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Gifted article in the NYT:

Was the 401(k) a Mistake?
How an obscure, 45-year old tax change transformed retirement and left so many Americans out in the cold.
https://www.nytimes.com/2024/05/08/magazine/401k-r...

Forbus [age 50] figures that she can retire comfortably on around $1 million, although if her house is paid off, she might be able to get by with a bit less. She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.

Per the previous thread, that's a mistake. She'll get at least 80%, probably 100% of her SS benefits.

She also knows that markets don’t always go up. During the 2008 global financial crisis, her 401(k) lost a third of its value, which was a scarring experience. From the extensive research that she has done, Forbus has become a fairly savvy investor; she’s familiar with all of the major funds and has 60 percent of her money in stocks and the rest in fixed income, which is generally the recommended ratio for people who are some years away from retiring. Still, Forbus would prefer that her retirement prospects weren’t so dependent on her own investing acumen. “It makes me very nervous,” she concedes. She and her friends speak with envy of the pensions that their parents and grandparents had. “I wish that were an option for us,” she says.

As long as she didn't sell in 2008/2009 she didn't lose anything, of course, and if she kept contributing she got to buy cheap. She should be praying for another 50% stock market drop.

Volatility is the "fee" we pay for those sweet stock market returns. Preaching to the choir here, I know. How to educate people on this? I've tried to educate family members...it has NOT gone well. No matter how many charts I show some people can't get past the volatility, and "the market is a casino" idea.

So my mistake was not contributing to an employer 401k in the early days (uncertainty around getting the money as a non-citizen then) and using a SEP-IRA instead of a solo 401k (solo 401k allows more money to be socked away at a lower income level, handy during the lean times).

Further to the point, that article was just another example of trash financial "journalism". It's been thoroughly debunked by several, including the online representatives of Ritholz Wealth. Absolutely opposite of "leaving so many out in the cold", the 401K has allowed literally millions of people to build wealth they could not have hoped for without it, while perhaps accelerating the corporate process of ending traditional defined benefit plans.

Yes, there are also many people that never had jobs from companies providing a 401K, have never had access to it - but it's a complete fallacy to "blame" that on the 401K. People either get jobs from companies with 401Ks, or they can't / don't.

My example, for what it's worth - after 27 years of service with an insurance company that provided BOTH (a rarity even in the mid-80s), I have a pension annual payment available of X. They recently offered a lowball buyout of about 11X. By comparison, over a slightly longer timespan, my 401Ks (rolled over) now stand at 20X, even with the crappy investment options in that company's plan.

The point is, there's no way I'd be in a position to retire reasonably comfortably, let alone a few years early, after nearly 40 years of working full time at a "soft" corporate job - on SS and that pension without the 401K.

The 401k was a mistake for the 90% of US workers who were unable to find their way to a low-fee S&P 500 index fund or other suitable investment. The folks who post on this board are, for the most part, among the 10% of 401k winners.

Wall Street's business model requires them to take 2% per year in fees, commissions and costs from the average customer. Over a 50 or 60 year investing lifetime (i.e., 25 or 30 years saving for retirement, and God-willing, 25 to 30 years spending the money in retirement.)

At a 2% annual fee, the "skim" takes half the value of the account over 50 to 60 years. Even Vanguard's low-cost Personal Advisor Service with the 0.30% annual fee claims 10% of your wealth.

Some small company 401k plans have fees and costs as high as 5% per year. You'd almost do as well taking your monthly 401k contribution in cash and setting it ablaze on the veranda.

Labor economist and long-time retirement planning researcher Teresa Ghilarducci has a new book on the subject (Work, Retire, Repeat: The Uncertainty of Retirement ..). She discusses the failings of the US retirement system in the podcast at this link:

https://open.spotify.com/episode/7s6qs0s7c2Vm7bVqe...

intercst

I retired from a medical practice and was the main partner looking over our retirement plan. We chose a SIMPLE IRA (Fidelity) with 3% match which cost each participant only $25/year & provided extreme flexibility in whatever one wanted to invest in. I did not want to deal with the fees, choosing fund options and the other time and energy which I’d have to devote to a 401k. I promoted our SIMPLE plan every year and highly encouraged all staff to participate, but only 60% chose to participate despite my best efforts with strong reminders of the 3% match. You can lead a horse to water…

, but only 60% chose to participate despite my best efforts with strong reminders of the 3% match.

Sadly, too many people think of investing as spending. "You bought some stock, so I get to buy something, too!"

Also, too many people only want to get something for free only if they don't want to put out any effort.
When I retired early at 58, I had a string of people come into my office and ask how I did it, so they could retire early, too. I told them that I worked 40 hours a week for Motorola and another 10 hours a week at investing.
Every single person lost interest at that point.

Yes, people don't want to hear about spending control. They want that jet ski. They want to eat out every night. Etc.

If they set aside money for investing, they can't do all that.

Which is a valid point. If you avoid living so you can save, then you can end up with an expensive funeral and not have lived. It's a balance. However, people tend to be bad at delayed gratification and planning for the future.

If you avoid living so you can save, then you can end up with an expensive funeral and not have lived. It's a balance. However, people tend to be bad at delayed gratification and planning for the future.

</snip>

Absolutely!

But even for those that are sacrificing and saving diligently, if they are losing too much to fees, commissions and trading costs, it's mostly for naught. Wall Street will take on outsized portion of it.

When I was living in Texas, I was always astonished that the Texas Teacher's Retirement Plan (403)(b)) was managed by VALIC at an almost 3% per year in fees. Couldn't one of the math teachers have explained how much they were getting screwed?

intercst

When I retired early at 58, I had a string of people come into my office and ask how I did it, so they could retire early, too. I told them that I worked 40 hours a week for Motorola and another 10 hours a week at investing.
Every single person lost interest at that point.

</snip>

As many of you know, I retired 30 years ago at age 38 once I'd accumulated enough capital to live off the "4% rule" at age 38. You're wasting your time if you're spending 10 hours per week on investing (though I assume it's an engaging hobby for some).

Numerous studies have shown that between 85% and 90% of the well-dressed, impressively credentialed, active mutual fund managers fail to beat the S&P 500 after fees. The long running DALBAR study shows that investors picking individual stocks as a group capture a small fraction of the S&P 500 return.

This is the way I explained the advantages of "long-term buy & hold, low-fee, index fund investing" to my engineering colleagues at the office.

"Imagine you could go to engineering school, never crack a book or attend a class, and still get a starting salary and lifetime income equal to or better than 85% to 90% of your classmates. Would you take that bet?

That's what investing in a low-fee index fund is offering you versus the rest of what Wall Street is selling."

intercst

As many of you know, I retired 30 years ago at age 38 once I'd accumulated enough capital to live off the "4% rule" at age 38. You're wasting your time if you're spending 10 hours per week on investing (though I assume it's an engaging hobby for some).

Yeah, well, if I didn't have a wife and 3 children then I would have been able to retire that early, too.

Most people would rather have a family with loving wife and kids than to be single & alone for their entire life. But you do you. De gustibus non disputandum est.

===========================
You're wasting your time if you're spending 10 hours per week on investing (though I assume it's an engaging hobby for some). The long running DALBAR study ...

Ah, you are assuming that one can start out by knowing what you know only after educating oneself.
The problem with the DALBAR study, et. al. is that there are many many studies and articles and papers, all with differing conclusions. You don't automatically know which ones are good and which are bad. Everybody says theirs is best.


This is the way I explained the advantages of "long-term buy & hold, low-fee, index fund investing" to my engineering colleagues at the office.

Almost exactly my experience. I could not even make anybody see the benefit of using payroll deduction to buy company stock at 15% discount every 6 months and immediately selling it. ESPP. An immediate risk-free return of 17.65% twice a year. All you have to do is delay taking 10% of your paycheck by 6 months for ONE TIME. And we were all engineers.
Funny, it took my wife (without an engineering or math degree) only a simple explanation to understand that buying the S&P500 index fund wasn't "spending" but was an investment.

Yeah, well, if I didn't have a wife and 3 children then I would have been able to retire that early, too.

Most people would rather have a family with loving wife and kids than to be single & alone for their entire life.

</snip>

I know the math is scary. But the sweet spot for early retirement is a two-income couple with no kids. They only need to fund the expenses of one household between them. It's harder to do it as a single.

But as you say, "You do you".

intercst

If you have a wife and kids, that just pushes the time out a bit. The premise about fees and taking advantage of ESPP (etc, etc) remains the same.

We retired two years ago. I just turned 61. Probably worked a bit longer than I had to, but it was a pair of health scares that made me realize that our health was going to be fine until it wasn't. Fortunately, we recovered sufficiently that we have taken several large trips in the past two years (two just this year). Someday we won't be able to, but right now we can.

I did take advantage of the ESPP (ours was really good...guaranteed 15% discount from the lower price between the start of the offering period and the purchase date). Sweet deal.

Today we have more money than when we retired two years ago. A little of that came from 1poormom's inheritance (she died last year). But that was only a small percent of the total assets we have. As I've probably mentioned, 1poormom was a cautionary tale for me. She worked into her 70s, planned to travel with her BFF whom promptly died, and so mom spent the last 20 years of her life doing nothing. Her savings supported her in memory care when it came time, but the rest ended up with me. What a waste.

<< If you have a wife and kids, that just pushes the time out a bit. The premise about fees and taking advantage of ESPP (etc, etc) remains the same. >>

</snip>

Yep. The factors that fueled my early retirement would have worked whether you're single or married, kids or not.

1) Engineering degree. I happened to attend a college (WPI) that had an innovative, competency-based program that allowed you to graduate in less than 4 years at the time if you played your cards right. Only a few students were able to do so, because, everyone knows college takes 4 years, maybe longer. I graduated in 3 years. A math major 2 years ahead of me got his degree in 18 months, along with passing the first 4 exams for becoming an Actuary. Some years later he appeared in the alumni magazine in a feature story with a picture of him in the courtyard of his Virginia mountaintop mansion with about a dozen expensive European motorcycles fanned out in a semicircle. All the result of being a pioneer in selling annuities on the Internet. Obviously a man who understood the angles.

My starting salary as an engineer with a Fortune 500 company was about equal to 3 years of room and board, so being able to get that big engineering salary a year early, almost made the education "cost free".

2) Job-Hopping. I learned pretty early in my career that working uncompensated overtime in the hopes of big raises and promotions is only a sound financial strategy in the rarest of situations. You can usually get much higher compensation if you move around. I got my BS degree in 1977, cycled through five Fortune 500 companies in the 1980's, then quit working in 1994 at age 38 after a 5-year stint with a chemical company in Baton Rouge. Once I'd accumulated enough capital to live off the "4% rule", there really wasn't a good reason to remain under the supervision of an employer. {{ LOL }}

3) 401k investing. I paid off my student loans by age 25, about the same time I left Corning in New York for Exxon in Houston. This being 1981, Exxon had only recently started their 401k plan -- and it was a good one. It had a 6% match and employees were allowed to contribute up to 14% of their salary (at least until they reached the "highly compensated level" where that "up to 14%" number get reduced.) I contributed the max since I now had some free cash flow after paying off the student loans.

One thing that was notable about the Exxon 401k plan was its low fees. Company paid all the admin costs, and the mutual funds matched the super low expense ratios you see in the Federal Gov't Employees Thrift Savings Plan. As I moved around to other employers during my blissfully short engineering career, I noticed the fees were generally rising. The last company I worked for in Baton Rouge had an expense ratio of nearly 1.00% on their S&P 500 index fund during the time Vanguard was charging about 0.20%. You're going to lose a lot of your wealth over time paying those kinds of fees.

And that brings me to the big advantage I've enjoyed in my financial life. That 3-day financial planning course I took as an 18-year-old Freshman in college where I learned that financial advisors, mutual fund salesman, stock brokers and insurance agents really weren't going to do much to help you, and to "Never pay a load" (In the 1970's it was common for a mutual fund purchase to come with up to an 8% sales commission (i.e. sales load). You're not going to ever retire paying fees like that.

Once I had money to invest, I was smart enough to avoid Merrill Lynch or anything to do with an insurance company. Most people lose a decade or two of compounding before they figure out where they're getting screwed. I was able to avoid all that on the strength of the 3-day financial planning course and hit the ground running. It was by far the most valuable piece of information I gleaned from by engineering education.

Housing Costs. The other thing I did was apply a rent vs. buy analysis to my housing decisions over the past 40 years which goes against what just about every American is taught from birth. Let's face it "renters are losers".

Bottom line is that over the past 100 years the average home in the US has appreciated at 4% per year (and about half of them, less than that), while you can get 10% plus in an S&P 500 index fund no matter where you live in the country. My preference is to have more of my money in the stock market, and less of my money tied up in a poorly appreciating single-family home. I’m only willing to own a home if it has some prospect of delivering the unleveraged 10% return of the stock market

The rent vs. buy calculation didn’t turn positive for buying until I was living in a suburb of Portland OR at the tail end of the 2008 home mortgage market meltdown when I paid cash for a home in 2012 for 70%-off it’s 2008 value. It’s since quadrupled in price. And how did I pay cash for a home? The difference between 4% and 10% compounded over 2 or 3 decades is a fortune.

intercst

I didn't have a course in college. I don't recall how I ended up there, but I found the Prodigy mutual fund boards. Since I spent my first two years in community college (cheaper, same basic classes like Eng 101, etc), I had a bit to spare from my meager earnings and bought a couple of mutual funds. I learned a lot on Prodigy. (Our board was actually featured in Kiplinger's magazine, and several of us -including me- were interviewed.) Later on I found TMF.

I was a MF guy until I was hired with a company that had ESPP. I knew enough math to know that was a smokin' deal. It also got me to start learning to evaluate individual stocks.

My retirement accounts are all MFs, a good chunk in indexes. (Note to self...check how those are doing, and maybe reshuffle a bit. I know a few funds aren't indexes.)

As for homes, it depends on what you want. If you look at pure math, I'm not surprised you obtained the result you did. And that is a reasonable approach. But there is something satisfying about your own home. You don't have to wait for a landlord to repair something, you don't have to request permission to paint, you don't have to worry about hanging stuff on the walls, or adding ceiling fans, or whatever. My first home I re-fi'd for a better rate, and then when we built this home we had the opportunity again (in 2008 or 2009) to do it again. In both cases, I was paying less monthly than a lot of people were paying for rents. Though, of course, I was responsible for my own repairs (property taxes and insurance was part of the monthly payment, though it no longer is since we paid the house off two years ago).

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