Guy who wrote book in favor of 401ks in the 90s - can't retire cuz his 401(k) is now in tatters

[Liberal_in_LA]

My Faith Based Retirement

The only thing I haven’t dealt with on my to-do checklist is retirement planning. The reason is simple: I’m not planning to retire. More accurately, I can’t retire. My 401(k) plan, which was supposed to take care of my retirement, is in tatters.

Like millions of other aging baby boomers, I first began putting money into a tax-deferred retirement account a few years after they were legislated into existence in the late 1970s. The great bull market, which began in 1982, was just gearing up. As a young journalist, I couldn’t afford to invest a lot of money, but my account grew as the market rose, and the bull market gave me an inflated sense of my investing skills.

I became such an enthusiast of the new investing culture that I wrote my first book, in the mid-1990s, about what I called “the democratization of money.” It was only right, I argued, that the little guy have the same access to the markets as the wealthy. In the book, I didn’t make much of the decline of pensions. After all, we were in the middle of the tech bubble by then. What fun!

The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That’s where I stand today.

When I related my tale recently to Teresa Ghilarducci, a behavioral economist at The New School who studies retirement and investor behavior, she let out the kind of sigh that made it clear that she had heard it all before. The sad truth, she told me, is that I’m the rule, not the exception. “People have income shock, like divorce or loss of a job or a health crisis,” and those crises tend to drain retirement accounts, she said.

http://www.nytimes.com/2012/04/28/opinion/nocera-my-faith-based-retirement.html?_r=1&src=me&ref=general

[HiPointDem]

1. what a surprise. i remember when 401ks were replacing regular pensions & being touted as

a path to financial freedom. "you can invest your own money!" i knew it was a lie even then.

but people ate that shit up.

"the bull market gave me an inflated sense of my investing skills."

remember this well, too. all my relatives telling me about how they hit big with stock x, as though they'd discovered it for themselves & didn't hear about it through some stocking pimping source.

then suddenly, everyone stopped talking about their "investments".

and here we are.

[Liberal_in_LA]

2. investment 'experts' would tell employees, $5 per month will be $1 million

by retirement age. I remember those days.

[HiPointDem]

5. financial industry made out well on the deal though. lots of nice fees.

[crazylikafox]

9. And now they're pushing this as a replacement for Social Security too.

Why do people fall for this shit?

(edited for fat fingers)

[HiPointDem]

11. i don't know why people fall for it. my theory is that it's generational. they bring round their

poison when the generation that learned the lesson is dying off and a naive one is just coming into adulthood.

young people don't hear their elders too well and often tend to discount those life lessons. especially if the elders are "failures" or "low-status" in the eyes of the youth.

[magical thyme]

3. uh-oh. time to write a new book. nt

[Liberal_in_LA]

4. lol. he probably will.

[badtoworse]

6. So what is he recommending? Not saving for retirement?

401k's ARE a good idea, but you have to invest prudently and have the discipline not to use the money for other purposes.

[Liberal_in_LA]

10. he's just lamenting his loss. The expert in the article is reccing that 401ks be rethought

[badtoworse]

16. The statistics cited are sad. It's going to be a huge problem

[CTyankee]

28. The problem is that this only works if you make enough money and start early enough to

to invest enough to "make it" in retirement. Oh, and you have to keep your jobs too...no two or three year stretches of unemployment. People who work in nonprofits or people who take time off to raise children just cannot do it (I know, I tried).

[bluestate10]

41. It works if a person has a balanced portfolio and don't over tweak the savings.

Too many people in 401k plans seek to make the plans seudo stock picking tools.

[CTyankee]

56. I didn't do that. I simply did not make enough money to put aside for my retirement because

I didn't start out in one place, going up the ladder and putting more and more money in as I got increases in salary. I started late, being that I raised kids and only went back to work when the youngest was 6. I started at a lower rung salary-wise. We moved. I got a divorce and became a single mother. My salary and child support was not enough to keep us afloat, even tho I put in regularly what I could towards retirement (I was working in non-profits).

You see the pattern. I have no doubt that the 401k deal was a set up from the get go. The people managing these plans were in it for a profit. No wonder I and other workers suffered. It's a scheme to rob us of our salaries to fatten their wallets. And it's crazy.

Luckily, I was able to retire thanks to my parents portfolio stretching back over 40 years, since my brother predeceased me. That, the pittance I put in over my work years and Social Security, saved me. But my inheritance was the keystone, not the other two. And believe me, there are others I know who only have the latter two, not the former. And they are really suffering.

[coalition_unwilling]

30. "you have to invest prudently and have the discipline not to use the

money for other purposes" - that's a tall order when the safety net is frayed and in tatters and there is so little financial education out there. I used to have co-workers come to me for advice on what to do with their 401-Ks, all becuase I could sling a term or two knowingly. Since California is ending its Fed-Ed extension of unemployment as of May 12, 2012, I may have to start tapping my rollover IRAs. I don't want to do it, but I also have a mortgage and other obligations.

[saras]

7. That's why real retirement accounts prevent you from withdrawing, not merely make it expensive

Of course, a real retirement account ought to be converting your money to investments that won't lose value in bubbles, as you can pretty much guarantee that one will be manufactured at the appropriate time.

[Curmudgeoness]

8. I never understood how they expected us

to be competent investors---and that has come home to roost more than ever when I see that the professional investors have also been wrong.

We are teachers, janitors, waiters, doctors, secretaries, butchers, bakers, and Indian chiefs. We have skills. But we can't know how to do everything. And investing gets more complex daily. How are we supposed to keep up with all the new offerings, old offerings, and the market ups and downs? I knew this the first time I heard about IRAs and 401(k)s. But the appeal of having "your own money" saved and invested was too much.

I originally saw this as a way to get the whole country investing and caring about the markets. I saw it as a way for smart swindlers to get their hands on the hard-earned money of the masses....and I wasn't wrong.

[Egalitarian Thug]

13. Even if you are, they are so restricted in choices and it takes weeks or months to make a move,

that in the end, what they are is a massive slush fund for Wall Street. Half the secret of the so-called boom years and the fundamental shift away from a production economy to the kleptocracy.

It's only "your money" so long as you do what we allow you to do with it.

[roscoeroscoe]

14. great point

lots more suckers i mean customers for the investment professional!

[A Simple Game]

49. You aren't expected to be a competent investor. If you were competent and knew

with 100% certainty what was going on, you would not blame yourself when they stole your money.

The money we lost on 401(k)s was not raked into a pile and burned, someone has it, just not us.

[Curmudgeoness]

51. That is true. We were always expected to be incompetent.

And then they throw the blame at us for not making the right choices and not being informed. But in reality, they were betting on this. They blame me, and I blame myself for letting them get their hands on a penny of my money.

I like the comment about the money lost---that puts it into simple terms that we all can appreciate.

[Egalitarian Thug]

12. K&R&No Shit. n/t

[Baitball Blogger]

15. About financial consultants, something really weird just happened to me.

I got a knock on the door and it was some guy who wanted me to let him in to talk about financial consultants. Get this, his come on line was that he worked with some of my neighbors.

Is it normal for financial consultants to go door to door?

[Curmudgeoness]

19. I had a financial consultant come to the door years ago.

This was during the bull market times. He was opening a new business in town and was trying to get exposure, I suppose. But instead of getting my business, it scared me away from him. There was something creepy about financial services being sold door-to-door.

[Baitball Blogger]

20. That was my impression, too.

We did have a really nice guy as a consultant. But in the end, he couldn't do anything for us. There's no reason for us to find another. We did better without them.

I worry about people who have really unethical consultants.

[RebelOne]

17. When I was laid off my job in 2010, my 401K was also in tatters.

I pulled the money out and put in my savings account. At least, I knew it was not losing money. In fact, that is the only money I have in reserve because now I am living on social security, which isn't too bad because it meets my basic needs. But that money in savings is for emergencies.

[Liberal_in_LA]

18. I'm glad you have that nest egg for the extras

[RebelOne]

54. Not that much. Only a few thousand

and at this time, it won't go far/

[badtoworse]

22. There was no money market or safe harbor in the plan?

Didn't you have to pay a penalty for an early withdrawal?

[Ruby the Liberal]

24. Only before 59 1/2

Member stated she is already drawing Social Security.

(Noting that there are exceptions)

[Festivito]

21. If only Social Security had been "Democratized". (--Angry sarcasm. /nt

[NNN0LHI]

23. Bet he thought we didn't need all those dirty manufacturing jobs either

Well guess what?

We did.

Don

[Liberal_in_LA]

27. we'll all be rich from working on computers. Just get a computer degree, that's all you need

[eyewall]

25. Three attempts to build a 401k failed for me.

If it weren't for Social Security I'd be in real trouble.

Social Security is a brilliant system. An individual can't ruin it for himself.

[Ruby the Liberal]

26. "I didn’t make much of the decline of pensions"

A lot of people overlooked a lot of things starting in the 80s.

NAFTA, Repeal of Glass-Steagall, lack of regulation on Commodities/Futures, the Derivatives bubble, the tech bubble, the housing bubble (and the Fed propping that until it burst), the HFT casino run by math engineers as opposed to selections by CFAs, etc, etc, etc.

Funny how that all worked out.

[JoePhilly]

29. This guy is a dope ... his 401k was not the problem.

I'm sorry ... I started my 401k in 1990. And its done just fine.

From what I see, what killed his 401k was the divorce, and the rather stupid mistake of cashing in 401k money because he bought a house that needed costly renovations.

Re-Read what he wrote ...

He lost HALF of his 401k in a divorce. That's not the 401k's fault. The other half didn't disappear, it went to his wife, so it still existed. He just didn't have it any more. His EX had it. And if you stay married, your spouse will be using that 401k money too. Or what, was he planning to kill her after he retired so he could have it all to himself. A 401k is an asset, and assets are divided in a divorce. That's just a fact.

And then, he made the foolish decision to buy a house that needed costly revisions, and to use his 401k to pay ... which means he decided to SPEND the money .. AND he paid taxes and fees for the early withdraw. But again, the 401k did not lose value ... He made a bad decision and SOLD IT.

The author glosses over the real issue. People make bad decisions. That's not the 401k's fault. In addition, the article does not discuss the role of company matches, or of the tax break you can take by funding a 401k. The article is correct that a healthcare crises or a lost job could cause one to use 401k money, but even then, that's not the 401k's fault. Personally, I'd like to see some change in the 401k program such that you could use it for Health issues or job loss. That would be a nice improvement.

Lastly, the article does not say anything about what most people would have done with the money if there was no 401k. Years ago, I had a friend recommend that I put money in a 401k. He said, social security could go away. He said, if a company goes under, you can lose your pension. A 401k is something you can control. You can pick the investments, and you can be as aggressive or conservative as you want.

I'm glad I did not blow that money on fancy cars or extravagant things. I've invested my 401k broadly. I tune it regularly.

Bottom line: The 401k wasn't the problem.

[coalition_unwilling]

31. The popping of the tech bubble in 2000 also did not help but I agree with

you that is not the fault of the 401-K but of a failure to disversify adequately. If, in 2000, the author had 60% in bonds and only 40% in tech stocks, he would have escaped pretty much unscathed. (It was more difficult in 2007-08, because then all asset classes other than money markets and cash seemed to get hammered.)

But you make some excellent points. The tax benefit from the 401-K alone, even if there is no employer match, makes it pretty much a no-brainer for most average working folk.

[JoePhilly]

36. Right ... no argument here.

I think my main point would be that one could take the money and not invest in a 401k, and do something else with it.

Or, you take it and invest in the 401k.

Either way, you are making the decisions.

And so, if the article is saying that people make bad decisions, I agree ... and they'd make just as bad decisions even if they did not put it in a 401k.

[dkf]

33. Look at his timeline...

"The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That’s where I stand today. "

So 2000 plus a half dozen years is 2006 plus a couple years places him in 2008-2009.

He sold at the bottom and paid penalties and paid taxes. I guess that makes him really really unlucky?

[JoePhilly]

35. Here is a nice chart of the DOW from 1971 to March 2012.

He says he started to invest in the 70s ... even if you pick the lowest point during the Tech bubble pops, its WAY UP.

http://www.the-privateer.com/chart/dow-long.html

Which means he was buying low for about 20 years. Even at the low point of the tech bubble (say the dip in 2003), everything he bought up until 1997 MADE MONEY relative to that point. How can he claim he lost HALF of everything he invested up to that point when that point is well above the levels 20 years prior ... years in which he was investing. Makes no sense.

Then, around 2006 he gets divorced. The Dow at that point is between 11 and 12k. He's still up because he has yet to touch that money ... so his wife gets HALF. That's what happens in a divorce. You split the assets. SO now he has HALF of what he had.

Then, sadly, he makes the mistake, and it is a mistake ... to pull MORE money out of his 401k, to buy a house that needs very costly renovations. That's not bad luck. Its a BAD decision.

Luck had nothing to do with it.

My sense is that he thought that he could buy the house, fix it up, and then make back the money his wife too in the divorce.

[dkf]

43. Goodness he is the NYT business columnist!

And worked for Fortune.

I wonder what his point is? That even people who understand basic principles are likely to make bad decisions?

[JoePhilly]

59. OMG ... he was a NYT Business Columnist!!! And Jim Cramer is on CNBC ...

screaming nonsense 5 days a week. Do I care?

And he clearly did not understand the basic principles.

If he did, he would not blame his divorce. Nor would he blame his decision to spend the money on a house he'd need to renovate.

Arguing "from authority" doesn't really help you here. His mistakes are "basic" ... clearly he did not understand those basics.

[coalition_unwilling]

44. I suspect he, like so many others (myself included to an extent), caught tech fever in

the late 90s and ramped up his contributions such that he was buying high-flyers like Cisco (or maybe a NASDAQ index fund like the Triple-Q) at their height. IIRC, Cisco plunged almost 80% from its high. (I rode it part of the way down, but was such a small player that I didn't get hurt much.)

As for the house that needed renovations, sounds to me like perhaps he caught the bubble mentality so many others caught and harbored ambitions to flip the property and got caught when the bubble burst and he could not unload the property. Just a guess from reading between the lines.

You can call each of these bad decisions, or you can say this guy has a real talent for getting caught up in the bubble mentality when the market has almost topped out. Either way, he does not sound like a serious investor. Warren Buffett says his ideal time period to hold a stock is 'forever.'

[A Simple Game]

50. That's a good idea, let's reread it.

"My tech-laden portfolio was cut in half." Apparently you started reading after this short sentence.

As for the divorce, those things happen, and I agree with the wife getting half, but now his 401 is about one fourth what it was. As for being his fault for taking money out for renovations? Maybe he thought he would make up for what he lost when the tech bubble burst by getting in on the housing bubble, then it burst?

If 401s are to replace pensions, perhaps they should have the same safeguards pensions have, no withdrawal until retirement. The system allowed him to make bad decisions.

[JoePhilly]

57. I never said 401ks should replace Pensions.

And again, if you remove the 401k from the discussion, do you think he would have made BETTER decisions with the money?

I don't see anything in the article that suggest that YES, he would have made better decisions.

Again ... the 401k is not the problem.

[coalition_unwilling]

32. There's a wonderful comment from a "Paul Gallager" of

London, OH:

"This is the fundamental difference between conservatives and liberals:
The former would consign those not blessed with luck or genetic advantage to some out-of-sight, out-of-mind dust-heap of failures.
The latter acknowledge that most people will fail some or most of life's tough tests, and it's society's job to both catch them when they fall and care for them when they can no longer try.
This is why we have a social safety net, and why it needs to be strengthened, not weakened."

Unfortunately the comments are closed, so I can't rec the comment on the NYTimes site.

[Nye Bevan]

34. Don't blow your retirement savings on home improvements

would seem to be the moral of this story.

[JoePhilly]

37. +100 ... and I'll add.

Exactly ... why buy a house that needs costly renovations. My guess, he thought he could fix it up, flip it, and make back the 401k money his wife got in the divorce.

[tsuki]

38. I remember telling a friend of mine that come 2011 when the boomers

start retiring the market will crash.

[deutsey]

39. Where's the fucking money, shit head?

Quotes from The Big Lebowski remains all-too relevant as time goes by.

[Nye Bevan]

40. He spent it on home improvements.

Obviously a nice marble master bathroom beats a comfortable and secure retirement.

[gratuitous]

42. Life do have a way of happening, don't it?

When the market's rising and everything's doing well, picking winning stocks isn't so very difficult. Throw a dart at the financial page, and you're on your way. When the market's stumping and bumping along, it's a little trickier, innit? And when the market's falling, it takes nerve to hang in there. Nerve and knowledge. Of course, if you're working a regular job, raising a family, and pursuing other interests, you might be a little short on knowledge. Even the pros don't always know what's going on, or if your particular pro makes a faulty analysis, you can watch your carefully husbanded investment bite the dust anyway.

And that's just the market. Throw in a few other variables, like your marriage falling apart or your job getting downsized. How about a big illness with inadequate insurance? Or maybe your spouse or a close relative gets busted for embezzling or something? Yeah, if every little thing goes exactly as planned, you can put away plenty for a very comfortable retirement. But most folks are one bad turn away from the skids. And it doesn't even have to be that bad a turn.

[coalition_unwilling]

45. I hope you will consider fashioning this into an OP. It's really powerful stuff - I will

say that all good financial planners that I've read recommend strongly not investing in the market until one has built up a rainy day fund of 6-12 months of expenses that is in a government-insured savings account or laddered CDs. IOW, you should only invest with a minimum of a 5-10 year time horizon and then only after you have set aside the rainy day fund.

[raouldukelives]

46. Sorry to hear that he suffered at the hands of the problem.

Every dollar invested in Wall St is a vote for more of the same. So if your enjoying this shit were living in, feel free to increase its influence daily. You only live once, ya know. Too bad others have to be born into it but they can figure it out. We can only pray the invisible hand will guide them as well as it has our lives.

[Sen. Walter Sobchak]

47. The 401k was NEVER intended to be the basis of a retirement system

The sole purpose was to grandfather corporate matching retirement investment plans from changes to the tax code. My dad has one of these pre-401k accounts - it was intended to supplement his pension, not replace it.

[NNN0LHI]

48. You are correct

We had a similar program. It was called TESPHE or Tax-Efficient Savings Plan for Hourly Employees.

It was never designed to replace our pension. It was designed to supplement it.

Same thing goes for Social Security which was intended to supplement a pension and not replace it. They used to teach us that in high school. Unfortunately I don't think they teach that any more.

Don

[CTyankee]

62. But there were people, such as my father, who had no pension and had to rely on something

else. My mother had not worked for years when my brother and I were young, but when she went back to work she had to brush up on her basic skills and her pension was small by the time she retired. They had put together a nice portfolio for themselves, which nicely met their needs at the time.

But if they had been younger and lived longer, it would have been very inadequate. In a way, they died at a good time, having lived long and productive lives into their 80s and 90s, before everything went to hell.

[SoCalDem]

53. Yep..Pension + SS + 401-k = security

Except for the part where the corporations then eliminated pensions, and the upper cap on SS was held ridiculously low, and the Boomers were sold the bill of goods about how we would have our deductions doubled so that we were prepaying our own SS, as well as augmenting our grandparents'/parents' SS..

and of course money put automatically into 401-ks that would be "held" for us for 40 years gave wallstreeters plenty of time to gamble with our money, and the ones gambling would be long-gone (or super-rich or both) by the time we all realized how badly we got scammed.

Money saved in a bank was accessible to us, and not all that available for the fat cats to play with longterm.

and of course now that SS is federally taxable, people who need to take it to augment their incomes are limited in how much they can earn (if they are lucky enough to make a decent income at the job they must hang onto), or they get hit for taxes owed every year. We had to fork over $3,116.00 to the IRS this year, and that was on top of the almost $7K withheld from my husband's job. My SS comes to $10,008.00 annually, so my whole SS payment goes to pay the taxes we owe...

[hatrack]

52. Looks to me like somebody needs to man up and take responsibility for his choices!

Y'know, choosing to get divorced, choosing to buy tech stocks, choosing to get chopped in half by multiple market manipulations and crashes . . .

Isn't that the conservative rock-ribbed Republican position?

[varelse]

55. Unfortunatetly it is also a position defended very vigorously on this site (nt)

[Aerows]

58. Uh, yeah

Par for the course. A conservative while the living is good, now pissed off because he was robbed.

Anyone think this is new? It isn't. If you are the 1% you are completely shocked when you get booted down to the 99% when the .1% think it will profit them.

[seabeyond]

60. he needs another book.. how i fucked up. nt

[TBF]

61. I would call that poetic justice. nt

[cprompt]

63. What has 4 letters begins with F ends with K and means to screw employees? -nt

Nt

[cbdo2007]

64. This guy is a dumbass. I don't buy the story at all....

We can argue 401K's til the cows come home but there are so many things here that don't add up....first off, two of his main reasons for having a terrible 401K have nothing to do with the market or capitalism - his divorce, and his taking money out for his house renovation (WITH a penalty!!!).

In regards to his investments, anyone with any knowledge of any aspect of long-term investing would tell you not to put most of your chickens in one basket (his tech stocks). Study after study after study proves that if you just put your money in something that follows the market, it has ALWAYS gone up in the long run. ALWAYS!!!