Thoughts on why 401(k)’s are a bad idea.

The following thoughts were posted at reddit by user /u/listenthenspeak, a millennial who has worked extensively in the financial sector. Reposting here as a signal boost for wider exposure. The writer’s thoughts are cogent and compelling, and backed up with ample documentation.

The original post at reddit linked to an article stating that millennials have little confidence in most major institutions.

The writer’s first comment was as follows:

I was born in 1977, it’s not just millenials. And for people who are teenagers now I can say at least in my experience that YES things are worse for everyone now than they were 20 years ago.

Even my parents who grew up in the 60s say that things are quantifiably worse for working Americans.

In the last 30 years we have witnessed (among other things):

  • The largest economic downturn since the depression
  • Skyrocketing housing prices that lock most families out of home ownership in major urban areas.
  • Financial scandals on an unprecedented scale (Arthur Andersen, Worldcom, Tyco, Enron) and hardly anyone was punished.
  • Two major wars. We fought in Iraq for 8 years and in Afghanistan for 13 years. We lost a combined 6,000+ soldiers with tens of thousands more wounded and spent 1.7 trillion dollars with 400 billion more that will be spent in the future.
  • The cost of education is becoming all but unobtainable. Rising education costs mean that millions are locked out of home and car ownership because of student loan payments.
  • The cost of medical care is unsustainable and out of reach for most families. A single illness even with insurance could bankrupt your family and decades worth of labor.
  • The loss of both unions and pensions. You can track the decline in unions and the decline in real wages across the decades along with the loss of benefits. If you want to chime in with “well I’m ok… have…” well good for you. Most people don’t. Most young Americans today simply will never retire even in their final years. A lack of social security, a lack of pensions, and a lack of viable options for saving (no 401k is not sustainable but that is a whole other rant) means that we will be able to save very little in our working lives.

For people that are curious, this didn’t just come about. This is a process that has been underway for 40 years. The top 1% of the country (and really its more like the top 1% of the 1%) have actively funded lobbyists and campaigns and laws at the local level all the way to DC to fundamentally strip workers of their rights, roll back protections for working families, undermine social safety nets, reduce their tax burden at the expense of everyone else, eliminate the ability for the elderly to retire in security, and have squandered trillions of dollars to “protect American interests” which basically means the interests of a few connected corporations.

So yeah…. it’s no wonder people don’t trust major institutions. Especially now that we’re witnessing a presidential campaign that consists of an almost Machiavellian woman running against a man who is almost literally insane.

The following segment was in response to a question about why 401(k) accounts are unsustainable.

Hey sorry it took so long to get back to you. Family stuff and I wanted to actually give you a good answer for this.

So to start I have to tell you a bit of my background. I worked in finance which among other things included working as a pension and defined contribution auditor along with working in a bank for a time.

I’ll start with my anecdotes and a bit of history. The piece of legislation that allowed the 401(k) was created in the 1970s as a way to offer more benefits to high-wage executives in lieu of additional payments. The intent was originally to create an additional way for high-earning executives to put more money aside for retirement as a BONUS to what they were already getting from their companies and from social security. It was never intended even from the start to be a replacement for pensions or social security. We have to make that very very clear from the outset.

It was designed to offer extra compensation to already well-off employees as a way to spruce up fringe benefit packages.

You can read a bit about the history of the plan here.

And you can check out the wiki here

Obviously by the 80s it didn’t stay that way and it soon became the norm to offer defined contribution plans to office workers.

Cut to today.

I worked as an auditor and saw the insides of plans for hundreds of companies and in my experience what I saw made me begin to question the viability and the sanctity of people always pushing the 401(k) as a way to retire. My anecdotal experience was that in a company of roughly 100 people you would have 1, maybe 2 employees who were maxing out their contributions. Those were always the higher earners, senior engineers, CFOs, assistant controllers, presidents, those types. The average account balance that I saw for employees was usually between 5 and $10,000 even after years of contributions. The average balance for executives (those 1 or 2 people) was around $100,000. My anecdotal experience seems to be a bit low according to stats because the average balance is actually all over the map.

Some figures that I’ve read say people have as little as $19,000 in their 401(k).

Investopedia has a decent breakdown of balances by age but point to the fact that it is always too low to sustain people in retirement.

The Economic Policy Institute

says the average balance is around $34,000 but this varies widely by race, income, and age so you have to dig a big, but again the takeaway is that Americans have almost nothing saved in their 401(k) plans.

Zerohedge (which I don’t consider a good source most of the time) has a fairly accurate stat in this case saying that the average contribution is a very low $2,700 a year, which is certainly not enough to retire on even with growth and dividends.

The GAO (which is a fantastic source) has a great read that is fairly dry. The tldr is that we don’t have enough saved for retirement and aren’t contributing enough

This talks about income from all sources not just 401(k)

So we’re contributing… not that much to our 401(k) plans so how will that affect us in retirement?

Well it won’t give us income.

Motley fool has a decent writeup saying that at current and average saving rates, the 401(k) will provide only around $4,000 a year.

That is supplemental income that might help you pay your electric bill or buy some extra groceries, but you certainly can’t live on that.

But that applies to everyone right? Everyone will at least have something in retirement right?

Not even close.

Around 50% of households in the US aren’t even eligible for a 401(k) and of the people that are eligible only a portion of them contribute. So you have close to 70% of Americans NOT contributing to a plan.

This is a structural crisis that needs to be addressed at the national level because more than 2/3rds of Americans aren’t putting money away for their retirement and of the ones that are, most will not have enough to do anything beyond supplement a very meager existence.

A full 30% of workers have literally zero dollars saved for retirement.

So at this point you could say, well why don’t people simply contribute more or get into a plan… there are Roth IRAs there are 403(b) plans there are ways to save right? And it’s because we simply don’t have the money. Families cannot afford to put aside even more money because real wages aren’t rising at the same time that housing, education, food, and healthcare are eating what we have left.

Most households don’t even have $1,000 in savings.

Most households can’t even cover an unexpected $500 bill

So how does that last part relate to my talk about 401(k) plans?

We as a nation are prioritizing the wrong way to save. The 401(k) is an addendum policy for wealthy workers that spread and became the “norm” but it simply doesn’t work when implemented as a main way to save. That is why I say that it is unsustainable. Of the people that do save (and you can watch the John Oliver on this) fees are a hugely contentious issue that can destroy people’s contributions.

It’s a broken policy for savings that needs to be scrapped.

So what is the solution? Well… as a former financial insider, banker, analyst, and auditor my take is this… we need a legally protected, quasi-independent nationalized system that everyone contributes to.

One of the biggest issues with social security is that it IS solvent but congress keeps borrowing from the trust with limited assurances that they can pay the money back. Social security DOES work if you don’t spend the money you collect for it on other things.

We need something held in trust that legally cannot be touched by Congress held in an entity similar to the Fed (quasi independent) that will hold individually numbered accounts for all of us. When we’re born you get something like $1,000 put into that fund and as long as your parents are working, from birth you get another $500 or $1,000 a year put into that fund until your 18th birthday. Then it’s on you and there would be 3 components. Your contributions, your employers contributions and the government’s contribution.

You could use actuaries to create a pension that has money coming from tax revenues (the government portion) you could include contributions you make to the plan (your side of the contributions) and your employer would contribute to your account at a rate that they could set (so this could be part of how they compete with other employers). You have a 3 legged stool basically. Three sources of money in and one source of money out.

That quasi independent agency would then have a fiduciary responsibility to oversee all of those assets (again just like a pension) and invest in AAA rated bonds, safe municipal projects, and a broad base of blue chip stocks and an index of all the funds on the market.

You could even offer a limited range of options like “low, medium, and high” for risk tolerance where the low would invest only in things like low interest treasury bills, municipal bonds, and AAA rated projects that pay a low but dependable amount of interest, medium risk could be a blend of index funds and bonds, and the high risk could all be stocks in an index fund. This would provide for growth and investment, ensure all Americans get a fair go at retirement, and ensure that Congress can’t purloin the proceeds with a promise to simply pay it back at an unforseen date.

We need to try something new and the private market is not the solution because when you try to separate people from their money you create perverse incentives. The government should ABSOLUTELY be involved in securing people’s retirements and ability to provide for themselves in their old age.

I know this is a long answer but I hope this was a well-thought out response to your question and I hope it encourages you to do further reading. This is only my opinion based on my experience in industry but I feel it is a valid opinion backed by economic data and experience.

No further comment needed by the Old Wolf.

Beauty in Paper – The 1896 Educational Currency

I previously wrote about what I considered to be America’s most beautiful coinage:

1907_uhr_pr69_cami

Today, paper money gets a turn.

From Wikipedia:

The Educational Series series of notes is the informal nickname given by numismatists to a series of United States silver certificates produced by the United States Treasury in 1896, after Bureau of Engraving and Printing chief Claude M. Johnson ordered a new currency design. The notes depict various allegorical motifs and are considered by some numismatists to be the most beautiful monetary designs ever produced by the United States.

one

The One Dollar Bill

The Goddess History instructing a youth, pointing to a panoramic view of the Potomac River and Washington D.C. The Washington Monument and the US Capitol Building are visible in the background. The United States Constitution is displayed to the right. Circling the motif are the last names of famous Americans. Some of those listed are: (George) Washington, (Benjamin) Franklin, (Thomas) Jefferson, (Robert) Fulton, (Samuel F.B.) Morse, & (Ulysses S.) Grant. Full Resolution.

Reverse: Martha and George Washington.

two

The Two Dollar Bill

Science (center) presents Steam and Electricity (the two children) to the more mature figures of Commerce (left) and Manufacture (right). Full Resolution

Reverse: Robert Fulton and Samuel F.B. Morse

five

The Five Dollar Bill

Electricity surrounded by other allegorical figures, representing the dominant force in the world. The United States Capitol building can be seen behind the female figures. Full Resolution

Reverse: Ulysses S. Grant and Phillip Sheridan

These beautiful works of art, embodying both aesthetically and factually pleasing images combine with superb engraving skill1 to create works of incredible beauty.

Not surprisingly, some Boston society ladies got their knickers in a twist over the bare breasts visible on the $5.00 note, and some bankers refused to accept these bills. The Bureau of Engraving planned a “draped” version for the 1897 series, much as the 1916 Standing Liberty quarter was re-designed the following year for the same reason (see the above-linked article), but the design was never used.

For the longest time, American currency has been soul-searingly boring. We used to be able to get away with it because the world valued the dollar no matter how ugly it looked, but those times are coming to an end. I have long wished that we could redesign our currency along the lines of things done by Australia and other countries, but as long as government is dominated by people who are convinced that the almighty dollar is unassailable, this is unlikely to happen.

At least at one point in our history, people were willing to try something new and different.

The Old Wolf has spoken.


1 On a semi-related note, a wonderful and chilling tale which involves engraving skill can be found in “Don’t Look Behind You” by Frederick Brown. I recommend it, but not if you’re home alone on a dark night.

Progressive Insurance Company: Run away, run away fast.

scam-alerts2

Aside from complaint pages like you see behind the link, Progressive has now totally destroyed any semblance of reputability by posting blog spam, one of which I just received.

I was wondering if you ever considered changing the layout of your site? Its very well written; I love what youve got to say. But maybe you coud a little more in the way of content so people could connect with it better. Youve got an awful lot of text for only having 1 or two images. Maybe you could space it out better?

This is typical of the kinds of camel ejecta that blog spammers send out. They try to make it look as legitimate as possible and usually include mis-spellings and bad grammar, but they include links to their website and use a bogus email address and user name, in the hopes of creating backlinks to their website, thus boosting their page rankings in search engines. There are even unethical businesspeople out there who teach others that this is a valid way of increasing your SEO rankings, which I think is disgraceful.

Stay away from any business that does this. It will not serve you to have unethical enterprises in your circle of influence.

The Old Wolf has spoken.

The High Cost of Smoking

To my eternal discredit, I smoked heavily when I was a kid. I thought it was cool, and six years of it left lasting scars on my lungs. But when I started smoking, a pack of Luckies cost 33¢. Yes, that was more in 1965 than it is today, but let’s look at current prices in Europe and environs today (all prices are in Euro.)

tumblr_mz3xe72tni1rasnq9o1_1280

 

For the United States, the following list will suffice (found at The Awl). Notice that some states appear on the same line if their prices were identical.

48. Kentucky (last year $6.56): $4.96 = -24%
47. North Dakota ($5.03): $5.04 = +.2%
46. West Virginia ($4.84): $5.07 = +5%
45. Oklahoma ($5.24): $5.19 = -.1%
44. Idaho ($5.11): $5.25 = +3%
43. Missouri ($5.87): $5.25 = -10%
42. Louisiana ($6.50): $5.33 = -18%
41. Oregon ($5.74): $5.35 = -7%
40. Wyoming ($5.21): $5.37 = +3%
39. Mississippi ($5.55): $5.45 = -2%
38. Nevada ($6.04): $5.50 = -9%
37. South Carolina ($6.25): $5.55 = -11%
36. Colorado ($5.19): $5.59 = +8%
35. Indiana ($5.56): $5.77 = +4%
34. Alabama ($5.18): $5.80 = +12%
33. Virginia ($5.43): $5.81 = +7%
32. Ohio ($5.67): $5.88 = 4%
31. Tennessee ($4.91): $5.89 = +20%
30. Georgia ($5.93): $5.93 = 0%
29. Minnesota ($5.96): $5.95 = -.2%
28. Florida ($6.29), Delaware ($6.10): $6.00 = -5%, -2%
27. North Carolina ($5.14): $6.03 = +17%
26. Nebraska ($5.99): $6.09 = +2%
25. Kansas ($6.47): $6.21 = -4%
24. Montana ($6.12): $6.25 = +2%
23. Arkansas ($7.10): $6.50 = -8%
22. New Hampshire ($4.86): $6.59 = +35%
21. Utah ($6.88): $6.64 = -3%
20. California ($6.45), South Dakota ($6.82): $6.77 = +5%, -.7%
19. New Mexico ($6.69): $6.91 = +3%
18. Michigan ($6.50), Pennsylvania ($6.93): $6.95 = +7%, +.3%
17. Maine ($6.97): $7.12 = +2%
16. Texas ($6.89): $7.24 = +5%
15. Iowa ($7.52): $7.25 = -4%
14. D.C. ($8.27): $7.89 = -5%
13. Maryland ($6.53): $7.93 = +21%
12. Wisconsin ($7.98): $8.11= +2%
11. Washington ($8.98): $8.31 = -7%
10. New Jersey ($8.00): $8.55 = +7%
9. Massachusetts ($8.49): $8.77 = +3%
8. Connecticut ($8.85): $9.30 = +5%
7. Vermont ($7.60): $9.52 = +25%
6. Rhode Island ($8.16): $9.56 = +17%
5. Alaska ($9.39): $9.59 = +2%
4. Arizona ($7.46): $9.65 = +29%
3. Hawaii ($10.22): $9.68 = -5%
2. Illinois ($10.25): $11.59 = +13%
1. New York ($12.50): $14.50 = +16%

To help with the comparison, here’s a map as of 1/1/2014 showing state tax prices on tobacco:

MapTax

 

If you want to know how much smoking has cost you or will continue to cost you in terms of raw dollars, you can use the American Cancer Society’s Smoking Cost Calculator.

As for health and societal costs, you can see more information here.

“It’s voice-over. An interior monologue. Maybe even the voice of God. ‘Don’t, Pudgie, don’t smoke.’ “ (Mrs. Doubtfire)

The Old Wolf has smoken.

How the 1% live

I’m currently yanking the chain of an advance fee fraud scammer, much the same way I did over here. This one appears to be operating out of China. I’ll be posting a full report at the end of the game, but in the meantime, Mr. “Zhang Yong” has asked me to do some research for him so he can have a base of operations in the USA after all those “millions” have been transferred into my bank.

Simon_Two_Trunk_Boxes_large

Just in case you’re wondering, these chests of money don’t exist.

Certiicate2

See? This excellent certificate of deposit shows that I, personally, deposited lots of dollars into a Hong Kong bank.

Anyway, here’s the official request:

I am in receipt of your mail and the words in the contents made me happy that I finally got the right person for my proposal. As you have stated in your email that all monetary assets pertaining to this venture are confidently secure and that you are going to search for a business that will profit both of us. I will so much appreciate if you could start searching for a very nice four bed house with a very big garden located in a quiet environment conducive for learning.

So I did a little research on the net and found this lovely property – a real one – for sale by Sotheby’s:

lb7a93f44-w0x

Only $28,950,000. Wow; a real steal. In addition, if you look closely at the page, you should be able to buy the same property in the Fringe Alternate Universe for about $11,000,000 less:

Oops

But seriously, assuming that the “Other Listing” is just an “oops” (I sent the agency a note letting them know that they might want to contact their webmaster, so the page probably won’t look like this for long), I allowed the monthly payment calculator to tell me how much this charming 4-bedroom property would be:

Payment

Assuming a $6 million down payment, your monthly charge would only be $157,708.

Cushlamochree. Who the hqiz has this kind of money? And this is only one of countless homes like this all over the place, in cities like New York and Boston and Los Angeles and San Francisco… and they’re selling.

Along with (cxhchhhxxttt paTOO!) Bank of America, we’re part owners of a 6-bedroom home in Central Utah. That monthly payment would just about buy our place every single month… for 30 years. I have a hard time getting my head around that kind of money… and it’s not lost on me that there are people in the world for whom $30,000,000 for a home would be considered petty cash. We just re-watched “Inception,” and I remember chuckling at this little exchange:

Cobb: For this to work, we’d have to buy off the pilots…
Arthur: And we’d have to buy off the flight attendants…
Saito: I bought the airline.
[Everybody turns and stares at him. Saito just shrugs]
Saito: It seemed neater.

Yes, it’s Hollywood – but let’s not kid ourselves – there are people like that out there.

1098288_10151756152833851_1182733652_n

It’s not a very nice world we live in when it comes to social equality; and, all things are relative. A large percentage of the world’s population would look at me and think I live like a potentate.

Our species deserves better, but how to overcome the massive inequality in wealth allocation without resorting to forced redistribution is a puzzlement.

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”
Dr. Adrian Rogers, 1931

Those who would simply take from the rich and give to the poor ignore this at their peril, but the dangers of social leveling are only part of the problem.  When I studied Economics in college – the only class I ever got a “C” in – one of the few concepts that really stuck was that at its base, money represents stored labor. This concept has been pretty much thrown in the trash; in our country, the Fed keeps creating new fiat dollars, and these are promptly snapped up by corporations and individuals who trade in the most complex, esoteric and incomprehensible instruments imaginable, not one of which has anything to do with work. It’s all smoke and mirrors, and as the recent bubbles (dotcom, housing, etc.) have shown, all of that wealth can vanish in a heartbeat.

More important than fixing the financial structure of our society would be fixing what goes on in the hearts of men; this article is a good spotlight on the depths of immorality to which humanity will sink when it comes to the gathering of money and power. One of my favorite quotes from entertainment comes from “Star Trek: First Contact”, when Picard explains to Lily,

“The economics of the future is somewhat different. You see, money doesn’t exist in the 24th century… The acquisition of wealth is no longer the driving force in our lives. We work to better ourselves and the rest of humanity.”

Please, make it so.

The Old Wolf has spoken.

This is not a world that works for everyone.

According to an article by by David Cay Johnston posted at Taxanalysts.com, the average adjusted gross income for 90% of American wage earners grew only $59.00 from 1966 to 2011, while the top 1% of the top 1% saw income growth equaling $18.4 million dollars. Put that in a graph, and it looks like this:

Income Gain

Screw whole bunches of that.

From the article:

“In 2011 entry into the top 10 percent, where all the gains took place, required an adjusted gross income of at least $110,651. The top 1 percent started at $366,623.

The top 1 percent enjoyed 81 percent of all the increased income since 2009. Just over half of the gains went to the top one-tenth of 1 percent, and 39 percent of the gains went to the top 1 percent of the top 1 percent.

Ponder that last fact for a moment — the top 1 percent of the top 1 percent, those making at least $7.97 million in 2011, enjoyed 39 percent of all the income gains in America. In a nation of 158.4 million households, just 15,837 of them received 39 cents out of every dollar of increased income.

That extreme concentration, however, is far from the most jaw-dropping figure that can be distilled from the new Saez-Piketty analysis. That requires a long-term comparison of those at or near the top with the bottom 90 percent.

In 2011 the average AGI of the vast majority fell to $30,437 per taxpayer, its lowest level since 1966 when measured in 2011 dollars. The vast majority averaged a mere $59 more in 2011 than in 1966. For the top 10 percent, by the same measures, average income rose by $116,071 to $254,864, an increase of 84 percent over 1966.

Plot those numbers on a chart, with one inch for $59, and the top 10 percent’s line would extend more than 163 feet.

Now compare the vast majority’s $59 with the top 1 percent, and that line extends for 884 feet. The top 1 percent of the top 1 percent, whose 2011 average income of $23.7 million was $18.4 million more per taxpayer than in 1966, would require a line nearly five miles long.”

These numbers show without equivocation that the rich truly are getting richer at mind-boggling speed, while the rest of us are getting poorer by the year. It almost makes me want to support forced redistribution of wealth, but even these disgusting statistics can’t quite get me there. But somehow the playing field needs to be leveled, because inequalities of this nature in the land of the free and the home of the brave will not long endure without some sort of massive social upheaval down the road.

I’m not an economist, so I don’t have the answers. I can only hope that there are people out there who still believe in a world that works for everyone, with no one left out, and who have the skills and insight to make a difference. For all of us.

The Old Wolf has spoken.