You start a new job with benefits.  One of those benefits is a 401K complete with a generous company match.  You feel lucky, your new employer is interested in your future, interested in helping you build a secure retirement.  But what if he isn’t?  What if you 401K is just a way for your employer to cut expenses?  Earlier this week, I ran across the CNN Money article: “Reality sinks in for 401K investors and providers” the article was pretty sobering.  That people are finding that they will have to work longer than planned because of the market turmoil of the past decade is really no surprise.  What I found surprising is the way employers view 401Ks, the coveted benefit that they offer employees.  The CNN Money article quotes a study by Wells Fargo that looks at employer attitudes toward the 401K.  The study found that:

1)Employers view retirement plans as a benefit rather than as the main way that employees will support themselves in retirement.  Half of employers say that they offer competitive benefits to attract and retain employees.

2)Fewer than 1/3 of employers believe that employees participate in 401K plans in order to have a comfortable retirement. Many employers believe employees are only after the match.

3) Only 1/3 of employers stated that their 2010 goal was to educate plan participants about retirement needs and  how much to save.

4) Only 20% of employers said that providing employees with the ability to retire was the greatest challenge their plan faced.

5) Only 10% said that they measured plan results against expected employee retirement needs.

In other words employers feel no obligation to assist employees in reaching retirement goals other than offering the 401K savings plan.  Most plan providers do not provide financial literacy education or education about the implications of investing in the markets.  When the markets were exploding during the heady 1990’s it seems that everyone became an investor, there was a millionaire born every minute, stock prices were destined to always rise and no one had to ask the important question: will the 401K really help people create the funds for a healthy retirement.

Some friends of mine would say that it was never or should never have been an employer’s responsibility to provide for an employee’s retirement.  I am not sure I find the philosophical point relevant.  Employee benefits are expensive and any employer will have to do something about those expenses if they hope to compete globally but the shift from defined benefit to defined contribution plans as the primary mode of retirement planning occurred gradually and quietly.  Looking at where the DOW was in the 1980s before the proliferation of plans to where the DOW ended as 401K plans took hold, one cannot help but conclude that the proliferation of 401K plans created the market explosion of the 1990s by flooding the markets with new money, much the same way that creative financing and the securitization of those loans fueled the housing bubble. In short, the 401K plan fueled the very market boom that retirees were supposed to take advantage of.  This is what we are left with:  defined contribution plans are the primary vehicle of retirement planning, but the employer who provides the plan has no vested interest in making sure employees actually reach their retirement goals.  This is America, we fundamentally believe in freedom of choice including the right of individuals to make unsound financial choices therefore it is unlikely that we will ever mandate financial literacy and education.  I believe that the most that the American public can do is realize that Social Security is in trouble, that the 401K, maxing it out and getting a generous company match will not guaranty a comfortable retirement and that financial literacy is critical to building a sound retirement. Financial literacy is more than reading the jargon of the day, it means studying financial history, bubbles and true long term returns.  Going forward a comfortable retirement will likely be due to a combination of Social Security, the 401K, savings outside of a defined plan, and entrepreneurial activity designed to generate reliable cashflow.  One thing’s for sure the employee has never been more on his or her own to create a comfortable retirement.

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Regarding HENRY

by Ouida on May 4, 2010

I started regarding HENRY when I read The fortune article “Why the ‘rich’ aren’t feeling so rich“.  It referred to a “Message  from HENRY” published around tax day in the Wall Street Journal.  HENRY is an acronym for high earners, not yet rich.  At first blush who cares about these people?

The reality is that we all should.

While they are high income earners making $250,000-$500,000 HENRY’s are not conspicuously wealthy.  While their largest expense is taxes, their second largest expense is their children;  as a result, many HENRY’s will have retirements that hardly reflect their income during their working years.  HENRY’s are doctors, lawyers, contractors, consultants and business owners.

HENRY’s are the children of struggling emigrants and the children of the middle class.

Although there are only 5 million of them HENRY’s account for a disproportionate share of taxes, contributing 17% of all federal taxes at a time when fully 40% of the country pays no taxes whatsoever.

Why should we care?  Because while everyone has had their eyes on the jobs lost in the financial sector and big names like GM, the HENRY’s are the drivers of the economy, controlling 15% of all consumer spending and stoking the engine of job growth in America.  The HENRY’s own half a million small businesses and pay $100 billion in corporate taxes.  Two-thirds of job growth is the result of the business activity of HENRY’s.

Let me say this again, the HENRY’s create jobs.

About a month ago I asked the question is it time for ATLAS to shrug? In response to the passage of health care reform, not because I feel that health care reform is a bad idea but because I question the wisdom of targeting a small segment of the population for additional taxes to fund a proposal the fruit of which all will enjoy.  If we think of HENRYs as ne’er do wells, perhaps it is easier to believe that they should pay their fair share and they aren’t doing so already.  Should a family that pays $100,000 in taxes be asked to pay more?

I am sensitive to the needs of small business.  My landscaper is an emigrant who readily admits he would make more money and have fewer hassles if he had a job, but he tells me he is an entrepreneur.   He employs a dozen guys.  He is taxed on the supplies he buys for his business and is taxed on every service he provides for his customers.  He pays FICA taxes, corporate taxes, state income taxes. corporate taxes and a roughly 7% tax the state charges called the gross receipts tax.  That tax is what it sounds like:  a tax paid on all receipts before legitimate business expenses are taken out.

I think we need to look at how we do things in America.  I do believe that taxes are the price of success in America, but we all, regardless of income level have responsibilities in a civil society.  Goose HENRY lays plenty of Golden Eggs for our country we need to make sure we don’t support policies that kill it.

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The Wealthy Vampire

by Ouida on May 3, 2010

It was the heady 1990’s and you really could not swing a dead cat without hitting a new personal finance book.  Just about all of them extolling the virtues of mutual funds and the stock market as the way to get wealthy.  The Robert Kiyosaki/Suze Orman smack down came down to just that: the viability of the stock market, mutual funds and 401Ks as retirement savings vehicles.

I was looking at a ranking of the world’s wealthiest people Warren Buffet is on that list, of course, but he has the distinction of being the only one who created his wealth as an investor and even Mr. Buffet doesn’t invest the way the average Joe is taught to invest.  Mr. Buffet doesn’t own mutual funds.  His company Berkshire Hathaway buys other companies like Wells Fargo, Sees Candies, the Pampered Chef, Geico and runs them.

Berkshire Hathaway has been around for decades.  Those who bought in the 1960s and held were the ones who created the  bulk of the wealth.  The truth is that the investment time horizon for the stock market is 30 years. In my post the Great 401K experiment, I quote author and financial strategist Charles Farrell who points out 68% of the wealth generated by market investors is generated in the years 21-30 of the investment.

One of the most interesting books I came across in the mid 2000’s was the Wealthy Barber.  Here was a small businessman, a barber, who mentored three young people about how to create wealth and wouldn’t you know it, his main vehicle was mutual funds.  He was a lover of term insurance and eschewed whole life.  Given the true historical returns of the market that I discovered while writing the Great 401K experiment, I am forced to conclude that that barber was a vampire pure and simple.

Before I go further I want to point out that mutual funds and 401Ks are not the same thing.  A mutual fund is a fund that invests in classes of assets from commodities to bonds to stocks to real estate.  You can go short. You can go long.  Yah, Yah, Yah.  The point is that you don’t have to have a 401K to invest in mutual funds.  A 401K is a tax-advantaged savings vehicle and it is a very common way that people invest in mutual funds.  I only care about 401Ks and mutual funds in so far as people use them to invest in the stock market.

Now back to vampires.  I truly believe that barber was a vampire.  From Twilight, to TV’s Moonlight, from Dracula, to TrueBlood all of our vampire subjects have become wealthy through the passage of time.  Time that exceeds the normal human life span.  Heck I just finished a cheesy vampire novel that has one of our vamp friends starting out poor in a one-room flat and, poof!, three hundred years later he is wealthy in a resplendent home.

All of this actually points out one true thing:  that wealth is actually created by taking right actions over time.  It is the American Dream that each generation will succeed and exceed the prior one.  We understand that wealth creation may take a generation or two or three.  There is simply no denying the impact of time on wealth creation and therein lies the rub.  In a pension-less society will parents become so focused on saving more, earlier in order to plan for retirement or will they simply accept a significantly lower standard of living in retirement while putting away for college and weddings for their children during their working years?

It is easier to spend money in the present when you know you have a pension in the future.  What about when you are dealing with an entity the long term behavior of which is unknown, like your 401K?  In some ways these are deep questions.  Those who begin saving early may have time to recover from the vagaries of the markets.  Those who begin saving late feel forced into the markets chasing returns in an effort to make up for the time they were not investing.  Something is afoot as more and more articles appear in the mainstream press about the shortcomings of the 401K and the perils of people being expected to provide for their own retirement.  Saving 10% with a company match will not be enough.  Perhaps we will conclude that saving 30-50% of our incomes will be.  Since most of us are human with but one life to live, I suspect that that will be the conclusion, a real bother since 70% of American households make $65,000 or less.

Ah, where is a good vampire when you need one?

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Beginning With the End in Mind

by Ouida on May 1, 2010

Adam Baker’s Man versus Debt is one of the blogs that I follow.  This post was inspired in some ways by Adam’s April 27th post When to Quit Traveling. Adam at the age of 24 or so, didn’t like the way his life was going accumulating things and personal debt so he and his family decided to sell their possessions and travel for a year.  They decided to cut their trip short by a couple of months and return home.  Adam discusses the implications of that decision on their present and future realities on his blog.

I am middle-aged.  I don’t say that like it is a medical diagnosis with all the emotional impact that medical diagnoses can have.  I say that at a statement of fact.  I am middle-aged.  I have also had a long and rewarding professional career and I have gotten to a point where I can see beyond my career to other opportunities.  Honestly, going to school for years and training to become something, in my case a doctor, can make you feel that you always have to be that thing you trained to become or practice that thing you trained to do the same way you have always done, but you don’t.  You always have the right to change your mind no matter how crazy every one around you may think that you are.

I have taken enough personal development classes to know that bringing about an even slightly different reality than the one I currently enjoy will require a great deal more than wishing.  It will require beginning with the end in mind.  The first time I heard the catchy phrase “you plan your life first by beginning with the end in mind”. I thought what kind of BS is this?!  Personal development programs always use the example of travel.  We plan trips toward a specific destination and, although there may be many ways to reach that destination, we always settle on a specific route.  The problem is that travel is easy and life can be a bit more challenging.

In the additional years of living since I first heard that phrase I now understand what that phrase truly means.  I will never reach a destination without first setting that destination as specifically as I know how. I then have to reject the things that prevent me from reaching that destination.  Wow, that sounds kind of harsh but ultimately that is really true.  If I know that in 10 years I want to be a person who owns 10 investment properties and that those properties will require a down payment of $20,000 each, I will have to engage in behaviors today that enable me to develop the requisite funds.  That will certainly mean saving money, it might mean networking to find like-minded business partners, it will also mean controlling day-to-day expenses as well as large purchases to make sure that I have the funds on hand that I need to buy the investment properties.

The toughest thing about beginning with the end in mind is deciding what that end is, deciding what I want my life to look like in all areas.  If I make one decision will that close off other opportunities?  Probably, but life teaches that a decision will also create opportunities.  There is a whole multi-million dollar  industry called personal development and life visioning to help people decide what they want illustrating that this is the toughest part of the life change process.  What if I make a decision and fail in the attempt?  I have to ask myself what is the worst that could possibly happen and can I survive that?  Yep, fear of lost opportunities and fear of failure are probably the two reasons people find it hard to decide what they truly want and therefore find it hard to make change.  I know that is surely the case for me.

Looking back, I found it relatively easy to be where I am today.  I certainly worked and worked hard and there were times that I felt quite alone. Looking forward feels a bit different because there is a certain level of complacency.  I really don’t have to do anything different and, except for the stirring in my heart, I would make no change at all.  Fortunately I am into listening to my heart these days.

First step?  Begin with the end in mind.  Quite fortunately in life we can have several beginnings.  Thank God for yellow note pads!

Are you beginning with the end in mind?

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