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Started By
Message
re: Are any of y'all anti- 401K or IRA
Posted on 5/3/13 at 11:58 am to ZereauxSum
Posted on 5/3/13 at 11:58 am to ZereauxSum
quote:
ETA: Russian types faster than I do
0
Posted on 5/3/13 at 2:46 pm to TheWiz
My biggest complaint with retirement accounts is the number of different types and different rules for each one of them. (Simples, SEPS, Single Ks, 401ks, defined benefit, IRAs, Roths, 403bs,etc)
I think that the IRS should have two types of retirement accounts: Roth and Retirement account. We should all be able to contribute the same amount or percentage and be able to choose our own provider for the investments. This would eliminate the need for several chapters of IRS code.
The employer could choose to match or not, and it would be funded just like any payroll deduction.
I think that the IRS should have two types of retirement accounts: Roth and Retirement account. We should all be able to contribute the same amount or percentage and be able to choose our own provider for the investments. This would eliminate the need for several chapters of IRS code.
The employer could choose to match or not, and it would be funded just like any payroll deduction.
Posted on 5/3/13 at 9:57 pm to tigerrocket
quote:
I think that the IRS should have two types of retirement accounts: Roth and Retirement account. We should all be able to contribute the same amount or percentage and be able to choose our own provider for the investments. This would eliminate the need for several chapters of IRS code.
Yea, they're all about making things as simple as possible
To be fair, legislative bodies send them crap piled on crap, year after year without ever getting rid of anything old...
Posted on 5/3/13 at 10:17 pm to TheWiz
quote:
The average expense ratio in a 401(k) is about 3%
Anybody here have an expense ratio anywhere close to this?
Posted on 5/3/13 at 10:22 pm to CoolHand
quote:
Anybody here have an expense ratio anywhere close to this?
In mine there is NOTHING over 1%, avg expense ratio for my 401k elections is <20 basis points.
Even the priciest options in my 401k (managed through Hartford) are all under 1%
Posted on 5/4/13 at 1:05 am to TheWiz
There are problems with 401ks - lack of control over investments, Mutual fund fees, etc....not sure a 401k plan is the best vehicle for everyone to plan for retirement and definitely if your 401k is your sole retirement plan you may find yourself in serious trouble....but as a piece of your retirement...you could do worse.
Posted on 5/5/13 at 7:52 am to cwill
quote:
Mutual fund fees
What kind of fees are you paying that make your 401k unattractive?
Posted on 5/5/13 at 12:28 pm to TheWiz
quote:
Allow me to explain the "Lies of Averages". If you take the gross market returns (no fees) of the S&P 500 from 1980-2012, you'll find that the index has averaged 12.55%. This sounds great. You'll sit down with your advisor or you'll jump on a financial calculator and insert 12.55% for the average return and determine if you put $205 into your 401(k) you'll be a millionaire in 33 years! You'll think, "I'm all taken care of!"
The reality is far from the fiction. For the simplicity of math, I'll assume a starting balance of $10,000 and no additional contributions. The ending amount isn't the point...it's the principle that I'm want you to grasp.
I'll start out describing the perfect investment. The perfect investment is one that has no losses, no fees and no taxes. Today, want you to focus in on the losses and the fees part. We'll dig into taxes on a later date.
Using the perfect investment scenario, you sit down with your advisor and he shows you that the market has average 12.55% over 33 years and your $10,000 will grow to $494,767 because that is what the market has averaged. True, it did average 12.55%. But average and actual (you spend actual) are two different beasts when you deal with scenarios that you can have losses in.
Here is a quick illustration: Add 100% gain plus a 50% loss. What is the average? What can you spend?
Back to the prior example. The perfect investment at 12.55% average has your $10,000 growing to $494,767 in 33 years. However, the real ending value (factoring real gains and real losses) has you at $323,889! The losses cost you $170,878! Recall the conversation that you probably had with "your guy"..."Hang in there, the markets will come back, they always do, you just have to ride it out, don't bail out now...." This advice sounds great, but in real life it cost you $170,878! How many years of retirement income is that for you?
Now do you see what I mean when I say the "Lies of Averages"?
Let's apply fees to the "Lies of Averages". The average expense ratio in a 401(k) is about 3%. Some more and some a bit less. The more aggressive the fund, the higher the fees. Other plans have much higher fees (I've seen some 403(b) plans as high as 5%).
When applying the fee to the 12.55% gross average return of the S&P 500 you are left with 9.55% average. The perfect investment scenario (no losses) would have your $10,000 growing to $202,767. However, the real numbers have your $10,000 only growing to $129,402!
If you recall, at 12.55%, $205 per month for 33 years would have you at $1 million dollars! Add in the 3% fee and this number is reduced to $522,505 AND this doesn't even include accounting for the losses! The fees have cost you nearly $500,000! How many years of retirement is that? With six losses in 33 years for the S&P 500, this $522,505 would be around $260,000 after factoring in those losses!
Let's role play for a moment. You're 33 years old and you walk into a Wall Street advisor's office or you pull up the financial calculator on your online 401(k) account and you figure you want $1 million when you're 66. You see that the market has average 12.55% and you decide to put in $205 into your 401(k) plan or other retirement account. In your mind, you're all set and you rebuff any person's attempt to shed light onto your situation because you're convinced that "you're all set". Fast forward 33 years and you're 66. You've ridden the wave of ups and downs and you got the advice from everyone to "hold on, ride it out, the markets will rebound" and now you're 66 years old. You look at your account to see that you only have $260,000 in real money (that will be taxed at a yet-to-be-determined tax rate when you pull it out). A far cry from that $1 million your calculator told you that you'd have.
What do you do now? Back to work. You put off all of your dreams to age 66 only to find out what you were told isn't true and isn't a reality. According to the Census Bureau, of the people that started working at age 25 and are now turning 65, 1% is wealthy and 4% have enough put away for retirement. Of the remaining 96%, 29% are dead. That leaves 67% dependent on government (Social Security), family (their adult children), friends, charities and employment.
A bit of a side note, the IRA was created around 1974 and the 401(k) in 1980. People turning 65 today were about 25 when the IRA was created by ERISA in 1974...could the lack of financial security with today's crop of new retirees be a coincidence?
I am still rather naive on retirement accounts and wet behind the ears overall with investing. I would like to hear an educated response to what was posted here.
In my view this is simply an illustration of unrealistic hopes being brought down to reality. The returns proposed are nothing to be scoffed at, even at their low ball amount. Its simply saying don't expect to be a millionaire with a modest 401k contribution. Which any rational person should recognize anyway.
Posted on 5/5/13 at 1:19 pm to rintintin
It's magical math, which is why it hasn't really been refuted.
It refutes itself.
Take the inital point of "factoring gains and losses."
How did they do that? They just throw a number at me and sit back as if they have presented an ironclad argument. Are the losses compared to the inital amount or the 100% gain? They don't even spell out their own hypothetical.
And as for the second one regarding fees: yeah, paying that much yearly would really eat into your gains. The only problem is that no one really pays that much. Most of my funds are 1/12th of his assumed value.
All those words and his main points were refuted with 2 paragraphs.
Lots of fluff with no content.
It refutes itself.
Take the inital point of "factoring gains and losses."
How did they do that? They just throw a number at me and sit back as if they have presented an ironclad argument. Are the losses compared to the inital amount or the 100% gain? They don't even spell out their own hypothetical.
And as for the second one regarding fees: yeah, paying that much yearly would really eat into your gains. The only problem is that no one really pays that much. Most of my funds are 1/12th of his assumed value.
All those words and his main points were refuted with 2 paragraphs.
Lots of fluff with no content.
This post was edited on 5/5/13 at 1:20 pm
Posted on 5/5/13 at 1:44 pm to rintintin
Historical performance for small caps may approach 12% since 1926, large caps may be close to 10%. See ibbotson. Most people have allocations of stocks and bonds, not 100% stocks. A straight line assumption of 6.5 to 7% blended return might be better assumption if relying on straight line projections. Then, further reduced be advisor fee and/or expense ratios. Then, this analysis cannot account for benefits of dollar cost averaging into bad markets or buying in at market highs during accumulation phase. Perhaps more realistic projections assume random returns for capital markets over lifetimes and predict probabilities of success of saving $1 million by a certain age (see monte Carlo projections).
Anyway $205 per month is only $2460 per year @ 6.5% this may grow to $225,000 in 30 years.
Suggested retirement savings is 10% of gross for necessities and 20% gross for comfort. The $2460/yr or $205 per month suggests this person makes $24600 per year if he's saving 10% toward retirement and never increases.
I didn't really read much of that most so I may have missed some assumptions or logic.
Save as much as you can systematically in a vehicle you are semi confident about and you still might be underfunded given inflation and needs.
Anyway $205 per month is only $2460 per year @ 6.5% this may grow to $225,000 in 30 years.
Suggested retirement savings is 10% of gross for necessities and 20% gross for comfort. The $2460/yr or $205 per month suggests this person makes $24600 per year if he's saving 10% toward retirement and never increases.
I didn't really read much of that most so I may have missed some assumptions or logic.
Save as much as you can systematically in a vehicle you are semi confident about and you still might be underfunded given inflation and needs.
Posted on 5/6/13 at 9:13 am to Breadcrumbs
quote:
Most people have allocations of stocks and bonds, not 100% stocks. A straight line assumption of 6.5 to 7% blended return might be better assumption if relying on straight line projections.
Asset allocation is a critical component of the return and compounding formula. But each investor should determine how aggressive or conservative he wants to be and when he wants to change is asset allocation balance.
I got out of school in '06 and was contributing at a 10% clip. When the recession hit and I got concerned about my job, I trimmed back my contribution. Am I kicking myself for it now? yes. Was I 100% sure I'd have a job in six months since I was working for a financial services firm? no. Hindsight is always 20/20, but I made the proper decision at the time. However, I've seen a small return on that money I invested. But I decided that.
All an individual can do is make the best decision for himself. Most people who have become as "successful" as I am now would've bought a new car since getting out of college. I've held on to my crappy car from college, get repairs done as I need it, and prefer to aggressively invest now. My next oil change is at 190K miles.
Why should the government control everything if other people would rather have creature comforts now and live in poverty later? Why should people who buy new cars now get the benefit of government aide, yet those who make wise decisions do not?
The original retirement system was put into place when families had more children than parents (as opposed to most families with max 2 children today) so the retirement ponzi scheme worked. Also the typical retiree was only on that system for 1-2 years; now people are expecting to live as a retiree 20-30 years, and neither the individuals or the government has fiscally planned for that.
The problem is that the citizens of our country do not want to take responsibility for themselves and live with the consequences of their action. However we do not live in a world where we can bake our cake and eat it to.
I think the 401k is a great option out there; however people need to be educated on its limits as well as the impending limits of our government to provide any benefits, since that ship is already halfway under water.
ETA: on the links in the OP, the advertisement ones look like shams. There can be a guy out there who beats the market and all, but generally speaking, you should get a good, solid return following conventional wisdom investing in diverse, low expense ratio 401ks.
This post was edited on 5/6/13 at 9:20 am
Posted on 5/6/13 at 1:00 pm to meldawg399
Very well put.
Posted on 5/6/13 at 6:31 pm to TheWiz
He probably believes Defined Pension plans were better for workers. Which is true is some regards. But it tied a worker to a particular company, which is good for the company but not so good for a worker in today's world. But I know people who work for companies with defined pensions and they are going to better off in retirement than the average 401K worker.
Posted on 5/6/13 at 6:35 pm to TheWiz
If anyone can provide a better alternative to tax deferred retirement savings I haven't seen it. People would be beating a path to the door of anyone who could provide a better means of providing for retirement and achieving current tax savings. Your acquaintance isn't P.T. Barnum per chance?
Posted on 5/6/13 at 11:52 pm to rintintin
quote:
I am still rather naive on retirement accounts and wet behind the ears overall with investing. I would like to hear an educated response to what was posted here.
I'll have to double check, but this seems to imply that an advisor would quote historical average returns like an idiot. When you quote historical returns, it is unethical, if not illegal, to simply average 100% and -50%. I would never tell someone that a fund has averaged 25% over the last two years like this shitty "lie of averages" implies. Idk why the article would even bring it up.
Posted on 5/7/13 at 7:50 am to TheWiz
Great thread.
Would read again.
Would read again.
Posted on 5/7/13 at 9:54 am to Poodlebrain
quote:
Your acquaintance isn't P.T. Barnum per chance?
not so much. quote:
BestBanker
Amazing input
Posted on 5/7/13 at 12:13 pm to CoolHand
quote:
Anybody here have an expense ratio anywhere close to this?
Many 403b teacher retirement plans are riddled with terrible options. Some include only annuities as investment options in what is already a tax sheltered vehicle, VALIC comes to mind immediately as one of my siblings is stuck in their POS plan. The true cost to them can be much greater than 3% annually depending on the form of annuity and investment options contained therein. Many small employer plans have limited, high cost options. Due to the number of crappy plans and coincident impact on long term returns "recently" being brought to the great overseers in DC the push to provide better options in all plans may gain traction.
My wife recently had a crediting adjustment made to her defined benefit pension plan with a health care company. She glanced at it, no big deal she thought, but I said that change that many will think is minute will cost many long term employees a shite ton of money. 3-months later a letter arrived stating it was estimated that employees should save almost 3% more of gross income into the employee 403b to offset the pension crediting change. One one hand her company doesn't have to offer a defined pension, on the other hand the majority of people in the plan have no real idea of the impact of what most would consider very small changes nor probably even bothered to read the letter explaining the estimated long term effect.
Posted on 5/8/13 at 7:38 am to TheWiz
Everybody has an opinion on what is best. Reality is: what is best for some is not best for all.
At the present moment in time, ii choose not to participate in any federally-created deferred income tax law, penned by the very same people that enacted the problem with high taxation.
Why would I want to participate in a troubled system when the problem AND the solution were manufactured by the same enterprise?
At the present moment in time, ii choose not to participate in any federally-created deferred income tax law, penned by the very same people that enacted the problem with high taxation.
Why would I want to participate in a troubled system when the problem AND the solution were manufactured by the same enterprise?
Posted on 5/8/13 at 10:09 am to BestBanker
As to that long explanation quoted above the average return of the S&P is used to make a point to the gullible. No investment is ever looked at in this way, every return number used for comparison is annualized.
The annualized number is the average return of the growth of assets from what you invested ($10,000 in his example) to the final value. It is the average annualized return that you look at to calculate the growth of your money not the average return. I had to laugh when he said the final asset value isn't important. That being said volatility is a great destroyer of wealth.
On a couple of the other pieces. Giving your money to the government is a bad idea. You can't sue them if they do a poor job. If it is a pension style of account then the burden of underfunding/losses is placed on the taxpayer and we have seen the job they are doing ergo social security. You are also giving them a pool of assets that they may be tempted to "borrow" from in order to run the government.
Employers hate DB plans. Employees love them. Them employer has to project consistent earnings on the assets and then is responsible for all losses and shortfalls. The actuarial assumptions on growth are usually around 7-8% and there are no conservative investment options to get the plans there without significant risk of losses (which the employer has to cover). Most DB plans have not hit their return numbers in a long time.
They other problem employers have with DB plans is that the benefits are based on the employee's salary (most are averages of the last 3-5 years). Typically employees are earning the most in their career right before they retire. Say you have an employee who has earned around 50k for most of their career (25 years) who gets promoted and earns 100k the last several years. You (the employer) have made 25 years of pension contributions based on providing 50k of retirement income. Now that the employee is making 100k you have to make huge contributions for them to make up for 25 years at the wrong contribution amount (50k).
Basically traditional pensions are not options employers will ever use anymore (cash balance plans being the exceptions).
What is more fair, that the employer should have to take responsibility for the employees retirement or that the employee should have to take responsibility for themselves (a la 401(k))? There are huge problems with most 401(k)s but they are still the best answer.
Every time I have looked at anything that says no market risk etc it is an insurance product. Insurance products will always have the highest and most hidden fees in the retirement industry.
The annualized number is the average return of the growth of assets from what you invested ($10,000 in his example) to the final value. It is the average annualized return that you look at to calculate the growth of your money not the average return. I had to laugh when he said the final asset value isn't important. That being said volatility is a great destroyer of wealth.
On a couple of the other pieces. Giving your money to the government is a bad idea. You can't sue them if they do a poor job. If it is a pension style of account then the burden of underfunding/losses is placed on the taxpayer and we have seen the job they are doing ergo social security. You are also giving them a pool of assets that they may be tempted to "borrow" from in order to run the government.
Employers hate DB plans. Employees love them. Them employer has to project consistent earnings on the assets and then is responsible for all losses and shortfalls. The actuarial assumptions on growth are usually around 7-8% and there are no conservative investment options to get the plans there without significant risk of losses (which the employer has to cover). Most DB plans have not hit their return numbers in a long time.
They other problem employers have with DB plans is that the benefits are based on the employee's salary (most are averages of the last 3-5 years). Typically employees are earning the most in their career right before they retire. Say you have an employee who has earned around 50k for most of their career (25 years) who gets promoted and earns 100k the last several years. You (the employer) have made 25 years of pension contributions based on providing 50k of retirement income. Now that the employee is making 100k you have to make huge contributions for them to make up for 25 years at the wrong contribution amount (50k).
Basically traditional pensions are not options employers will ever use anymore (cash balance plans being the exceptions).
What is more fair, that the employer should have to take responsibility for the employees retirement or that the employee should have to take responsibility for themselves (a la 401(k))? There are huge problems with most 401(k)s but they are still the best answer.
Every time I have looked at anything that says no market risk etc it is an insurance product. Insurance products will always have the highest and most hidden fees in the retirement industry.
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