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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsThe Crushingly Expensive Mistake Killing Your Retirement
http://www.theatlantic.com/business/archive/2014/02/the-crushingly-expensive-mistake-killing-your-retirement/283866/?n11qlt
Humans are horrible at understanding compound interest, and it's making our golden years much less so.
Think about your 401(k). The first thing you probably look at when you pick your funds is their returns. It's only human nature. Everybody likes to think about their nest eggs growing and growing and growingespecially if they're growing a little bit faster than everybody else's. But, in this case, human nature is costing you hundreds of thousands of dollars.
The sad fact is that returns aren't certain, but fees are. Now, maybe everything will go according to plan, and your 401(k) will be partying like it's 1999. Maybe the 1 percentor morethat you're paying in fees will actually buy you market-beating returns. But probably not. You can see this in the chart to the left from Vanguard. It shows the percentage of actively managed funds that have underperformed index funds over the short and longer hauls, net of fees. Which is to say, most of them. It's hard enough for funds to beat their benchmarks over just one to three-year periods. But that gets damn near impossible the longer you go. Once you account for survivorship biasthat bad funds go bust, and disappear from the samplealmost 80 percent of actively managed funds don't beat simple index funds over 10 to 15-year periods.
In the meantime, you're stuck paying fees. Those fees don't sound too badjust 1 percent!but this is where our total lack of intuition for how compounding works really hurts us. Let's try an example: what's 0.99 to the 40th power? It's not exactly a calculation you can do in your head. It's not even one you can estimate. But it's the kind of calculation that you need to do to figure out how much your 401(k) fees are costing you.
onehandle
(51,122 posts)Fumesucker
(45,851 posts)I think that means one third of your retirement funds will disappear into fees over 40 years at a 1% rate per annum.
Skidmore
(37,364 posts)when we were forced to invest part of our retirement plans in the stock markets.
reformist2
(9,841 posts)PowerToThePeople
(9,610 posts)Nothing more. The ONLY way to make money is to sell to someone else higher than you bought it. Since unlimited growth is impossible to achieve mathematically in a closed system (Earth), someone is going to be holding the bag and taking a loss for the profits made. The hope is, that someone is not you. But, more than likely, that someone is you.
Fumesucker
(45,851 posts)Then you are the mark.
tkmorris
(11,138 posts)exboyfil
(17,865 posts)The one thing that they can do with 401 (k) is to allow the direct purchase of U.S. Treasures with a small transaction fee to buy. Low cost index funds for the stock market. My 401(k) and IRA have made a big difference in my life. I have options I would not otherwise have.
In theory the stock market is supposed to make capital available to invest in our economy. For examples by far the largest shareholders in my company are retirement funds. Those owners keep me employed.
PowerToThePeople
(9,610 posts)unless your business is losing money, the people purchasing your product and services keep you employed.
dawg
(10,624 posts)Don't get me wrong, I understand how you feel. And it is true that the stock market is rigged to some degree. But it is not true that it is a Ponzi Scheme.
Selling your stock to someone else is not the only way to make money in the market. Those insanely high corporate profits? A significant portion of those earnings accrue to the benefit of the shareholders. And those dividends are taxed at a lower rate than labor because rich people want it that way.
Also, the Earth is not a closed system. Every day, the Earth is bathed with an immense dose of solar energy, and our current technology is only capable of utilizing a tiny fraction of it. We have also become a space-faring people, which opens up limitless possibilities for growth down the line.
PowerToThePeople
(9,610 posts)For all intents and purposes, the Earth is a closed system. If we are not harnessing the solar energy then it is not being capitalized on. We can ignore that, since it is not a part of the economic system. We are not farming other planets, so that can be ignored as well.
Also, dividend earning stocks are the extreme minority offered to the general public.
The stock market IS a ponzi scheme.
dawg
(10,624 posts)Microsoft pays 3.0%. GE pays 3.4%. Pfizer pays 3.3%. Coca-Cola pays 2.9%. Pepsi pays 2.9%.
Of the 52 stocks I monitor as potential investments, 50 of them pay a dividend.
Or, you could just buy an index fund that diversifies your holdings across the entire Fortune 500 universe of stocks. That would pay a dividend of only 1.8%, but you would be protected from being crushed by problems in any one company or industry.
As technology advances, the things we are capable of building and doing grows exponentially. The owner-class is perfectly happy with you not owning a piece of that potential growth. Sure, they are willing to use the market to churn you, and rip you off, if you let them. But you can also use the market to beat them at their own game.
PowerToThePeople
(9,610 posts)You are not going to beat them at their game. You may be able to run in and scrape some meager portion and get away safely, but you will not beat them. Think of crows circling a lion eating his fresh kill. You are a crow. You do not beat the lion. He could kill you in one bite if he gets you.
There are few normal people you have the ability to "beat" the wealthy (who have professional investors working for them) at their own game.
dawg
(10,624 posts)Their "professional investors" are a joke. They move like a big, dumb, frightened herd. All they care about is extracting commissions from their rich clients.
Response to dawg (Reply #16)
PowerToThePeople This message was self-deleted by its author.
PowerToThePeople
(9,610 posts)so you are able to outwit those pesky 1%ers and their leagions of bankers. What about those who can not? They just lose? They are unworthy of having a decent life on this earth? They can just deal with whatever scraps you want to give them? You, the great investor, can donate to some charity to help those unfortunates? That is so great of you. I bow down to your superiority...
Adrahil
(13,340 posts)Every bit of food we eat would be impossible without energy form the sun. And population growth (and thus, market growth) is also directly related to this. If the earth were a closed system, we'd all be dead in a matter of days.
PowerToThePeople
(9,610 posts)I never considered photosynthesis...
Still, energy extraction via photosynthesis is not enough to allow for eternal exponential growth in capital markets.
Adrahil
(13,340 posts)the planet can support probably 2-3 times the current population, and at a higher standard of living. That's a LOT of market growth.
I do agree that a growth-based plan is ultimately doomed. And since capital markets depend upon growth, that will have to change. But there remains lots of room for market growth in the short term. The REAL challenge will be growing markets without trashing the planet or destroying the market by impoverishing consumers.
Igel
(35,337 posts)But the thing about a Ponzi scheme is that at the end the markers you have are worthless. All the money you paid in late in the game is paid out to those who bought in early, so nothing is left.
Stocks are a different. Unless the company goes belly up, they still have some valuation because they're tied to assets.
Also, unless the company runs no profit you get dividends. If the company does well, you get splits.
The stock market usually adjusts itself for inflation, as well, as the assets tied to stock valuation inflate. (They can also deflate, which is a different problem.)
So a portion of the value of the stock is in many cases speculative, but there's also a portion tied to dividends and current value of assets. Which is different from a Ponzi scheme.
Used to be that dividends were what people bought stocks for. That and long-term appreciation. Now that people think that everything that takes more than 3 minutes is too long to bear, and a long-term project is one that takes 2 years, too many people are in the market for sheer speculation. That killed the housing market, all the greedy people getting as much house as they could afford at the moment because then they could see the house values appreciate in the next 30 minutes and flip them, with more greedy people providing mortgages that no reasonably educated person would accept if they didn't think "long term" really did mean "2 years."
This has always been a part of America's way. (Which statement is, of course, two-way ambiguous. Gotta love syntax and s-cliticization.)
reddread
(6,896 posts)both ripoff the taxpayer who hopes or intends to secure their future.
Is there anything that appreciates less than cash in hand?
We are so close to finding out what our aging and senior populations will ultimately face
in this Mean New World.
Wonder who will be profiting from their needs and suffering?
We are going to be a fifth world economy.
They just need to obscure the facts through 2016.
doc03
(35,363 posts)I had it invested in various mutual funds. Around 1990 my employer started a 401K so I couldn't deduct IRA deposits anymore. So at that time I divided the balance 50/50. I put 50% in a bank CD and the other 50% in Vanguard funds, today I have roughly twice the balance in the mutual funds then I have in the bank CD. They total about 360% of the total deposits I made in the IRA. Inflation from 1984 to today is about 225% that is if I would have deposited all the money in 1984. So I think I did pretty good in the market.
Igel
(35,337 posts)My father did so, and locked in good rates and got a lot of appreciation in his paper assets. For 20 years he made the occasional change, but only the occasional change.
That lasted until he went with a new broker who was more into risk and speculation. Same company, just a different branch. Young whipper-snapper followed the advice of the advisors. Fairly quickly all the conservative, long-term investments were junked and what he was moved into was risky. The arrogant kid assumed he knew everything because, well, he was young, liberal, and had his college degree.
You don't put a 75-year-old man into risky stocks and bonds that might have a high payoff. You don't tell him that he should be in for the short-term since that's what he has left.
tridim
(45,358 posts)People actually get paid enough to save for retirement? <- IMO the actual problem.
doc03
(35,363 posts)have a good paying union job. We had a defined benefit pension and in addition we made enough money to invest in a 401k. If a person isn't retired or within a couple years of retirement they are screwed. I am secure today but I get one small pension from the PBGC and I have another defined benefit pension. I expect eventually that DB pension will be taken over by the PBGC. Will the government honor their commitment to the PBGC? If the Republicans have their way, they won't. I have heard a couple of them say why should the taxpayers bail out someone's pension when many don't even have one themselves. In my opinion we are headed for a revolution, I think the 99% eventually will get fed up.
MattSh
(3,714 posts)Might that be electing Republicans?
Just thought I'd ask...
Fred Sanders
(23,946 posts)TexasTowelie
(112,369 posts)Last edited Sun Feb 16, 2014, 06:05 PM - Edit history (1)
if the economy is subject to high inflation and no COLA occur with the DB plan. My father retired in 1985 and lived until 2012. He collected a pension check and SS benefits, but gradually his income barely covered his expenses. He was very frugal and had some assets, but if he had to pay for housing as prices inflated rather than locking in a fixed payment on his mortgage, then the situation could have been worse.
Still a defined benefit plan is better than a defined contribution plan which is better than no plan at all. There are going to be so many people struggling later in life that it could lead to instability in our current social structure.
doc03
(35,363 posts)a month. When he died in 1989 inflation had eroded the value of $300 to $119. Even with our low inflation the buying power of my DB pension has lost $60 a month the last 2 years.
Fred Sanders
(23,946 posts)inflation. It is unfortunate your father did not have such a clause, but 1974 was early in the evolution of this type of plan.
doc03
(35,363 posts)20 years or so even with low inflation it really takes a bite out of a pension. I am depending on making the difference up with my IRA.
doc03
(35,363 posts)keeping their promise to insure it. We get a Republican administration they will let it go under,
after all DB pensions were mostly union jobs.
hughee99
(16,113 posts)And pension funds never invest in the markets.
Fred Sanders
(23,946 posts)required to file annual actuarial reports, stocks, bonds, real estate etc. are all part of the mix of course, but I am not sure about your taking issue with investing, if the proper legal structures and reporting are in place.
hughee99
(16,113 posts)If an independent board is putting it's money in some of the same casinos, what's the difference? My big issue is that workers seem to be losing their pensions left and right these days (or getting them significantly cut), so I think the notion of ANY retirement plan being truly guaranteed is somewhat of a farce.
ctsnowman
(1,903 posts)eppur_se_muova
(36,281 posts)Egalitarian Thug
(12,448 posts)a good estimate.
madinmaryland
(64,933 posts)That employees are really using their 401k's as a savings plan to cover times when they are unemployed or underemployed. It has happened to me. I have NO savings due to short stretches of unemployment and really cannot worry about retirement, even though I am only 15 years away from retirement.
TexasTowelie
(112,369 posts)and for many others that I know.
madinmaryland
(64,933 posts)such thing as job security anymore, they have abdicated any responsibility for their employees retirement years. Interesting how unions and pensions have been decimated over the last 33 years.
TexasTowelie
(112,369 posts)"Human Resources". Like most comodities, the people are there be used and disposed of after they are no longer useful.
I was fairly lucky about 10 years ago because the company I worked with matched half of the employee contribution up to the first 6% of salary on 401k plans. I also chose an aggressive mix of mutual funds that were invested in the Asian markets and tech.
I also kicked in to the ESOP plan when the stock price was near its lowest and the price tripled while I held. Overall, I drew a 120% return over four years, so I was pleased that I took the risk. I also was the beneficiary of some good timing since I sold all of the stock about three weeks before the market crashed in 2008.
madinmaryland
(64,933 posts)We should really have a pension system, that both employees and companies pay into.
Oh wait, we do have that. It's called Social Security and should be expanded to provide a full retirement to senior citizens (which I will be one of in the near future)
Nevernose
(13,081 posts)Refers to the rest of us as "human capital." We're not even a resource anymore, just a disposable commodity.
Jenoch
(7,720 posts)to invest just $100 per month in azretirement plan. (I was 32.) i attempted to explain compound interest and investing. I don't think I got through to them. I wonder how they are doing now?