By JLP | January 8, 2009
From the front page in today’s Wall Street Journal comes, Big Slide in 401(k)s Spurs Calls for Change. Here’s a quotes (WARNING: some of this might make you mad):
The stock-market rout has ignited a crisis of confidence for millions of Americans who manage their own retirement savings through 401(k) plans.
After watching her account drop 44% last year, Kristine Gardner, a 35-year-old information-technology project manager in Longview, Wash., feels no sense of security. “There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.”
First off: SHE’S 35-YEARS OLD! Why is a 35-year old worried about retirement? People need to understand that the market goes up and DOWN! Simple concept but it is very hard for people to comprehend.
Unfortunately, this woman’s example is leading our idiots in Washington to propose changes (emphasis mine):
Congress has begun looking at ways to overhaul the 401(k) system. At hearings in October, the House Education and Labor Committee heard from a variety of witnesses. Some proposed setting up “universal” retirement accounts, which would cover all workers. One such plan called for establishing accounts that would receive annual contributions from the federal government, and would offer a guaranteed, but relatively low, rate of return. Another proposed automatically investing contributions in an index fund that holds stocks and bonds, with the mix getting more conservative as workers approach retirement. Other witnesses proposed less drastic changes, such as providing better education.
I don’t know about you but I really do not like the first two ideas. The word “universal” scares the living daylights out of me and I can’t imagine the government doing a better job at managing people’s money.
As far as that “guarantee” goes…guarantees come with a price. Let’s look at the math.
Let’s look at two hypothetical examples. The first one is a traditional 401(k) plan in which the participant contributes $10,000 per year for 30 years and gets the LONG-TERM average rate of return of 10%. The other is a guaranteed plan, also with annual contributions of $10,000 for 30 years and with a 5% “guaranteed” rate of return.
Now, say the market crashes and the Traditional 401(k) account’s value drops 40%, while the “guaranteed” account remains unchanged (this would be highly unlikely). Even with a 40% loss, the Traditional 401(k)’s balance after the crash is still $322,000 HIGHER than the guaranteed account. And, that’s assuming that the guaranteed account didn’t drop in value.
Not only that, but people who are at retirement age STILL HAVE A LONG-TERM HORIZON! If you’re planning on being retired for 30+ years, you are a long-term investor. Therefore, you should be investing as such. So what if your account value is down. Just live on a smaller income while your account value builds back up. It most likely isn’t the end of the world.
So, I’m going to say that it’s people’s lack of self-discipline, saving money, and poor choices that are the real cause of their problems and NOT the market’s performance. For example:
Peg Kelley, a 58-year-old small-business consultant in Watertown, Mass., didn’t contribute anything to her 401(k) last year. Instead, she’s been focused on paying down credit-card debt and building up an emergency fund in case the bad economic times turn worse. She’s also still paying off an $8,000 loan she took from her 401(k) plan four years ago to buy a new car.
Afraid of reliving the dot-com market meltdown, which knocked $100,000 off her retirement savings, she moved her entire 401(k) from diversified stock and bond holdings into cash-like investments early last year.
“I’m not going to get rich on my 401(k),” she says, “but also don’t want to get poor because of it.” She had hoped to retire early, but now she figures she won’t quit work before age 65.
She borrowed $8,000 from her 401(k) to BUY A NEW CAR!!!!!!!!