I think that most folks who have read my blog understand that I am not a fan of the 401K. The market crash of 2000 and each market crash after that have lead me to believe that the vehicle of tax-deferred savings with the majority of those savings going into the stock market is simply not going to help the average worker reach any sort of secure retirement. A couple of years ago, I wrote and and published an article outlining what a scam I thought the stock market was and is. I also put the article on my blog. Recently I have posted to my Facebook page links to articles I have found around the web about Social Security. These articles are not so much about the need to overhaul the program, they are about what financial planners are telling their clients in anticipation of changes to the program. I have posted these articles for one reason only: The people getting the financial advice are 6-figure income earners.
Throughout the Bush era, the median household income was $43, 000. That income threshold is now slightly above $50,000. Only 25% of US households earn above $66,000 dollars. In other words when financial planners are talking about building a secure retirement future, they are not talking to the majority of working Americans.
CNN posted an article, Secrets of Extreme Savers, that I also posted to my Facebook page. Many of these savers were six-figure income earners but not all were, some were single, some were not, some had children, some did not. The one thing that they all had in common? They all saved 30-40% of their after-tax income. The one who saved the least, 25% actually started a side-business to make up the difference.
This turns the whole concept of living within your means on its ear. Living within your means will land you in the poorhouse, the truth is that you have to live well below your means. Unfortunately this concept is entirely at odds with an economy that has consistently outsourced its manufacturing to cheaper labor markets and has become increasingly dependent on a spending consumer.
The mantra of save 10%, get a 50% match then invest in the stock market for 15-16% long term returns and a secure retirement is simply a financial myth. Every financial book written in the 1990’s had some version of this formula in it and retirement savers adopted the strategy en masse. Simply “googling” the search terms, history of the 401K, leads one to the inescapable conclusion: that the proliferation of 401K plans led to the very stock rally that culminated in 1999 and that retirement savers hope will occur again today. It won’t. In 1982 the DOW sat at roughly 800 by January 2000 it was at roughly 11,700. The last decade has been classified as a bear market. The demographic trend, the baby boomer generation, that created the bull market run of more than a decade ago has passed. Those boomers are no longer saving for retirement and driving the markets, they are collecting Social Security.
The truth is that we have to save more and investing for appreciation in the hopes that that strategy will lead to a secure retirement is probably a fools game. The crazy thing, though, is that the 401K was never intended to get anyone rich. It was intended to supplement Social Security. From Teresa Ghilarducci professor at The New School for Social Research, “In a perfect world, an average worker could amass something like $400,000 in a 401K by retirement. After nearly three decades of 401K contributions, though, the average account balance for people nearing retirement age is about $60,000. Far less than what’s needed. So it’s no surprise that when a recent Gallup poll asked what Americans want most from government, more chose guaranteed pensions than guaranteed jobs or health care. Most people save less than 5% of their income for retirement, and many start withdrawing funds early because of layoffs, divorces , and other unexpected events. The consequence of these 401K leaks is that workers retiring in 15 years will do worse than their parents and grandparents, according to the Center for retirement Research at Boston College. Almost two-thirds of households will probably face declining living standards in retirement.”
In short, the 401K was intended to be a base hit, not a home run and saving 10% was the least a worker could do to prepare for the future, but not the only thing.
I used a retirement calculator to calculate the payout over 30 years for a given retirement fund balance. Then I went to the Social Security website to find the benefit of a person born in 1948 and retiring at age 62. An individual with a $400,000 nest egg in retirement + Social Security will yield an initial retirement income retiring at age 62 of $2000 per month. Assuming 3.5 % investment return and 3.5% inflation that worker will be able to give himself additional modest increases in income throughout retirement. This retirement calculator at hugh’s calculators is a handy tool.
As I plan my retirement now, I look at what I have today and what I can buy today that will give me cashflow in retirement. Buying buckets of bonds and dividend-yielding stocks will give cashflow in retirement. Buying stocks for appreciation won’t. Buying rental property will, buying a house won’t. Starting or investing in a business will, looking for a job unless, I intend to save a third of my income so that I can engage in one of the other strategies I just mentioned won’t.
Am I saying that a person who is unemployed with the wolves at the door shouldn’t look for a job? I will answer that question by paraphrasing author, Robert Allen. In 2002 I attended a Robert Allen seminar and he basically said this: Some of you are here today because you are hurting financially. Many of the opportunities we will discuss here are not going to be for you. I urge you instead to do what you need to do to get stable.
I take that to mean find a job, sell your crap, sell your ideas, what ever you can to establish an income stream then save 30-40% so that you can buy things that generate cashflow. The truth is that most folks generate income to pay the bills, but that is a pretty narrow view of money. Each dollar generated has to pay the bills today and work to build a future. It is a lot to ask of a dollar to do two and three jobs at once, but we have to do it. Creating a situation where each dollar does more than one job versus only doing one job is the difference between taking a leisurely stroll in the park on a sunny day versus running an endless marathon in the mud.
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