Saturday, April 27, 2013

The Retirement Gamble ... 401(k) Investing Made Simple ... PAINLESSLY SO!

An enormous issue facing Americans is financing our retirement years. And it's a problem that needs attention from the moment we become adults. Unfortunately, it's also an area where hardly any education about how to go about it has been given to our young people.

This failure to educate the young doesn't stop there and continues throughout life. We know that Social Security is inadequate yet we don't know exactly what to do about supplementing those benefits.

It's a failure of our society that has to be addressed and solved for future generations. We can't afford any longer to ignore this huge elephant standing squarely in the middle of our American room.

So if you have 53 minutes to spare this weekend, "The Retirement Gamble" is very much worth approximately one hour of your time. It's sobering summation of where we are, how we got here and what we need to do now is both an accurate history and informative guide to the future as well.

John Bogle of Vanguard makes the simple mathematical case that we can all be good investors as DIY owners of passive index funds. He also points out that for individual investors over a period of fifty years, an investment which earns 7% annually results in dramatically different endings for a DIY investor compared to one who uses a financial 'expert.'

For the person paying the 'expert', assuming total annual charges 2% for management fees and mutual fund commissions, the individual will end up with two thirds less of a nest egg than that same individual would have earned had he been a basic DIY investor.

That's right. Three times more retirement funds for the DIY investor. That 2% annual difference is simply the compounding rule of 72 working over a long period of time.

And by the way, it works that way too when bonds earn considerably less than stocks over time, which they have done and will continue to do for years to come. {See yesterday's post "Interest Rates Likely to Remain Low . . . . ."}

401(k) documentary refuffles feathers has the overview as well as a link to the Frontline story on PBS as well:

"The PBS “Frontline” documentary “The Retirement Gamble” debuted on Tuesday night, and it made for a sobering introduction to the American savings crisis. If you’ve got 53 minutes to spare, and you’re the kind of person who’s galvanized by bad news, you can watch the entire report online at this link. I recommend it as a concise introduction to the biggest shift in the retirement landscape in our lifetimes – the migration from a corporate pension model to a self-funded model that depends on personal savings and investments. . . .

The second half of the program focuses on the problem of high fees and hidden expenses in retirement plans, and this, as you might expect, has ruffled some feathers in the financial-services community. In an interview with MarketWatch’s Robert Powell this week, Stuart Ritter, a senior financial planner at T. Rowe Price, suggested that its focus on 401(k) fees being excessive was missing the forest for the trees. (You can watch their interview here.)

“I think what’s even more important than that issue is how much people are saving,” Ritter told Powell. “The biggest driver of your ability to have enough money to maintain your lifestyle in retirement is how much you save. It’s totally within your control. You know exactly how much it is.

And people should be focusing on that…The one [question] I’m hoping they are starting with is, ‘Am I saving that 15%?’ Because that’s the biggest thing within your control.”

When asked whether self-inflicted asset allocation and investment mistakes cost 401(k) plan participants more than 401(k) fees, Ritter had this to say: “There are a lot of things that affect what the results are. I’m going to keep coming back to that one thing: Not enough people are saving enough. Saving 3% for retirement is like going to the gym for six minutes. We can have conversations about cardio vs. weight bearing and which way I do my bicep curls but until I’m in the gym for a long enough period of time, it’s premature to talk about those things. So get the savings rate to 15%.”

As Powell notes: “To be sure, Americans saving 15% per year will put more fees in the pockets of mutual funds firms. But it will also put more money in American nest eggs. And that, regardless of how much money Wall Street skims off our nest eggs, is a good thing, yes?”"

Summing Up

To repeat, it's worth taking an hour to watch the documentary .

It's then worth a great deal more than that -- perhaps up to three times as much or more -- if you decide to be an informed DIY passive index fund investor during your working years.

That's the simple effect of basic DIY investing over a long period of time, and we can all learn to do it.

That's my take.

Thanks. Bob.

1 comment:

  1. It's sounding more and more like people should be investing for themselves, rather than using an "expert" do it for us. Also, taking part in a 401(k), if you are eligible and offered one, is a huge step. Unfortunately, not all workers are eligible and not all employers offer one. You do still have options, but this one, which you can learn more about at, is one of the most secure.