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Don’t you love having 5% matching contribution taken out of your paycheck every week to put into your 401(k), which causes you to not as easily afford beer and brunch? I sure as hell don’t. But hey, it’s for my future, right? I’ll retire on a cloud of smart investments from my youth. Yay, retirement money!
“Not so fast, my friend,” says Robert Merton, a Nobel Prize-winning economist, who says that 401(k)s are heading for a crisis, just like everything else that has anything to do with money, because it’s 2014. Thanks a lot, Obama/Cheney/Baby Boomers/Donald Sterling/FIFA/Jason Kidd/Jay Leno/Etc.
Merton, who founded Long-Term Capital Management, a hedge fund that almost brought down the global economy in 1998 (remember that?), says that 401(k)s take the wrong approach to investing for retirement, emphasizing account balances, investment returns and amassing the largest portfolio possible, rather than emphasizing the level of income employees should expect in retirement.
He’s talking about income projections and an actual, tangible income stream rather than amassing a lump sum of money. This actually makes sense, but, frankly, I don’t understand what the hell my 401(k) actually is anyway, and neither do you.
“The seeds of the coming pension crisis lie in the fact that investment decisions are being made with a misguided view of risk,” Merton writes.
Well, retirement was a nice thought while it lasted. Better enjoy working until I’m 85. I’m just gonna keep writing these articles until I die at my floating computer bench. If I live long enough to see floating computer benches.
[via TIME]
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@JayTasShow
@FireJayTas
SIMPLE IRA
I can’t even. The amount of retard in this article is over-the-charts high. 401(k)s are a fine way to save for retirement. You have to actually SAVE and do research on what investments are going to fit your goals. They even create investments that provide “tangible income streams”. I hate you.
“The seeds of the coming pension crisis lie in the fact that investment decisions are being made with a misguided view of risk,” – makes a hell of a lot of sense to place this quote right after discussing retirment income generated off of T-bills. If you’re competent enough to research the current yield on T-Bills (newsflash, you wont be able to retire on T-Bills), you should be able enough to realize this is an advertisement for Merton’s Dimensional Fund Advisors masked by a “research article”. Merton has obviously proven to be a very intelligent individual, but this article just has too many fallacies for my liking
A decent record-keeper should have the ability to create model portfolios based off of the plan’s investments options that would fit the participant’s risk parameters and retirement age – thus eliminating the problem of professional management and shifts in asset allocation mentions in paragraph eight. Not only that but mutual funds are suppose to take care of this problem, themselves. However, it is up to the participant to read through the prospectus and realize which fund fits their needs.
401k plans tend to be self selected, so go research about finance a tiny bit, or call and ask someone who you know who is in finance and they can at the very least point you in the right direction. Also when you separate service (ie: retire) you can roll it over into an IRA which would give you more control and let you take money whenever more or less. If your 401k doesn’t grow that’s on you, all of the knowledge of the world is free on the internet, so stop bitching and research some shit or ask a guy in finance, but don’t whine and never act on it and then be surprised when it hasn’t grown.
You forget to mention the fact that the fund selection for most 401k plans is absolutely pathetic.
true, but if you can at least go with an asset allocation or some amount of equities rather than pure target date bullshit you at least stand a chance
It’s all about diversifying your income during retirement so it’s not all in one pot (401(k)). You should definitely be contributing to your 401(k) (at least up to your match) but it shouldn’t be your only bucket. You also want to create a steady income stream (Annuity) and contribute to a tax-free bucket (Roth IRA or Life Insurance). The average American has no idea of how to properly save for retirement because only contributing to your 401(k) will leave you penny pinching in your later days, especially taking inflation into consideration. JayTas– If you want some proper planning in NYC I’ll help ya out.
There’s no other way to get a “tangible income stream” than to amass a lump sum of money now. Most 401k accounts let you make quarterly or monthly draws. You just have to estimate how long you’ll live, because that’s fun, and then use that to adjust your draws / income stream.
Well there are annuities, but 99% of them are bullshit.
It’s called the 4% rule. Annuities are for the poor.
Your comment shows that you have no idea what you’re talking about.
http://www.investopedia.com/terms/f/four-percent-rule.asp
I’m aware of what the 4% rule is, I work as a Financial Planner. Only withdrawing 4% a year at retirement will make you penny pinch and worry about running out of money before you die.
To be completely accurate, Bengen’s formula suggests a 4.5% initial withdrawal which is subsequently adjusted annually for inflation. He built the drawdown model to generate a 30-year retirement income (so from 65 to 95 years of age). His portfolio was built on a 50/50 stock bond mix. Only one single 30 year period had the money run out in 30 years (1939-1969), so the anxiety of running out of money before you die is completely human behavior and is not based on facts. I’m not sure if you are referring to penny pinch in retirement or during working years. As a financial planner, I would believe you would like your clients to be penny pinchers during their working years so they can save more and therefore invest more. If your clients believe their lifestyle will drastically change in retirement, then you setting yourself and your clients up for failure. Unless you are taking more risk than Bengen’s 50/50 portfolio, the 4% has served and will serve the majority of retirees better than any alternative.
I’m talking about penny pinching in retirement because (as you said and I agree with) lifestyles between working and retirement don’t change much. Going from an annual salary to a fraction of it often causes people to be scared of spending and only withdraw a small amount of their wealth. If you use, say, a variable annuity, you can withdraw your retirement funds at a higher rate (~6%) and when your money depletes from the IRA, an annuity kicks in and continues to pay you for life. Being a planner is about reducing the uncertainty our clients have in retirement so they can worry about other things. Sure, the 4% rule can work, but why use that when there are significantly better options out there? Also, with these variable annuity contracts you can keep yourself allocated aggressively (even up to 80/20) because the contract allows you to capture all the upside while having an annuity option that doesn’t drop in value.
It’s called a 408(b), which is an IRA with an optional Variable Annuity option. Annuities have a bad rep because of old immediate annuities (which do suck). Most common deferred annuities are actually great.
And still require a lump sum to purchase.
I would imagine the “crisis” will be more from the generation who started their careers with a pension plan of some kind, then were forced to switch to a 401k based plan sometime later in their career, and not having the proper amount of savings nor the right financial approach to 401k savings to retire when they thought. Our generation that started on 401ks should be fine as long as nothing radically new comes out.
Spend everything and then buy a motorcycle at 65 along with a massive life insurance policy. Given the statistics you’ll done with this planet shortly thereafter and leaving the kids with some stacks.
Anyone under the age of 30 should be contributing something (if not everything- my tax bracket is
only goinf to go up, right?) towards a Roth IRA. Take control of
your contributions!
Considering there is a $5.5k limit, this is impossible.
*annual limit
Don’t forget the income limit too. Maxing out the Roth while you can is a good idea, but $5.5k a year won’t let you retire. Gotta save more than that.
VUL Policy. Same tax deferral as a Roth with no annual contribution limit or income limit.