end of the wealth spectrum too, with taxes. But here's what I don't understand. Contributing to a 401k and at LEAST getting your employer's free-money (match) (or contributing more and getting tax deferred money on your own contributions and earnings)--why aren't more people on to that game? Why isn't everyone lining up to take advantage of this boondoggle?

New at this

When America was polled to ask if they were willing to have their taxes raised to pay for Obamacare, almost 100% said "NO".

When the same Americans were asked if they were willing to have someone else's taxes raised to pay for Obamacare, 60% said "YES, I am compassionate to help those in need."

The reason people don't take advantage of the 401K match is that it requires them to sacrifice their own stuff in order to receive it. By contrast, you'll find near 100% participation in programs that don't require the employee to contribute any of their own money.

Retired Syd

New: Ok, one more argument for my proposal that folks just really don't think about it that much. Recent research has showed that companies with auto-enrollment for their retirement plans have much higher participation rates than for those plans where participation is entirely up to the action of the employee. So, it seems people aren't that opposed to putting up their own money to get the free money, because they don't turn around and elect-out of the program if auto-enrolled. It just seems people do whatever requires the least effort. If it was just about putting up your own money, there would be no difference among the two approaches, right?

New at this

Haven't seen that research, but its interesting when viewed along side the near 100% participation rate observed in programs that don't require any employee contribution (auto enrollment or not)....

Perhaps when auto-enrolled, a new variable is introduced.....people may not want to "disobey"...

Pretired Nick

I just watched that (and wrote about it) myself. I think they missed a few key points, but they did a great job exposing the fee scam. It's really sad how people are blind to this issue.

fred doe

IF you haven't figured out the financial industry is cheating you by now and if you happen to have a college degree then you need to mail that degree back to your alma mater:) I agree with NEW AT THIS if some dose not have the savvy and hard work ethic to make their own secure retirement and pay their own health care then let them die and degrees the surplus population:) The new american motto is Caveat Emptor or in god we trust,all others pay cash. As far as teaching this in college. Well the higher education industry might be the next scam? Oh wait their all ready saying that:) Sorry syd you caught me at a bad day, loved that cheese cake though thanks.

Tom Sightings

I agree with almost all of the above. But three other points:

1) It's HARD to save money, esp. if you're trying to raise a family on $40K or $50K or less a year, as a lot of people are. Just maybe it makes sense for lower income people not to try to save for retirement. They still have Social Security, which will at least keep a roof over their heads ... and that's a good reason to protect Social Security benefits for present and future generations.

2) While I agree it's a good idea to teach basic personal finance in high school, not everyone has a "head" for money ... just like not everyone can draw, or play music, or are good at math. Another reason to protect Social Security, to provide at least a base level of support in retirement.

3) There's no reason to feel bad, or feel like a "failure" if you can't afford to retire at age 60 or 62, or even 66. I know a lot of people who find it rewarding -- and who also find self-respect -- while still working into their late 60s and early 70s, even if it's not a high-paying career-type job.

Retired Syd

Tom: Further to your point in #1 and also to Banjo Steve's point about Social Security, from the SSA's website:

"Among elderly Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.
Among elderly Social Security beneficiaries, 23% of married couples and about 46% of unmarried persons rely on Social Security for 90% or more of their income."

$40-50k I believe is our national median salary range. Our social security system is even more crucial to the average earner. If we don't protect that retirement system, we are in even deeper trouble for the reasons you mention.

Cyclesafe

Positioning and spinning to game the system, whether it's the makers gaming the tax code or the takers gaming the entitlement regs - it's rational behavior for the individual. These loopholes need to be plugged so these respective behaviors, collectively inefficient for the greater good, are extinguished.

Jacq

Well, FWIW, when Canada put in place universal health care, it wasn't a seamless process without opposition.
Most accounting types that I know won't be able to clock out until ~55. That seems to be the norm among my friends.
Every company that I've worked at forces you to join the RRSP / defined contribution/benefit programs at work so I don't really get this opt-out thing. But I do think my son had to opt-in to his plan at his current employer. I filled out his forms and he's in. :-)

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