Retirement savings

by Grasshopper

Do you think 401(k) plans and IRAs will work as retirement savings for most Americans?
Are most of your friends and relatives saving enough for retirement in 401(k) plans and IRAs?
What have been your best 401k investments?
Do you think Teresa Ghilarducci and Hamilton James’s plan as described in the linked article would work?

A Smarter Plan to Make Retirement Savings Last – The New York Times

The current system — a mix of 401(k)s and individual retirement accounts (I.R.A.s) — is broken. These plans are individually directed, voluntary and leaky. Just over half of workers don’t have access to a workplace retirement plan. According to the National Institute on Retirement Security, Americans between the ages of 40 and 55 have retirement savings of $14,500, when they will need between 20 and 30 times that amount. Many people take money out before they retire. And the wealthy tend to pay lower fees and get higher subsidies for their savings.

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109 thoughts on “Retirement savings

  1. I’ve sometimes wondered if pre-paid and very simple annuities would be a good option for those who can’t afford (or don’t want) to save enough to get by on the 4% rule in perpetuity. I suspect that this idea gets buried in the more complicated versions, but what if I could go on State Farm’s website and enter my age. There could be a product that tells me if I give them $500 right now, they’ll guarantee me $X per month from the age of 65 to my death, or 0.75X for me or my spouse.

    If I have $5,000 wedding gift money, a $3,000 tax return, $1500 in scratch-off winnings, $2,000 that I made by hooking up the snow plow to my pickup during the last blizzard, and I can transfer that right now to the State Farm pre-paid guaranteed fixed annuity, I can see how much it increases my monthly retirement income.

    I think it would work a lot better for people who are leery of the stock market.

  2. Milo,

    I had the same idea.

    There could be a product that tells me if I give them $500 right now, they’ll guarantee me $X per month from the age of 65 to my death, or 0.75X for me or my spouse.

    The biggest issue with that is the guarantee. My plan would be a “pension” that is actually a target dated mutual fund that converts to a single premium fixed annuity at retirement. $25/week starting at 20 years old at 6% would yield $250k at 65 which would generate $1200 month in annuity income. But, the $1200 would only be the best estimate a subject to change. If it was $950 it wouldn’t bankrupt the company or require a bailout. You’d also get a statement every year giving you the latest retirement income estimate.

    The idea would be to let Vanguard market a product – “$1200/month in retirement income for only $25/week! Visit our website for details.”

  3. I made choices in my career to earn less, but have access to a defined benefit plan. On top of that I have a 401k, 453, IRA, Roth IRA and general savings for retirement. I’m 10 years off from the earliest I can take social security. My employer also provides health insurance to retirees that is the same as that for employees until I reach 65 at which point it becomes my medicare part b.

    My parents were very fervent savers for retirement and even though they never were part of a retirement plan and 401ks, etc really came into being after their working years ended. I think their harping on its importance my whole life translated into significant savings on my part. My dad always said that every raise you should put part of it away in savings as you weren’t used ot having it in your lifestyle anyway. For him savings really meant retirement.

    Regarding others — Most seem to be so focused on today, this month, this year or how to fund college for their kids since it will be happening in less than 5 years to be thinking about retirement. My employer started opting you into the 401k when you are hired and then you must opt out after your first paycheck. It is a minimal amount and most new hires (recent college grads) are not going back and opting out, which is a good sign. At the same time, they aren’t making any concious decisions about how to invest that money and it is always started in the safest investment, which doesn’t grow very fast.

    I think many in my age group had parents who had/have pension plans and don’t realize the huge difference between saving in that venue and on your own in 401ks, IRAs, Roths, etc. I’m not sure what will happen when a large population has not saved sufficiently. Will their children take care of them? Will government programs have to cover the costs? Will our society be fine with a large chunk of the elderly living in poverty?

  4. edit:

    If, due to unforeseen economic disruptions over the next 45 years, the monthly payout ended up being $950, it wouldn’t bankrupt the company or require a bailout.

  5. “Will their children take care of them?”

    Yeah, in many cases they will. My kid’s Scout leader has Grandma living with them. It’s not uncommon at all.

  6. I think some sort of national pension system is probably wise given what human nature is and how for most people, SS is not enough. It should be tax deductible up to the 401K limits indexed to inflation and mandatory. Most people won’t save on their own and it’s going to be a huge problem.

  7. But…aren’t Rhett and Milo just describing deferred annuities? They already exist.

  8. “But, the $1200 would only be the best estimate a subject to change.”

    Why? I can buy an annuity now, even at my relatively youthful and vigorous age, that is as guaranteed as any other, and is more than a best estimate subject to change. I think it would pay around 4%. USAA has a quote generator for it.

    My whole product idea is nothing more than what’s already available, and imagine if I bought that annuity now, saved all its payments, and at the end of every year (or month) used those payments to buy a new annuity, and let it continue to compound thusly.

    The only difference is that the saving and repurchase I described would be automatic.

  9. “and Milo just describing deferred annuities? They already exist.”

    I suppose they may. Are they as straightforward and user-friendly as I’m describing, or do they involve a lot of paperwork and high sales commissions.

  10. How much risk is there with deferred annuities that the company will still be around to pay out?

    I don’t ask my friends much about their retirement savings. I think we started saving earlier than others, but I’m pretty sure a lot of my friends will inherit some money. Between social security and 401k, we should be fine. All of our needs and many wants will be covered.

    I had thought about writing a separate post about it, but will throw it out now. I’m pretty sure my in-laws will die with credit card or other debt. Will we have any responsibility to pay for it? They live in rural Iowa. They have enough income from SS and pension, but will not have an estate. I’m guessing their house is worth $30K (about what they paid 40 years ago) and that is only if we’re able to sell it. My DH is the executor. My MIL told me that being an executor isn’t a big deal, but I’m guessing it’ll be a colossal headache that I’ll end up dealing with. I should add that they shouldn’t have financial issues but they aren’t good with money. Fortunately they have a decent guaranteed income (not Totebag level) and a paid off house. But I wouldn’t be surprised if we’re stuck with funeral home expenses etc.

  11. Will 401(k) plans and IRAs will work as retirement savings for most Americans? No. We (the royal we) are too focused on today; too many people don’t get / don’t believe in the miracle of compound interest to begin voluntarily (opt-in) setting aside even $20/week when they get their first “real” job. Increase that reluctance for people who are going into the workforce without a college degree and making below median income.

    Are your friends and relatives saving enough for retirement in 401(k) plans and IRAs? Never have discussed this except with one guy at work. One day he was talking about the pool he and his wife had just put in and he mentioned this was their forever house, the mortgage is almost paid and both of them (over 50) were setting aside $23k/yr in their 401ks. So I know he’s/they’re fully funded. I know my sister + husband and one of DW’s sisters + husband are saving little, if any. See royal we comment above. DW’s other sister + husband are certainly saving, but I have no idea where they are on the spectrum.

    best 401k investments? Actually investing. Beyond that, at a long-term, long time ago employer, putting my $$ in the “general fund” which was like a total stock market fund. Actually saving is the key thing.

    Do you think the plan as described in the linked article would work? Well, it would work better than what we have now for the vast majority of people.

  12. Why?

    Good question. I assume the low returns and high fees are the result of the guarantee. It might be better to have much lower fees in exchange for some risk. But, maybe not.

  13. My experience has been that unless you opt people into a plan when they start working- not many will call in or visit a website. This means a lot of years are lost. Then people are already 40 when they realize they have to do something. Even then, divorce, job loss etc hits and the little bit they have saved is taken out. I have been at firms where the employer themselves were in the financial advice business but yet inspite of all their efforts they couldn’t get their own employees to save.

  14. “…my in-laws will die with credit card or other debt. Will we have any responsibility to pay for it?
    Unless you are actually the maker of the debt, I would doubt it. But probably the creditor(s) can come after what’s due from the estate.

    My DH is the executor. My MIL told me that being an executor isn’t a big deal…
    well that REALLY depends. Simple direct will saying e.g. everything equally to my/our kids shouldn’t be a big deal. But who knows what lurks…my mom and stepdad ended up spending a lot of time over about 4 years till the estate for which he was executor (but my mom did all the work) for was completely settled.

    I wouldn’t be surprised if we’re stuck with funeral home expenses etc.” at least up front. Total estate less funeral expenses less settlement of existing debt leaves what (little) the kids can share.

  15. TCM, the Iowa Bar has a good presentation on estate administration here:

    http://c.ymcdn.com/sites/www.iowabar.org/resource/resmgr/CLE_materials/2014_Basic_Skills_Sept_Proba.pdf

    Short answer in non-community property states is that the estate is responsible for the debt, as is any co-signer. You are not liable simply because the decedent was your parent. (In community property states the spouse is presumed to co-own the debt.)

    If you are not an Iowa resident, you might need someone local to manage it for you, both for practical and legal reasons.

  16. Fred/Sky – thanks for the info. My guess is that they’ll have close to a negative estate as their only asset is their house. The house will be difficult to sell, and I wouldn’t be surprised if one of the other siblings would want to buy it (but probably wouldn’t be able to afford it). We may get reimbursed for the funeral expenses from the estate eventually, but I’m going to assume that we’ll have to pay for that cost (the other siblings won’t have any money). DH is the most responsible child, but probably is the least involved with his parents. They get along, but they aren’t close.

    I feel better knowing that we won’t inherit their debts, especially as I’m watching them spend right now and wondering how they are (or aren’t) paying for it. My other worry, from the post a few weeks ago, is what we’ll do when they get a bit older and need care. I’m going to bury my head in the sand over that for now.

  17. Retirement is more than just straight “income” to cover current costs, but also healthcare as medicare does not cover 100% of everything. Especially as you get older there are things you need help with, but aren’t covered so you either do without or hopefully have family/friends that will help you with it. If you are lucky, you can find community social services that will help out, but often what they do is limited and putting together the patchwork of services is time consuming and can add up in cost as well.

  18. This is an interesting conversation… even after thinking more about the side conversation Cordelia and I had last week, I cannot come up in anything better than what we already have.

    Are the majority of Americans prepared for retirement? No. Most people live in the here and now (see Fred’s comment above). If they didn’t, we wouldn’t have a national per person credit card debt of ~$10k.

    Have I talked with friends/family? No. Not outside this group. I did have an interesting conversation with my SIL a few weekends ago. My SIL always owes federal taxes. She knows what’s wrong, but does nothing to fix it. Because that would mean losing on out money now versus being zero or getting a refund at tax time. She’s also relying on a pension to support her in retirement. I don’t know how her pension is calculated, but putting pre-tax dollars there, or opening an IRA would do wonders for her taxes. She literally doesn’t know how her pension works, and had no idea about other retirement vehicles.

    My conversation with her solidified my opinion that a national mandatory system (expanding SS comes to mind, and keeping SS funds in that realm, not using it to shore up the general account) would be much better for people like her than the voluntary plans that exist now.

  19. I have no idea what my friends or coworkers have saved for retirement. I’m definitely curious, but we don’t really discuss the details. I can make some guesses as some friends definitely have saver tendencies and some don’t.

    We’ve had conversations with both sets of parents, and we feel comfortable that they are both financially secure. Both are very conservative with their money and have always been big savers and small spenders. IL’s are already retired, my parents are planning to retire in 2 years. It is a huge weight not to have to worry too much that we would suddenly have to support our parents financially. That doesn’t mean it’s a 0% chance or that we won’t have to provide support in other ways. But it makes a huge difference – I’ve seen already some friends and coworkers who are in tough positions because they are supporting underemployed or retired parents.

    Our siblings are all over the map. Some of them, I’m guessing, have zero to negative net worth through overspending and undersaving.

  20. I am 99% certain we will be supporting parents in retirement but like tcmama I am burying my head in the sand for now.

    We paid my in-laws rent for a few months about ten years ago because they had gotten themselves into a financial scrape and they just paid us back for one months worth of rent this past year. Dh tried to refuse taking the $, but I told him it would probably be best just to take it, as we’d at least invest it for them. I’m sure we’ll be paying that small amount and more at some point in the future so at least it has a chance of earning some money in the meantime.

    All of our friends are responsible types that have always maxed out 401K and have taxable accounts as well. My sisters are fairly frugal and one married a guy that had $250K in the bank just from being very frugal over 15 years of working. None of it invested, just sitting in a savings account but I think my sister is going to work on deploying that cash over the next year or two. My other sister and her husband seem to be struggling on their salaries but I think they’ll get a decent inheritance so will probably be fine.

  21. It’s funny, I read most of that article expecting a “surprise! we just described Social Security!” ending (was expecting them to segue into “and we’ll base the payouts on income levels, to ensure that everyone always has at least a minimum guaranteed income”).

    Per our recent discussions, I’m at the point of opposing all new programs, no matter how well-meaning, on the theory that the proliferation of programs actually makes it less likely that the average Joe is going to put money away. I would be very happy to consider new programs in the context of consolidating existing programs to make life simpler/more automatic.

    I do agree that automated savings is the way to go (sort of like, I dunno, Social Security?). My dad is really smart (for Totebag cred, #2 in his class in engineering school). And yet he got to about 50 and was convinced to look at his retirement by hearing *me* talk about *my* efforts — he had a pension, so he just spent whatever was left. Luckily, he started to save more then, and he married someone with an even better-paying job :-), so he should be ok. But I’m glad that I had my mom as a role model, because like someone mentioned above, my dad sure didn’t have the financial skills to pass on to someone growing up in the non-pension era.

    On a related note, my mother has *finally* finished her revised estate plan. Can I just say how happy I am that she may finally want to talk about something else after 2+ years of this? I know it makes her happy to look at how far she’s come and to think about paying for the kids’ college and stuff, but I’d occasionally like to talk about something that doesn’t involve her dying. :-)

  22. Tcmama – I had that experience when my MIL died. What I understand is that collection agencies by the debts if recently departed. I received some calls asking to speak to “the person responsible for distributing MIL estate”, to which I would reply that there was no estate to distribute. They called about 3 times, tried a spiel about it being my moral obligation to guilt me into agreeing to pay, then stopped calling. Since she didn’t drive and was in a nursing home with dementia, I knew it was family members who had been using her card, and I felt no moral obligation to pay their debts.

  23. One thing I think some people don’t understand about keeping SS funds separate from the general account is that it is simply not possible to do that. The ONLY vehicle in which the Social security trust fund (the yearly excess of collections over disbursements) can be invested is federal government bonds. And how do government bonds work? The Federal government offers to the investing public and other worldwide governments US government debt. The proceeds are added to tax revenues and the total used to cover daily government operations, infrastructure investments, payments to states and individuals and others under transfer programs other than SS. Sometimes the national debt other than the SS debt goes to zero or nearly so, most recently in the Clinton adminstration. Volker formally advised to cut taxes because the US needed to issue more government debt. So when the SS fund buys government bonds, the government cannot put the money under a mattress or in a commercial bank. It has to be used in general revenues.

    The article’s authors want to set up a non SS govt bureaucracy to take mandatory contributions from individuals and employers (still a traditional employment based model not reflective of modern working conditions for large numbers of US workers, one of the proposal’s limitations) and have the bureaucrats invest in the stock market and bonds of corporations and other government entities. That is the big difference from SS, and also the fact that it would be an inheritable asset, not a widows orphans and disability plan. The difference from 401ks or IRAs is that the individual can’t get at the money at all until 60 or so, much like a traditional pension funds.

  24. My sisters are fairly frugal and one married a guy that had $250K in the bank just from being very frugal over 15 years of working. None of it invested, just sitting in a savings account

    In talking about this with people in real life, the the number of people who have all their retirement savings in a money market account has surprised me the most. It’s very common – at least in my experience.

  25. Rhett – why is that surprising? It sounds less scary that 401k – or at least sounds like it has less risk.

  26. Meme – thank you for the information. Do you have a sense how the government would be able to protect the earnings of SS? Would it have to be privatized? I guess I foresee a time when more people would take out of SS than put in – what happens then? Or would that scenario never happen?

  27. Rhett – I was going to say something similar to Rhode. For non-financial types and for those who cannot assess risk, putting money in the bank whether a simple savings acct, money mkt acct, or in a series of laddered cds is the only thing they are comfortable with. And they are doing the most important thing…actually saving.

  28. “or in a series of laddered cds ”

    That’s all my maternal grandparents ever did. Of course, it would be nice if interest rates went back to normal so that this would be a reasonable option again. I’d prefer it, in fact, as I’d just as soon not have every working adult in the country buying all the stocks they can and driving up their prices.

  29. Per Rhett and Atl, I think we will never succeed in an “personal responsibility” approach to retirement because people fundamentally do not understand the power of compounding. Sure, they can plug in the numbers in the calculator and see the math, but at some level they just don’t believe that doubling a penny every day leaves you with over a million bucks after a month. Or that 2% inflation over 40 years is a killer. And by the time you’re my age and have been around long enough to say “remember when [insert standard object] cost [insert ridiculous price]?” — well, by that point you’re on the other side of the curve, and it’s too late to do anything about it.

    My index-card advice to people who are still on the right side of the compounding curve would be to save half of each (net) pay raise. This harnesses the power of compounding in your favor — if you get a $50/month raise each year, then your first year’s investment is $25/mo. But the same raise the next year isn’t just $25, it’s an *additional* $25 for a total of $50; and your third year’s is now $75, and before you know it, your teensy little raises that you complained about suddenly add up to thousands of bucks a year.

    Added bonus that it also permanently restrains your standard of living, so you’re not inflating your perceived “needs” with your salary, meaning the $$ you saved will go further when you retire — but you don’t feel constrained, because you still get to spend more each year.

  30. “Of course, it would be nice if interest rates went back to normal so that this would be a reasonable option again.”

    How much difference does that make? Everyone remembers when CDs were paying 9-10% — but they forget that inflation was in the teens. CDs will always lose power to inflation over time.

    I guess higher interest rates help you lock in a year 1 interest payout that is more likely to cover your current expenses. But then you’re losing buying power just as fast (or faster, as I think the current low inflation has pushed the delta to all-time lows, since we haven’t yet gone to negative interest on these kinds of things).

  31. “CDs will always lose power to inflation over time. ”

    I don’t know. We were buying 6% CDs as late as 2005 with our house down payment money.

  32. I was shocked when I found out my brother wasn’t fully funding his 401k. He is single, childless in a low COL area, I assume he has the ability to do so. I think he doesn’t trust the tax system/federal government – he may have gold under his pillow.

    I have a colleague – late 30s, practicing for the past 5ish years. She is specialized, from prolonged training that did not add to her earning power. She was asking my opinion on putting money is a 401k, she has been thinking about setting something up. I probably alienated her forever when I said, “OMG, what have you been doing with all your money??” She is probably paying a marginal tax rate of 35% on money she could be saving. Crazy.

  33. “Really? Wow! Thanks.”

    Also, I don’t know what CD term Rhett’s graph is showing, but you can drive up the return with longer periods, so for retirement savings, or retirement income, you could get some of it well above inflation rates.

  34. One of DH’s parents had the retirement-account-in-money-market-fund – for the entire 80s and 90s!!! Gah.

  35. “or in a series of laddered cds ”

    That’s all my maternal grandparents ever did.”

    Ditto.

  36. “I’ve sometimes wondered if pre-paid and very simple annuities would be a good option for those who can’t afford (or don’t want) to save enough to get by on the 4% rule in perpetuity.”

    Yeah, it probably would. The problem is getting them to put aside the money to buy those annuities.

  37. “The ONLY vehicle in which the Social security trust fund (the yearly excess of collections over disbursements) can be invested is federal government bonds.”

    So was Al Gore lying when he talked about the “Social Security Locbox?”

  38. The solution to lack of savings is they can just move in with their kids isn’t going to work because a lot more people are not having children. According to the U.S. Census Bureau’s Current Population Survey, in 2014, 47.6 percent of women between age 15 and 44 had never had children, up from 46.5 percent in 2012. This represents the highest percentage of childless women since the bureau started tracking that data in 1976.

    Time reported that this pattern is particularly pronounced for women between 25 and 29 — 49.6 percent of women in that age group don’t have kids. Unsurprisingly, after age 30 those numbers drop and more women become moms. The survey found that 28.9 percent of women ages 30-34 are childfree.

    The census data is backed up by data from the National Center for Health Statistics. According to a recent report, in 2013 there were just 62.9 births for every 1,000 women between the ages of 15 and 44 in the U.S. — an all-time low.

    These numbers confirm what most childfree women already know: greater numbers of women are waiting longer to have children, or not having children at all.

    Even if you have savings, there are consequences for when you need help or become ill if you don’t have family or nearby able bodied friends to help.

    The past two weeks have been eye opening about what happens when you have money, but no kids. My FIL’s wife is very fortunate that his kids, daughter in laws, and cousins are helping her – but you need family or an advocate when you’re sick. I got a brief introduction to this when my mother broke her leg and had to go to rehab. Her friend at rehab was wealthy, but she had no clean clothes until the staff found some donations because family or friends were required to do laundry even though this was a live in rehab facility. She had the money, but no family nearby to help.

    The situation we’re suddenly dealing with is similar. Stomach pains one week lead to a loss of colon the next week, and ten days in a hospital. She needed someone to take her home from the hospital, but my FIL is too old and sick to drive. Even if you can get home via a taxi, then you need prescriptions, and food. I’ve read about these amazing people that you can hire to almost be like a substitute family, but you have to be of sound mind and healthy enough to hire this person if you get sick.

    In our situation, wee’ve all swarmed in to help even though it’s not our parent or aunt/uncle because she has no child to help her. The number of medical appointments for her and my FIL is endless. My DH has already been called away from work twice with medical emergencies for his father while she was in the hospital and it has only been 2 weeks.

    My point is that it is easy to say, oh their kids will take them in if there is no money or they need help, but that isn’t the case for a lot of Americans.

  39. I have met a number low-paid workers (i.e. ER techs, make $13/hr), who have been pressured by HR to open and contribute to a 401k. This pressure seems to coincide with a big run up in stock prices, and talking heads lament all the service sector people who are missing out. By the time the poster campaign and special lunch sessions are in full force, the market it on it’s way down. ER tech (who may not pay any federal taxes), puts aside $500, sees it go down to $400 and thinks it’s all a big scam. Car repair comes due, and they can’t even get to their $400. Swears off giving any money to any of these stupid programs ever again.

  40. “My point is that it is easy to say, oh their kids will take them in if there is no money or they need help, but that isn’t the case for a lot of Americans.”

    That could apply to my uncle with a partner but no children. It’s still probably a long ways off, as he’s considerably younger than my Dad, but I’m not sure what’s going to happen. They seem to have plenty of money, based on consumption, but maybe that just means that they spend all their money.

    This was a fascinating article.
    http://www.nytimes.com/2015/10/18/nyregion/dying-alone-in-new-york-city.html

  41. My parents invested in a variety of things, but after about age 70 it became mainly municipal or blue chip bonds and laddered CDs. The CDs have had shorter terms as (1) the need to dip into princple increased and (2) my dad kept hoping interest rates would go up and he could jump on it quicker without a penalty. After being widowed, my mom was very concerned about money. After getting a handle on all they had, I let her know she could spend exactly what the 2 of them spent per month and never have another cent of income (interest/social security/etc.) and be able to pay her bills for 20 years. Unlikely that now in her 90’s and failing health that she will live another 20 years, 10 at best, more likey to be 5. Now that she needs some additional in-home care, it will go a bit faster than it would have otherwise, but I keep telling her not to worry about it. My only thought is that it would have been better if my dad had had more life insurance. What he had covered the modest burial he wanted with a little left over, but if he or my mom had wanted more in that vein, it would not have covered that.

  42. puts aside $500, sees it go down to $400

    I agree. Why not make the deffered annuity the default option? You give Vanguard $25/week and when you retire they will pay you $1200/month. Add in the $800/month from SS and you’re ER tech can enjoy a comfortable retirement. It sure doesn’t seem like making the average person sweat the market is really doing any good. If they want to sweat it then fine by why is sweating it the default?

  43. A few of my relatives are dealing with the issue that Lauren mentions. Just this morning I received a message from my uncle saying that his cousin who was single had passed. This man became my uncle’s responsibility as my uncle was his only living relative. The cousin had some mental health issues so it was very difficult to find a living situation for him. My uncle was so stressed dealing with this. It was a sad situation but my uncle was at a point where the news was a relief.

  44. I’m not sure what’s going to happen.

    What I’ve seen in some cases is the least successful of the grandchildren gets drafted into providing elder care for the grandparents generation in exchange for some current income and a larger slice of the inheritance.

  45. The guaranteed 3% return doesn’t factor in inflation, does it?

    I’m not convinced by “the magic of compounding”. Real returns after inflation depend on having people who will wisely use capital to create profits. This depends on people without capital who want to borrow (historically young people), people with capital who want to lend (pension funds, rich/older people) and business people who will profitably use the capital. Changes in global birth rates since the 1970’s are huge. Many economic assumptions depend on an expanding economy and an expanding population. We don’t know which are valid for a global economy that is contracting and a stable-and-maybe-declining population within my lifetime.

    Real returns after inflation of various stock market indexes for the past ~15 years have not been high. What do people expect for the next 15 years?

  46. milo, fascinating or depressing.

    I don’t think the people in this board are representative of the population because so many of us came from TOS and that publication used to attract a specific type of reader until they became a part of the Murdoch empire.

    We seem to be a bunch of really smart, savers, and what my grandmother would call “good eggs”. We do the generally like to do the right thing when it comes our extended families and friends when they need help. I like to think that most people are like this, but I have spent A LOT of time in three different hospitals, and nursing homes in the last year. It is clear that some people don’t have any visitors and they don’t have much extended family to help.

  47. Real returns after inflation of various stock market indexes for the past ~15 years have not been high.

    That 15 is doing a lot of the work*. Over the past 20 years the S&P has returned 6.97% (4.77% inflation adjusted). Over the past 14 years, the S&P has returned 8.07% (5.86% inflation adjusted).

    * Also keep in mind that almost no one went from cash to “all in” on March 10, 2000.

  48. At my previous employer, coworkers discussed 401ks a lot, especially when they were first rolled out. Most of my salaried coworkers with whom I discussed them were maxing out their contributions.

    I also worked with a lot of hourly workers, including some who would ask me, or other engineers, for financial advice. Of those who discussed it with me, most, if not all, of them participated in the 401k plan at least enough to get the company match, and most also participated in the employee stock purchase plan. While I knew some people were living financially on the edge, many of them were quite diligent about saving.

    One of the hourly employees purchased a lottery ticket that was worth $10k. After collecting, she used the proceeds to open a CD.

  49. “Individuals would not make investment decisions directly. Instead, low-fee diversified retirement portfolios would be created by a board of professionals who would be fiduciaries appointed by the president and Congress and held accountable to investors. The fees and investments would be much less prone to corruption because the managers’ income would not depend on the investments, the fees would be disclosed, and the accounts separated from government funds and owned by the individuals.”

    Kind of like 529 plans?
    Not convinced that creating a mandatory government investment program managed by industry “professionals” is a great idea. Any time you give folks other people’s money to play with, there is the potential for corruption and incompetence.

  50. Any time you give folks other people’s money to play with, there is the potential for corruption and incompetence.

    While true, the 401k/IRA experiment has been an unmitigated disaster for the average person. The question then is how much worse are they going to do that the average person? It’s not a high bar.

  51. “That is quite possibly the most depressing article I ever read in the Times.”

    All the little mechanisms and workings of the city government and its contractors are fascinating. Also, I’ve always found the ordinary fascinating, and that life is about as ordinary as it gets.

    Have you ever seen “About Schmidt”? I loved that movie.

  52. “In our plan, the more than 95 million workers without a pension plan would each have his or her own G.R.A. managed by an independent federal agency.”

    Is this another example of a mandatory program from which elites can effectively insulate themselves — in this case, because they are more likely to be covered by 401(k) plans? Granted, the programs has the best interests of its participants at heart, but it still tells people that they don’t know what’s good for them, doesn’t it?

  53. but it still tells people that they don’t know what’s good for them,

    They fact is they don’t know what’s good for them.

  54. I’m also not comfortable with the idea that the government can mandate contributions from private citizens and then dictate how it will invest their money in private enterprise. It’s a captive source of capital to companies–all they have to do is reach a certain size and go public, and then millions of Americans will be forced to invest in them? What about the people who don’t want to invest in Monsanto, or RJR?

  55. As a fan of big (huge!) government, I have to say I agree with Milo. The right answer is to make Social Security work to provide a reasonable social safety net for those who need it, and a decent return for everyone else.

  56. I’m also not comfortable with the idea that the government can mandate contributions from private citizens and then dictate how it will invest their money in private enterprise

    I agree. I think the goal should be an easy, simple, low fee, not job dependant default option that people can opt out of if they choose. As easy and seamless as a pension to the extent possible.

  57. There is so much money for the middleman (Blue Cross, money managers and funds, gatekeepers for the many social programs, tax deductible funded nonprofits) when we have this hybrid of govt mandate and private implementation. Just go full European style socialism or full sink or swim libertarianism.

  58. “While true, the 401k/IRA experiment has been an unmitigated disaster for the average person.”

    Has it really? I honestly don’t know. I live among very average people. But lots of them have smartphones, and sufficient numbers of them eat out often enough that there are lines at Bob Evans every Sunday after church. Many of the independent and assisted living communities have waiting lists. RV sales are way up.
    And listening to the stories of my hair stylist married to a welder, there is much more inter-family financial and practical assistance in this population than is typical in Totebag households. Elderly parents live with their children or grandchildren, single moms live with their fortysomething moms who take care of the kids, siblings and cousins help out with home renovations or car repairs. So perhaps the lack of substantial retirement savings is not the unmitigated disaster for them that it would be for most of us.

  59. “RV sales are way up.”

    For the reasons you’re implying (which I agree with), but also they’re much more attractive with buck-fifty gasoline.

    “Just go full European style socialism or full sink or swim libertarianism.”

    Be careful what you wish for.

  60. “The right answer is to make Social Security work to provide a reasonable social safety net for those who need it, and a decent return for everyone else.”

    I agree. I don’t think that is entirely far off from what we have. I’m okay with upping the full retirement age and/or substantially increasing or removing the cap.

    A lot of the relatives that I know that are retired right now are 60-something and have pensions of some sort, even from private industries. I don’t know that the full 401(k) experiment generation has really hit retirement age. I have 50-something relatives gearing up for retirement who have shared a bit of info with me, but they are Totebag types who have thrived and saved generously. I’m not sure if they are the norm or if the people with $5000 at age 55 who are always discussed in the “401(k)’s are a failure” articles are the norm. It’s hard to tell.

  61. Ivy,

    I have 50-something relatives gearing up for retirement who have shared a bit of info with me, but they are Totebag types who have thrived and saved generously. I’m not sure if they are the norm or if the people with $5000 at age 55 who are always discussed in the “401(k)’s are a failure” articles are the norm. It’s hard to tell.

    It’s hard to tell if they are the norm? If 36% of people have to rely entirely on SS, I’m going to guess your relatives aren’t the norm.

  62. “I’m not sure if they are the norm or if the people with $5000 at age 55 who are always discussed in the “401(k)’s are a failure” articles are the norm. It’s hard to tell.”

    Many of those articles are using statistics that look only at the average or median balances in a particular account, not the cumulative or total balance of retirement assets for the household.

  63. Milo,

    Looking at overall net worth tells a similar story. According to the Census Bureau, the (median) average net worth excluding home equity for an American 35-44 years old is $14,226. In the 55-64 age range, average net worth is $45,447.

  64. “Many of those articles are using statistics that look only at the average or median balances in a particular account, not the cumulative or total balance of retirement assets for the household.”

    Right, exactly. The stats in those articles are always suspicious. What I have in my 401(k) right now is irrelevant information without a lot of context, especially if I switch jobs periodically throughout my career.

    I’m sure that my relatives who are planning to retire in their late 50’s with a second home are not the norm for America. But I’m not sure that the average white collar worker has an average of $5000 in retirement accounts in their 50’s either.

  65. But I’m not sure that the average white collar worker has an average of $5000 in retirement accounts in their 50’s either.

    I don’t think anyone is saying the average white collar worker has $5k, it’s the average of all workers that’s the problem.

  66. “Looking at overall net worth tells a similar story. According to the Census Bureau, the (median) average net worth excluding home equity for an American 35-44 years old is $14,226. In the 55-64 age range, average net worth is $45,447.”

    First question….where did this data come from and how was it gathered?

    In my previous career, I was a economist. The data we generally used was from government publications, vetted, consistent over time agreed to by all parties that we would use that source of data. And it SUCK3D! And we all knew it, but we didn’t have a better source that was consistent over time. So that was the data we used. Generally, we figured we within an order of magnitude of the correct number and at least had the sign right, so, better than nothing.

    I didn’t work for the Census Bureau, but I don’t know that their data is any better than the stuff we used.

    Data gathered through surveys is notoriously inaccurate, because people won’t answer or won’t answer accurately for a variety of reasons.

  67. Rhett, that 5% number is about what I saw for both 10 and 20 year time frames on the S&P. Global large company equities was around 2.6%. Will the US S&P 500 continue to outperform other large global companies, especially given current P/E ratios.

  68. Will the US S&P 500 continue to outperform other large global companies, especially given current P/E ratios.

    You need to look at it from the perspective of a typical totebager putting $730.77 per pay period in their 401k. Your calculations don’t seem to include the impact of dollar cost averaging.

  69. “So perhaps the lack of substantial retirement savings is not the unmitigated disaster for them that it would be for most of us.”

    I tend to agree with this, as well as with Meme’s comment about the dangers of creating another federally-mandated program that will force savings. I have been looking for an article and of course can’t find it, but the upshot was along the lines of “poor people don’t save because they can’t afford to.” Which, you’d think, would sort of fall into the “duh” category. But it seems to me that most of the discussion on things like retirement savings is based on the premise that we can all find money to put away, if we just have a little discipline (or nudge) and step away from the latte. But I suspect that the bulk of the people bringing down that “only $5K saved” average aren’t buying lattes — they’re not saving because they make low and insecure incomes, and they need that money for more pressing obligations like food and rent and electric bills and the like. I’m not sure it’s in their best interest to force them to save $X from every paycheck, when they may well need that money to put food on the table or repair the car they need to get them to work. And I really don’t feel like it’s my place to make that decision for them.

    The reality is that we already have SS, which is paid by the employer but under standard economic theory works as a cut to wages, which means we already have a version of a government-run forced savings plan. I’d rather shore that up and make sure that it provides a reasonable safety net instead of developing a separate program that will pile more on top.

  70. I think that there is a huge amount of people in the middle class that could save and just aren’t (like my parents and DH’s parents). You know, the kind of people, MMM targets.

  71. I suspect the benefits of dollar cost averaging are roughly canceled out by the slight lag in an S&P 500 index fund/ETF compared to the S&P index, due to changes in the composition of the S&P 500 over time.

    One of the benefits of indexing that drew me to the strategy is that poor stock choices are disproportionately removed from the index and replaced with better stock choices, with no effort on my part.

  72. I found the article Milo posted fascinating. I know a couple of coworkers (men) who are divorced and are essentially on their own. Their kids are grown but not particularly close to them. Actually, the closest person they can call is their ex wife.

  73. “they’re not saving because they make low and insecure incomes, and they need that money for more pressing obligations like food and rent and electric bills and the like. I’m not sure it’s in their best interest to force them to save $X from every paycheck, when they may well need that money to put food on the table or repair the car they need to get them to work. And I really don’t feel like it’s my place to make that decision for them.”

    Exactly. At some point, don’t we need to let adults make their own decisions about how to allocate their resources? Even if they are making what WE consider to be the wrong decisions? I don’t understand how those who insist that women should be allowed to make their own reproductive choices — including choices that affect another human life — can justify controlling their spending decisions.

  74. My BIL is in his early 60s and works a blue-collar job that is getting to be too much heavy lifting and work for his arthritic hand. He had a stroke and a heart attack within the last year, which has wiped out his savings. He has a 14 year old daughter for whom he pays child support, so cannot retire. His plan is to sell his home, in which he has about $35k equity, and pay cash for a trailer or a tiny home on a few acres in the country his girlfriend had offered him. Hopefully, social security will cover his expenses. If not, he will continue to skip his medicine as he does now. I can remember his wife telling me years ago that “our retirement plan is death” while she and the daughter got bi-weekly mani-pedis. I do not think they are atypical.

  75. Exactly. At some point, don’t we need to let adults make their own decisions

    No, we do not. Many people could use their FICA money. It doesn’t mean we should let them.

  76. Actually, the closest person they can call is their ex wife.

    I was watching a show about Hurricane Sandy and they were talking to a blue collar guy who ended up in his own attic as the water rose. He called his ex-wife as well. It was heart breaking.

  77. The trend of working from home has it’s benefits for time strapped people in their mid years but it can be a lonely and isolating existence for those who are older if they are not forced to leave their house for days on end. My neighbor injured her knee and it is a good thing she has family around because it was several days before I realized something was amiss. She leaves her house mainly to do groceries, otherwise with my schedule I rarely see her outside even though she has a lovely yard. She is not very old in her 50s – but seems worn down and at this point has had a few ups and downs.

  78. “No, we do not.”

    I disagree. I’m with Scarlett here. If you’re a true liberal, you should have enough respect for individual choice and property rights to not be micromanaging every aspect of a citizen’s life.

    Else, we could make an argument using statistics that show regular religious service attendance is correlated with all sorts of positive outcomes (that also reduce the financial burden on the rest of society). Maybe we should make that mandatory, too.

  79. Well, except even true liberals know that correlation does not equal causation. And there’s that pesky little First Amendment thing. . . . :-)

  80. Wanting bodily autonomy so that women can make their own choices as to whether to continue a pregnancy doesn’t really affect anyone. If I abort the fetus in my uterus, you aren’t in any way affected.

    If you don’t save money for retirement, society will have to figure out a way to deal with that as most of us don’t have a strong enough stomach to let people live out in the cold with no services when they are old. Well, maybe some of us do.

  81. i agree with Rhett. When the burden is on the rest of society to pick up the tab for those who don’t save, I don’t think FICA should be a choice. For similar reasons, I support the health insurance mandate. I would also support requiring those on public assistance to be on long-term birth control. When you ask other people to carry you, I don’t think it is unfair of the people to ask you to do your part to make the burden as light as possible.

  82. I thought we were debating a new program in addition to FICA/SS.

    I say keep SS as a form of social insurance–annuity, disability, survivors’ benefits. But we don’t need additional federal programs mandating private investments.

  83. “I would also support requiring those on public assistance to be on long-term birth control.”

    this would go against the religious beliefs of some, so would violate their constitutional rights, correct?

  84. Just about every (arguably) poor decision made by individuals affects the rest of us who eventually have to pick up the tab. So, to take a different example, if it’s ok for the mentally ill jobless to choose to live on the streets of San Francisco instead of taking their meds, why is it not ok for mentally competent, gainfully employed adults to choose not to save “enough” for retirement?

  85. I thought we were debating a new program in addition to FICA/SS.

    Scarlett said, ” At some point, don’t we need to let adults make their own decisions about how to allocate their resources? Even if they are making what WE consider to be the wrong decisions? “

    By that logic FICA should be optional. If someone wants to use that money for something else – who are we stop them?

  86. it’s ok for the mentally ill jobless to choose to live on the streets of San Francisco instead of taking their meds

    That’s most certainly not ok with me.

  87. “By that logic FICA should be optional. If someone wants to use that money for something else – who are we stop them?”

    Balance for everything. A reasonable amount of social insurance is good. 12% or 13% or 15% contributions or whatever it is should be plenty, if managed properly.

    We don’t need to extend that to mandatory private investments.

  88. “By that logic FICA should be optional. If someone wants to use that money for something else – who are we stop them?”

    If you wanted to take the argument to the extreme, sure. But because FICA is NOT optional (except for the Amish), workers are free to make their own choices regarding additional retirement savings.

  89. I liked MMM’s recent hen analogy:
    http://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/

    I wonder if 401(k) statements would just include some sort of estimate about the underlying earnings per share of the funds in the account, and displayed the product of that and the number of shares held alongside a line graph of the same, as a function of time, that should be increasing fairly steadily, more people would get the hen message.

    If all you see is the balance at the end of the quarter, it’s harder to process that.

  90. “Balance for everything. A reasonable amount of social insurance is good. 12% or 13% or 15% contributions or whatever it is should be plenty, if managed properly.

    We don’t need to extend that to mandatory private investments.”

    Completely agree. Social Security keeps people off the streets & provides a safety net against the unexpected even for those who do save. It may need to be tweaked, but we don’t necessarily need an additional mandatory retirement savings program.

  91. @Milo — Interesting idea. As a frolic and detour, I just had a conversation yesterday at work that brings home how much presentation matters — basically, old guy asking young female partner if she was “working on getting her hours up”; young female partner is on a part-time schedule because she has three young kids, is one of the hardest workers you’ll ever meet, and has always met or exceeded her targets. But this guy just looked at the published hours report that highlights billable hours, and didn’t pay attention to the asterisk/footnote that says “on XX% schedule” or do the math to scale up the reported hours to a 100% schedule to see that she’s actually outworking many others (including him, probably). So I emailed the Committee of the Running of Things and said, hey, how about instead of reporting raw billable hours and putting the part-time note in the footnote, we report the hours scaled up to full-time equivalents, and footnote the raw hours? We already scale everything up to FTE when we are doing our financial analyses and comparisons, so why wouldn’t we report individual performance using the same metric? (Yes, it is sad that even owners of a business won’t take the time to look behind the highlighted number. But in reality they don’t, so you can either keep doing the same thing and whine about getting the same results, or change).

    So I like the idea of “you now own XXX shares of the entire stock market!” on page 1 — followed by “you have increased the number of shares you own by YYY since 1/1/16 and by ZZZ since [insert date]!

    Can’t you just imagine how much calmer that would make people? They might even notice that they buy *more* shares when the market goes down. . . .

  92. The 401k/IRA system is broken not because the statements need to be tweaked. It is broken because more than half the people do not have

    Employment options with a company plan
    Enough extra money to contribute meaningful amounts
    Comfort with the financial system

    Also, the complexity of all of the self employed and company options requires a great deal of knowledge or a good accountant, and as Cordelia has mentioned, even then one can be defeated.

  93. I saw in a WSJ article that says 1/3 of invested capital comes from retirement savings. I have looked for such a number several times without finding it. I was curious about how increasing (or decreasing) amounts of retirement savings purchasing earning streams from profitable businesses (stocks) will affect the cost of those earning streams.

    I still haven’t found a number for fraction of invested capital from pension funds.

  94. @Meme, I don’t think anyone is saying tweaks will fix all of the problems; the ones you identify are far more significant contributors. I just think that some tweaks will help those who do have some money to invest (but maybe not a lot of knowledge or experience) keep from making poor decisions that lock them into buying high and selling low.

  95. LfB – I don’t think any of the fine print will help the lay investor who has the opportunity and enough free cash to set aside a modest amount of money and prompting from HR or Turbotax to do so. Until I became an informal sidewalk financial consultant for my cohort and those a few years younger, I had no idea of the degree of financial fear/illiteracy (and refusal to believe the advice that they asked for gratis) among otherwise smart people and also the degree of magical thinking about a) how long they will be desired workers or b) some version of a future in a tiny house with indefinite good health.

  96. I replaced the ice maker in our freezer this past year. I found the product number then googled it to find a replacement part. It was easy after I figured out the part number. I could not just Amazon it. Our hard water tends to destroy ice makers, so my knowledge may be useful again.

  97. Our house has mostly Kenmore appliances. I usually use searspartsdirect.com to look at the diagram and be sure I have the right part number, then order the part from them (slow, highish shipping) or Ebay (where I can google the part number). Ebay sellers usually have a long list of equivalent parts including for other manufacturers and, depending on the price of the part, I’m often willing to risk my <$10.

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