Languish.org

I had a conversation over lunch over our 401 (k).  I was amazed that one had nothing in his (his plan was "To sort things out in the next few years" :bleeding:).  The other had $30,000 (though he's only 30, the first one is 41.)  I was curious how Languish stacked up.

I'm 41 and have $600,000 in my 401 (k).

A what?

I think I have around $200k or so.

The Canadian equivalent is the RRSP (just for kicks, here's a brief comparison: http://www.moneysmartsblog.com/canadian-rrsp-vs-us-401k-comparison/ )

I have I think around $250K in mine. I put most of my money into buying my house first. This year, I'm substantially beefing my RRSP up.

Around $150k, but mind as a Federal employee my thrift savings plan isn't like a 401k in terms of expected contribution to my retirement. I have the defined benefit pension plan, and then I have a private IRA I've funneled all the money I've made from outside government work that has a substantially larger amount than my TSP.

Quote from: Savonarola on July 19, 2013, 03:38:06 PM
I'm 41 and have $600,000 in my 401 (k).

Woah. You must have been lucky with your investments. Isn't there like a $15K per year contribution limit in the US?

Significantly less than any of you, hopefully more than Ide and Raz.

I have an IRA, a 401(k), and I also have deferred stock comp.  Between all of those things and including Princesca's IRA and 401(k) I'd guess we are close to the top of the $100K option.  Priority right now is to finish paying off the mortgage, and then funnel the max possible into the 401(k) plans.

Quote from: Malthus on July 19, 2013, 03:48:46 PM

Quote from: Savonarola on July 19, 2013, 03:38:06 PM
I'm 41 and have $600,000 in my 401 (k).

Woah. You must have been lucky with your investments. Isn't there like a $15K per year contribution limit in the US?

It's $17.5k now, but mind your employer can make contributions on your behalf--currently up to $33k per year. In theory if you had a very generous employer and contributed your maximum you'd be able to sock away a bit over $50k/year.

IRAs have a $5k contribution limit, but because you generally can structure them differently and rollover contributions from other retirement plans it's actually relatively easy to load a bunch of money into an IRA over what you'd expect from that limit.

Quote from: Malthus on July 19, 2013, 03:48:46 PM

Quote from: Savonarola on July 19, 2013, 03:38:06 PM
I'm 41 and have $600,000 in my 401 (k).

Woah. You must have been lucky with your investments. Isn't there like a $15K per year contribution limit in the US?

I've been employed as an engineer since I was 22 and always contributed a fairly high percentage, plus I've always had employers who matched a percentage of my investment.

It didn't occur to me that was unusual or even a large amount until today.

Quote from: OttoVonBismarck on July 19, 2013, 03:55:04 PM
It's $17.5k now, but mind your employer can make contributions on your behalf--currently up to $33k per year. In theory if you had a very generous employer and contributed your maximum you'd be able to sock away a bit over $50k/year.

IRAs have a $5k contribution limit, but because you generally can structure them differently and rollover contributions from other retirement plans it's actually relatively easy to load a bunch of money into an IRA over what you'd expect from that limit.

I assume that the employer contribution is also tax-deferred?

Holy shit, that's sweet.  :D

Here, we have basically three plans the average idiot like me can use: RRSPs that are kinda-sorta like 401 (k)s except no employer contributions; RESPs that are an education fund for the kiddies (the government 'tops up' contributions - basically, $7500 in free money for education if you make the matching contribution); and 'Tax free savings accounts' which are a reasonably new invention - you are allowed to put 5K per year, every year (now 5.5K, I believe - since inception its $25.5 K) into an account, and no tax on the increase within the account. You can take money into and out of that type of account freely. 

About $350k.

After I incorporated my annual RRSP limit went way down so basically it holds what I contributed when I was an employee plus the small annual amounts I contribut to it now - but it is still a nice chunk of change.

Quote from: Malthus on July 19, 2013, 04:04:26 PM
RRSPs that are kinda-sorta like 401 (k)s except no employer contributions

So do Canadian employers typically make no contribution to employee retirement?  Jacob in another thread said defined benefit plans were atypical, like the US.

I have a pension, no idea how much I have put in.  It is 10% of all I have earned which is....not much.

Quote from: Savonarola on July 19, 2013, 04:00:15 PM

Quote from: Malthus on July 19, 2013, 03:48:46 PM

Quote from: Savonarola on July 19, 2013, 03:38:06 PM
I'm 41 and have $600,000 in my 401 (k).

Woah. You must have been lucky with your investments. Isn't there like a $15K per year contribution limit in the US?

I've been employed as an engineer since I was 22 and always contributed a fairly high percentage, plus I've always had employers who matched a percentage of my investment.

It didn't occur to me that was unusual or even a large amount until today.

It's unusual in one sense, that is, many with that kind of cash to save tend to sink a large fraction of it in real estate equity rather than saving it all in a retirement vehicle.

Here in Canada, lacking matching employer contributions, it wouldn't be possible to put that much into an RRSP so young - you'd have to grow it within the fund through lucky investments. 

When I get old I plan to be a dashing masked highwayman.

I'm going with the "suicide after I can no longer work" plan.  It's simplified things tremendously.

Quote from: Admiral Yi on July 19, 2013, 04:10:38 PM

Quote from: Malthus on July 19, 2013, 04:04:26 PM
RRSPs that are kinda-sorta like 401 (k)s except no employer contributions

So do Canadian employers typically make no contribution to employee retirement?  Jacob in another thread said defined benefit plans were atypical, like the US.

My understanding is that the Canadian retirement system is seriously disfunctional. The idea was to use voluntary savings through RRSPs to fuel it, but participation and savings rates are abysmal, meaning that elderly Canadians had better enjoy the taste of dog food, because that's what they are going to be able to afford ...

http://business.financialpost.com/2013/02/20/business-leaders-offer-solutions-to-chronic-pension-shortfalls/

Only a third of Candian workers have some sort of workplace-assisted pension scheme:

http://business.financialpost.com/2012/11/16/no-saving-grace-are-our-best-savings-intentions-hitting-the-wall/

Quote from: Admiral Yi on July 19, 2013, 04:10:38 PM

Quote from: Malthus on July 19, 2013, 04:04:26 PM
RRSPs that are kinda-sorta like 401 (k)s except no employer contributions

So do Canadian employers typically make no contribution to employee retirement?  Jacob in another thread said defined benefit plans were atypical, like the US.

No.  Plenty of employers will make contributions to your RRSP.  Not sure how they get taxed.

I have a very negligible amount in my RRSP.  The assessed value of my pensionable time is $200k or so.

Quote from: Barrister on July 19, 2013, 04:22:44 PM

Quote from: Admiral Yi on July 19, 2013, 04:10:38 PM

Quote from: Malthus on July 19, 2013, 04:04:26 PM
RRSPs that are kinda-sorta like 401 (k)s except no employer contributions

So do Canadian employers typically make no contribution to employee retirement?  Jacob in another thread said defined benefit plans were atypical, like the US.

No.  Plenty of employers will make contributions to your RRSP.  Not sure how they get taxed.

I have a very negligible amount in my RRSP.  The assessed value of my pensionable time is $200k or so.

Certainly there can be a plan where employers put the money into your RRSP by way of payroll dedictions, but this doesn't increase your personal contribution limit, or so I understand.

http://www.ancasterfinancial.ca/link.php?link=investments:group-RRSPs

Canuckleheadim: I assume y'all have a Social Security equivalent?  How much does that typically pay out a month?

Quote from: Admiral Yi on July 19, 2013, 04:28:48 PM
Canuckleheadim: I assume y'all have a Social Security equivalent?  How much does that typically pay out a month?

We do. It's the CPP. It pays enough to keep you ... if you don't mind the aforementioned taste of dog food.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml

Average monthly retirement payment: a princely $596.66. The high life awaits!  :lol:

Edit: that's the mandatory scheme you have to pay into (paymend deducted every paycheque). There is also an amount you get regardless, called the Old Age Security.

http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml

It pays an average of $515.97.

So a working person gets on average $1,112 or so.

 :huh:  My goodness.  The Baldwins are totally fucked.

In a state pension system. SHould be around 40k-50k in it right now.

$0.00

:)

I'm going with the lottery winnings plan. :cool:

Quote from: merithyn on July 19, 2013, 04:38:02 PM
$0.00

:)

I'm going with the lottery winnings plan. :cool:

Quote from: Malthus on July 19, 2013, 04:34:31 PM

Quote from: Admiral Yi on July 19, 2013, 04:28:48 PM
Canuckleheadim: I assume y'all have a Social Security equivalent?  How much does that typically pay out a month?

We do. It's the CPP. It pays enough to keep you ... if you don't mind the aforementioned taste of dog food.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml

Average monthly retirement payment: a princely $596.66. The high life awaits!  :lol:

There is also Old Age Pension which pays to everyone independently of contributions, is there not ?

When my Dad retired, he was getting about $600 in CPP benefits, my Mom, who had only worked a couple of years for pay, got about $1. Howver both got OAP which iirc was about $500-$600 each. Together this allowed them to live comfortably and even travel a bit given that their home was paid for.

Quote from: Maximus on July 19, 2013, 04:42:53 PM

Quote from: Malthus on July 19, 2013, 04:34:31 PM

Quote from: Admiral Yi on July 19, 2013, 04:28:48 PM
Canuckleheadim: I assume y'all have a Social Security equivalent?  How much does that typically pay out a month?

We do. It's the CPP. It pays enough to keep you ... if you don't mind the aforementioned taste of dog food.

http://www.servicecanada.gc.ca/eng/isp/pub/factsheets/rates.shtml

Average monthly retirement payment: a princely $596.66. The high life awaits!  :lol:

There is also Old Age Pension which pays to everyone independently of contributions, is there not ?

When my Dad retired, he was getting about $600 in CPP benefits, my Mom, who had only worked a couple of years for pay, got about $1. Howver both got OAP which iirc was about $500-$600 each. Together this allowed them to live comfortably and even travel a bit given that their home was paid for.

You are correct - I added that to my post, but you must have missed my edit.  :)

Quote from: ulmont on July 19, 2013, 04:18:14 PM
I'm going with the "suicide after I can no longer work" plan.  It's simplified things tremendously.

That's the spirit.  Don't feed the machine.  Control your own destiny.

Quote from: Maximus on July 19, 2013, 04:42:53 PM

There is also Old Age Pension which pays to everyone independently of contributions, is there not ?

When my Dad retired, he was getting about $600 in CPP benefits, my Mom, who had only worked a couple of years for pay, got about $1. Howver both got OAP which iirc was about $500-$600 each. Together this allowed them to live comfortably and even travel a bit given that their home was paid for.

The Baldwins will be OK. :weep:

Quote from: Admiral Yi on July 19, 2013, 04:10:38 PMSo do Canadian employers typically make no contribution to employee retirement?  Jacob in another thread said defined benefit plans were atypical, like the US.

Bigger companies often have a matching contribution type of dea. Say, they may match your contribution up to 4% of your salary, or they may match double your contribution up to 5%, or whatever - it varies from company to company, and not all of them do it. I'm not sure what the implication is on the employer side.

Quote from: Jacob on July 19, 2013, 04:51:30 PM

Quote from: Admiral Yi on July 19, 2013, 04:10:38 PMSo do Canadian employers typically make no contribution to employee retirement?  Jacob in another thread said defined benefit plans were atypical, like the US.

Bigger companies often have a matching contribution type of dea. Say, they may match your contribution up to 4% of your salary, or they may match double your contribution up to 5%, or whatever - it varies from company to company, and not all of them do it. I'm not sure what the implication is on the employer side.

From what I've read, unless I'm wrong, this doesn't actually increase the employee's maximum contribution limit, while in the US employer contributions appear (again I could be wrong) to be on top of what an employee can contribute.

I think the biggest difference between the US and Canada, if your information about the rarity of matching is correct, is that the match is a huge incentive to put your own money in a 401.

Quote from: Malthus on July 19, 2013, 04:22:17 PMhttp://business.financialpost.com/2013/02/20/business-leaders-offer-solutions-to-chronic-pension-shortfalls/

Interesting article - I wouldn't have expected someone like Mr. Goldring and Mr. McCaughey to advocate expanding the CPP and savings, giving they are in the money management business themselves.

Quote from: Malthus on July 19, 2013, 04:53:36 PMFrom what I've read, unless I'm wrong, this doesn't actually increase the employee's maximum contribution limit, while in the US employer contributions appear (again I could be wrong) to be on top of what an employee can contribute.

Hmm...  I don't remember, to be honest. However, even if it doesn't it still encourages you to put the maximum possible into your RRSP account every year (and for many the wisdom to do that is still missing from their basic financial education).

Finally an OP Martinus would approve of.  :cool:

Wow, even here my retirement pile is in the top 50% already. :unsure:

I am no longer gonna wave my dick in these type of threads.

:smug:

I dont know but I just up it. Not 401k but TSP. *shrugs*

There are two other common ways I've seen on top of tax-deferred plans, a lot of companies have stock option plans for all their regular employees. Basically a share of your income goes into an account and usually quarterly you accrue option benefits. It varies wildly from company to company but often times it's something like, "after x number of years of holding these options you can exercise them for a 10-15% discount to market price." So at the end of your time at a company you can actually buy a large amount of shares at a discount to the present market price (and then immediately sell them for profit on top of whatever increase in value your company has had over your career.)

Some are even more generous, I've seen them written such that you can actually be entitled to buy your shares at a 15% discount to the lowest price in the past 12 months and then the company will buy them back from you (if you choose) at the highest price the stock has closed at in the past 12 months. So basically you get to buy at a guaranteed discount to the lowest share price over the past year, and sell back at the highest price in the past year. Or you can just hold your shares.

The second are these plans called "cash balance" plans. A cash balance can be sweeter than a regular 401k but usually not as sweet as the really good old school largesse pensions. Best explained here (http://www.dol.gov/ebsa/faqs/faq_consumer_cashbalanceplans.html).

Does the US military get DB pensions?

Also, with IRAs, if you go self directed the sky is really the limit to what you can do. You can start a real estate business inside your IRA and all your income can accrue as retained earnings of your company, which bloats up the value of your IRA. You can also incorporate yourself as LLC, and then put ownership of the LLC into your IRA and say you run a consulting business on the side or for a few years after retiring from your career but before "real" retirement. You can put all your consulting income and hold it in your company, which is inside your IRA.

... anyhow, I aspire to get the kind of personal DB pension like the one gentleman who was calling my wife about a missing couple of hundred bucks lost from some minor US-Canadian tax thing. He had been drawing $70K/month since he retired in the mid 80s... well, from this one pension at least. He probably had some other pensions kicking around somewhere.

That's not going to happen with RRSPs (or 401(k)s for that matter). I think that requires being an executive of a well capitalized major company.

Quote from: OttoVonBismarck on July 19, 2013, 06:03:51 PM
There are two other common ways I've seen on top of tax-deferred plans, a lot of companies have stock option plans for all their regular employees. Basically a share of your income goes into an account and usually quarterly you accrue option benefits. It varies wildly from company to company but often times it's something like, "after x number of years of holding these options you can exercise them for a 10-15% discount to market price." So at the end of your time at a company you can actually buy a large amount of shares at a discount to the present market price (and then immediately sell them for profit on top of whatever increase in value your company has had over your career.)

Some are even more generous, I've seen them written such that you can actually be entitled to buy your shares at a 15% discount to the lowest price in the past 12 months and then the company will buy them back from you (if you choose) at the highest price the stock has closed at in the past 12 months. So basically you get to buy at a guaranteed discount to the lowest share price over the past year, and sell back at the highest price in the past year. Or you can just hold your shares.

The second are these plans called "cash balance" plans. A cash balance can be sweeter than a regular 401k but usually not as sweet as the really good old school largesse pensions. Best explained here (http://www.dol.gov/ebsa/faqs/faq_consumer_cashbalanceplans.html).

I participate in the Pearson stock purchase plan, and a couple of details are off.

I don't have to wait X years to buy stock; I set aside a fixed amount from each pay check and bi-annually it buys shares (actually ADRs since the company is listed in London).  The discount is 15% relative to the market price at the beginning or end of the 6 month period, whichever is lower.  Pearson won't buy them back.  I can sell them on the open market, but I have to hold them for at least 2 years or that 15% discount gets treated as taxable income.

Quote from: Jacob on July 19, 2013, 06:04:08 PM
Does the US military get DB pensions?

Absolutely, after 1980 it got less good, but they're still very solid after 20 years. I didn't stay for my 20, I got nothing. They also let military members invest in TSP (a type of 401k, as a Federal employee I also participate in the Federal TSP plan) in addition to their pension benefit. A lot of guys ignore that, but they shouldn't--it's a great tax deferred retirement plan on top of the pension.

The big thing about military pensions, especially the older guys before 1980, is these benefits perpetually increase with COLA and you usually retire well before your working age has ended so most of these guys work for 10-25+ years after leaving the military and are getting double paychecks the whole time. I know of guys through my dad who retired as Colonel or higher in the 80s and were making like $60k/year just from their pension, which was far higher than a Colonels pay in the 80s when they left the service and they had been getting regular raises for 15-20 years.

The Federal system isn't quite as good. Older employees under the old civil service retirement system are basically fully pensioned. Someone like me is under FERS, which is a hybrid system. The old system you didn't pay into social security, and thus didn't receive social security benefits. But you did receive a much better pension through the civil service retirement system.

Me, I pay into the FERS Annuity program (or "Basic Retirement System") which is a traditional defined benefits pension system, I pay into Social Security, and I pay into TSP (optional, with an automatic 1% contribution and the government matches my contributions.)

Retirement planning seminars here tell you to expect your FERS defined benefit plan to replace about 40% of your highest income when you retire, Social Security should replace 15%, and the balance you should get enough out of TSP--if you aren't contributing enough into TSP for that to be true you need to up your contribution amount.

Quote from: CountDeMoney on July 19, 2013, 04:47:41 PM

Quote from: ulmont on July 19, 2013, 04:18:14 PM
I'm going with the "suicide after I can no longer work" plan.  It's simplified things tremendously.

That's the spirit.  Don't feed the machine.  Control your own destiny.

Honestly, I think I might be coming around to Seedy's way of thinking. I've been very bitter and jaded recently. Normally I'm a pretty optimistic guy.

Quote from: MadImmortalMan on July 19, 2013, 06:15:55 PM
Honestly, I think I might be coming around to Seedy's way of thinking. I've been very bitter and jaded recently. Normally I'm a pretty optimistic guy.

:huh: From the guy with 100K burning a hole in his pocket?

I will say that it's obvious most people haven't saved enough. You need around $2.5m or so at age 65 if you want to convert it into an annuity that will keep you in "upper middle class" comfort til you die at age 90.

Generally they say you should have an amount equal to your annual pay saved in your 401k by 30, and an amount equal to 4-6 times your annual pay in your account by 40.

Quote from: Admiral Yi on July 19, 2013, 06:17:03 PM

Quote from: MadImmortalMan on July 19, 2013, 06:15:55 PM
Honestly, I think I might be coming around to Seedy's way of thinking. I've been very bitter and jaded recently. Normally I'm a pretty optimistic guy.

:huh: From the guy with 100K burning a hole in his pocket?

I have a lot of reasons to not be depressed. I'm not sure what's up.  :P

Quote from: OttoVonBismarck on July 19, 2013, 06:20:50 PM
I will say that it's obvious most people haven't saved enough.

Yeah... I wonder how that's going to work out?

General prevalence and acceptance of elder poverty?

Old people - usually a high-turnout demographic - influencing the political process and upping benefits? And at what costs?

Change in working lives?

Something else? It'll be interesting to see.

Most peoples' savings really accumulates in the last decade before retirement. Compounding effect and all that.

Nothing now. But as soon as I can I will save a lot  :menace:

Although my major concern will be getting property as soon as I can.

I think DB pensions aren't good, Sweden I believe went to a national defined contribution, variable benefit plan that I think could work well. I'd like to see 401ks turned into something like that, too many options exist in 401ks and for 95% of people the options are bad because they aren't sophisticated enough to use them properly.

You can straight up withdraw all your money from a 401k if you're willing to pay both income taxes and a 10% penalty on them. I think they basically should not be withdrawable until retirement. You can take loans out of your 401k, where you have to pay it back over a couple years but at a low interest rate (like 3.4%), which means most likely you come out far below what that money would have turned into after a couple years in the market.

I think if you're an employer with a 401k plan, there should be some mandatory % contribution minimum, and the employee should likewise have a minimum. I think 6/6 is a good bare bones minimum, that doesn't hurt employers too much and gives employees decent savings. You should save 10-15%, but I understand some people desperately need present day income so I wouldn't want to "mandate" 10-15.

I think there should be rules about what type of funds should be in 401k. Too many 401ks are filled with mutual funds with 1.25-2.0% expense ratios, instead I believe basically just index funds (which typically have 0.10-0.50% expense ratios) should be offered. I also think companies should be limited in what way they can mandate employees take company stock in 401ks (maybe whatever your policies, if an employee has over 10% of his 401k in company stock he retains the right to sell down to 10% and exchange it for other plan holdings.) I think 401ks are a good idea but too much freedom for most people, I think "regulated" 401ks where the government takes options away from individuals would work great.

I wouldn't mind if there was a way out of the regulations if you get certified as a "qualified" investor (sort of like how you have to be a qualified investor to buy into a hedge fund.)

Quote from: OttoVonBismarck on July 19, 2013, 06:20:50 PM
I will say that it's obvious most people haven't saved enough.

That's easy to say, especially for so many families when there's simply nothing left to save.

QuoteGenerally they say you should have an amount equal to your annual pay saved in your 401k by 30, and an amount equal to 4-6 times your annual pay in your account by 40.

Yeah, that's a good one.

Quote from: OttoVonBismarck on July 19, 2013, 06:31:45 PM
You can straight up withdraw all your money from a 401k if you're willing to pay both income taxes and a 10% penalty on them. I think they basically should not be withdrawable until retirement.

Just imagine what the foreclosure rates would've looked like after 2008 if people couldn't liquidate their retirement funds.

QuoteI think if you're an employer with a 401k plan, there should be some mandatory % contribution minimum, and the employee should likewise have a minimum.

Smells like socialism.

Quote from: CountDeMoney on July 19, 2013, 06:40:49 PM

QuoteGenerally they say you should have an amount equal to your annual pay saved in your 401k by 30, and an amount equal to 4-6 times your annual pay in your account by 40.

Yeah, that's a good one.

Yeah that's pretty hard to do if you go more than a couple years contributing nothing.

Quote from: OttoVonBismarck on July 19, 2013, 06:31:45 PM
I think there should be rules about what type of funds should be in 401k. Too many 401ks are filled with mutual funds with 1.25-2.0% expense ratios, instead I believe basically just index funds (which typically have 0.10-0.50% expense ratios) should be offered.

My understanding is that 401k's only have mutual fund type investments because they're the only type of investment vehicles set up to handle dribs and drabs of money coming in every pay period.

Otherwise totally agree. The biggest problem with 401k's is *not* that the ordinary participant lacks the required sophistication, it's that they don't put any money in or, like you said, take it all out before retirement.  That's not lack of sophistication, that's being a meathead.

Quote from: CountDeMoney on July 19, 2013, 06:40:49 PM

Quote from: OttoVonBismarck on July 19, 2013, 06:20:50 PM
I will say that it's obvious most people haven't saved enough.

That's easy to say, especially for so many families when there's simply nothing left to save.

Nothering wrong with saying that if you're defining one of the parameters of the problem you're trying to solve.

Of course, if you're saying it because you assigning blame to justify ignoring a social problem, then it's different story....

Quote from: MadImmortalMan on July 19, 2013, 06:46:07 PM

Quote from: CountDeMoney on July 19, 2013, 06:40:49 PM

QuoteGenerally they say you should have an amount equal to your annual pay saved in your 401k by 30, and an amount equal to 4-6 times your annual pay in your account by 40.

Yeah, that's a good one.

Yeah that's pretty hard to do if you go more than a couple years contributing nothing.

That's the kind of math that only gets sold to educated professional couples with substantial combined incomes with discretionary spending. 
T Rowe Price isn't exactly marketing that kind of advice in the 'hood or rural West Virginia for a reason.

I just started my RRSP recently, so $1200 lol. I do have 26k in tax free savings investments. It's kind of like a RRSP, but you can take money out without penalties.

Quote from: Admiral Yi on July 19, 2013, 06:47:23 PMThe biggest problem with 401k's is *not* that the ordinary participant lacks the required sophistication, it's that they don't put any money in or, like you said, take it all out before retirement.  That's not lack of sophistication, that's being a meathead.

I think your analysis is off base for a number of reasons:

1: It's not a matter of a lack of sophistication vs not putting enough money in; it's a matter of a lack of sophistication leading to not understanding the consequences of underfunding your retirement accounts, and thus not saving enough money.

2: Another significant driver of underfunding retirement accounts is is financial hardship. As MiM said, it's hard to meet the desired funding levels with even a few years of not contributing, and these days significant portions of the populace have had several lean years in their careers. This has nothing to do with being a meathead.

3: Finally, as a matter of social policy people being "meatheads" is irrelevant; if the population as a whole are unprepared for retirement, that's an indictment of the policies and incentives put in place by policy makers, not of the population.

Quote from: Jacob on July 19, 2013, 07:04:50 PM

Quote from: Admiral Yi on July 19, 2013, 06:47:23 PMThe biggest problem with 401k's is *not* that the ordinary participant lacks the required sophistication, it's that they don't put any money in or, like you said, take it all out before retirement.  That's not lack of sophistication, that's being a meathead.

I think your analysis is off base for a number of reasons:

1: It's not a matter of a lack of sophistication vs not putting enough money in; it's a matter of a lack of sophistication leading to not understanding the consequences of underfunding your retirement accounts, and thus not saving enough money.

2: Another significant driver of underfunding retirement accounts is is financial hardship. As MiM said, it's hard to meet the desired funding levels with even a few years of not contributing, and these days significant portions of the populace have had several lean years in their careers. This has nothing to do with being a meathead.

3: Finally, as a matter of social policy people being "meatheads" is irrelevant; if the population as a whole are unprepared for retirement, that's an indictment of the policies and incentives put in place by policy makers, not of the population.

People who were forced to liquidate their retirement funds due to loss of employment to support their families or to fend off home foreclosures after 2008 are still meatheads, Jacob, as are the meatheads who don't have plans or don't contribute to them because they simply can't.  For fuck's sake, already.

Quote from: Jacob on July 19, 2013, 07:04:50 PM
I think your analysis is off base for a number of reasons:

1: It's not a matter of a lack of sophistication vs not putting enough money in; it's a matter of a lack of sophistication leading to not understanding the consequences of underfunding your retirement accounts, and thus not saving enough money.

2: Another significant driver of underfunding retirement accounts is is financial hardship. As MiM said, it's hard to meet the desired funding levels with even a few years of not contributing, and these days significant portions of the populace have had several lean years in their careers. This has nothing to do with being a meathead.

3: Finally, as a matter of social policy people being "meatheads" is irrelevant; if the population as a whole are unprepared for retirement, that's an indictment of the policies and incentives put in place by policy makers, not of the population.

1. It doesn't require "financial sophistication" to realize that if you don't put any in, you won't have any when you retire.

2. This is true, but hardly an argument for DB over DC, which was the starting point of the discussion.  And this effect is not limited to 401k's: you work for 10 years part time as a pool cleaner and your Social Security benefit gets fucked too.

3. Are there *any* decisions individuals are responsible for in your universe?  If I quit my job and start smoking crack full time who's responsibility is it?

Quote from: Baron von Schtinkenbutt on July 19, 2013, 05:18:01 PM
Wow, even here my retirement pile is in the top 50% already. :unsure:

I would have been surprised if you weren't in the top 50%.  I know how engineers are.  This is why I was so surprised by my co-workers.

Besides, vM married right.  She'll keep his ass on target.

Honestly, I think the contribution limits are still way too low.

A 401k is a government created thing in any case, so the cries of "socialism" are irrelevant. The government created a special tax shelter, it can also mandate how they are used. I'm saying how I would regulate 401ks as they exist, an employer could still opt to have no 401k at all. If they did, that would make them a less attractive employer. Further, I'm not saying 401k reform fixes retirement concerns for everyone, but there is a huge portion of Americans who are pretty middle class and comfortable right now who are on a collision course with Fuck City, population 100m, because they don't understand what their 401k is, have never modified their investments, have never changed their contribution amounts (most plans default to some paltry 3% or something) and will retire in poverty. They do not see it coming, had no idea how they could have changed it, and have little hope of saving themselves. Then there are those who cashed theirs out to buy a boat or something or those who took out a bunch of 401k loans or etc who are a different level of misguided.

My proposals would help those who have 401ks, which is a lot of Americans a substantial portion of the middle class. No, it would not help out of work people or people who have McJobs--because those jobs do not provide 401ks. Those people are a separate issue, their plight shouldn't muddy the waters of 401k reform.

Quote from: Admiral Yi on July 19, 2013, 07:14:39 PM1. It doesn't require "financial sophistication" to realize that if you don't put any in, you won't have any when you retire.

2. This is true, but hardly an argument for DB over DC, which was the starting point of the discussion.  And this effect is not limited to 401k's: you work for 10 years part time as a pool cleaner and your Social Security benefit gets fucked too.

3. Are there *any* decisions individuals are responsible for in your universe?  If I quit my job and start smoking crack full time who's responsibility is it?

1: But it requires financial sophistication to understand how much to put in, how to manage it, and grasping the consequences of the choice of putting more or less in when balanced against other options (home equity, educating children, paying down student debt, medical bills). See Otto's excellent post for more details.

2: I'm not arguing about DB vs DC, I'm arguing against this assertion that you made:

Quote from: Admiral YiThe biggest problem with 401k's is *not* that the ordinary participant lacks the required sophistication, it's that they don't put any money in or, like you said, take it all out before retirement.  That's not lack of sophistication, that's being a meathead.

I contend that the biggest problem with the 401ks is that they fail to provide the kind of retirement that are expected from them, and that there are no significant other structures in place to pick up the slack.

3: If you quit your job to smoke crack, that's your responsibility. If 100 million Americans all quit their jobs to smoke crack, then it's an indication that your economic and employment policies not to mention your drug and addiction management policies are severely failing. I'm surprised that's even a question for you.

Let me in turn ask you: are there any failed free-market policies where you accept that the policy was built on the wrong premise rather than blaming individuals for acting insufficiently like a perfect Randian Homo Economicus?

Seriously - if you're making public policy that leave hundred of millions worse off than they were before, individual responsibility is completely a moot point. Blaming individuals for making bad choices when you're excusing shitty free market policies is on the same level as blaming the people for being insufficiently rational or dedicated when making excuses for shitty socialist policies. If your policies leave significant number of people worse off then it's because your policies suck, not because the people failed you or themselves. If you have hundreds of millions of "meatheads", you need to make your policies such that "meatheads" aren't completely fucked over by the government, by business, or by themselves.

I max out a Roth 401k contribution each year and also accumulate "retirement points" towards a military pension via reserve and occasional active duty.

Quote from: OttoVonBismarck on July 19, 2013, 07:53:09 PM
A 401k is a government created thing in any case, so the cries of "socialism" are irrelevant. The government created a special tax shelter, it can also mandate how they are used. I'm saying how I would regulate 401ks as they exist, an employer could still opt to have no 401k at all. If they did, that would make them a less attractive employer.

You could conceivably mandate how they're used, but that's not even remotely a realistic option.  Forcing them to do so would be government overreach to say the least.
And I don't buy the argument that a lack of offering a 401k plan is some sort of self-induced detriment to the employer.  Shit, Hopkins had absolutely no problem taking away their 403b matching contributions from us in 2009, and they've never come back.  Doesn't make them any less of an attractive employer. 

QuoteFurther, I'm not saying 401k reform fixes retirement concerns for everyone, but there is a huge portion of Americans who are pretty middle class and comfortable right now who are on a collision course with Fuck City, population 100m, because they don't understand what their 401k is, have never modified their investments, have never changed their contribution amounts (most plans default to some paltry 3% or something) and will retire in poverty. They do not see it coming, had no idea how they could have changed it, and have little hope of saving themselves. Then there are those who cashed theirs out to buy a boat or something or those who took out a bunch of 401k loans or etc who are a different level of misguided.

Fixed 401k reforms for forcing employees to contribute at a specific level to enhance and at least try to ensure the survivability of their assets into retirement is a very good idea, but you're still putting those funds to risk to a volatile market.  That's partially the reason why so many 401ks have seen an erosion of cash in the last couple years, as investors put it into more tangible assets as foreclosed properties, short sales and other real estate options as an alternative.  Something tangible, as opposed to Wall Street's fake money on paper that has a tendency to suddenly disappear at the most inconvenient times.  And it's not like offering other products as alternatives within 401k plans would've helped in 2008, as everybody got whacked across the board.

QuoteMy proposals would help those who have 401ks, which is a lot of Americans a substantial portion of the middle class. No, it would not help out of work people or people who have McJobs--because those jobs do not provide 401ks. Those people are a separate issue, their plight shouldn't muddy the waters of 401k reform.

Of course they shouldn't muddy the 401k waters; they don't contribute to Wall Street's income. 
But we're dealing with them separately for their lack of contribution, what with the eradication of pensions and the political drive to eliminate government safety nets.  But that, as Oprah would say, is for another show.

Quote from: Admiral Yi on July 19, 2013, 06:47:23 PM
The biggest problem with 401k's is *not* that the ordinary participant lacks the required sophistication, it's that they don't put any money in or, like you said, take it all out before retirement.  That's not lack of sophistication, that's being a meathead.

Jake and CdM are all over this, so I don't mean to dogpile, but...401ks are one of the centerpieces of federal policy to encourage people to prepare for retirement. The issue is that it encourages people to start saving early, but penalizes them for ever dipping into the funds. In theory that is great, but in reality most 20 year olds are going to have several stretches of serious hardship before they hit 65 (illnesses, prolonged unemployment, elder care, maybe even just the birth of a child, etc.).

If that 20 year old makes it to 65 without bottoming out at least once, the system worked great for him: but he probably is fairly well off anyway. The majority of 20 year olds will bottom out at some point, and unfortunately for them the system will hit them with penalties and they would probably have been better off never hearing of the 401k.

We have a perverse system where the tax code is rewarding the people that probably "won" anyway, and penalizing those that tried to save but life got in the way.

Not to mention that the 401k benefit is directly tied to your marginal tax rate, so the wealthy benefit quite a bit more than the poor even if the poor never tap into the funds.

Quote from: Admiral Yi on July 19, 2013, 03:49:37 PM
Significantly less than any of you, hopefully more than Ide and Raz.

Hopefully.

There's 8000$ in my RRSP. My employer & I have put 6400$ in it, the rest is interest. I don't know if that's good or not.

Quote from: OttoVonBismarck on July 19, 2013, 06:31:45 PM
I'd like to see 401ks turned into something like that, too many options exist in 401ks and for 95% of people the options are bad because they aren't sophisticated enough to use them properly.

:yes:

Even pensions are invested in the market Seedy, there's not really anyway you can escape volatility if you want anything more than your principal contributions left at the end of your contribution period. Pension funds have that same problem just on a large scale, if they just invest in treasury bonds their benefit payouts would either have to be minuscule or the funds would go bankrupt (in some cases both have actually happened.)

With a 401k you can actually protect yourself from volatility though, if you're 35 years old it actually doesn't matter if your 401k is 90% in a S&P 500 index fund and the S&P 500 loses 40% of its value over night. Why? Because every time there's been a big loss like that it's rebounded at some point, sometimes years later, but it's always rebounded. The people that need to be concerned about that are the ones who don't have 20-30 years until they retire. With a 401k you can and should start moving your investments into assets which are not so volatile in the immediate years prior to retirement.

What exactly is your solution, to just infinitely raise taxes to fund retirements? The problem with that comes when your population begins to age and fewer people get born. It means you have successively smaller generations of young people paying for successively larger generations of old people. That's why Sweden went to defined contribution, variable benefit. Sweden recognized its demographic destiny was such they were making a decision between a mostly fair retirement system for the seniors and working people, or a system which basically made working people slaves to an entitlement class.

CdM's economic ideas are not Marx, they're like what Marx ideas would have been if he wrote his theories down when he was an angsty teenager. It's got all the wrong-headedness of Marx and none of the positives.

Quote from: Admiral Yi on July 19, 2013, 07:14:39 PM

Quote from: Jacob on July 19, 2013, 07:04:50 PM
3: Finally, as a matter of social policy people being "meatheads" is irrelevant; if the population as a whole are unprepared for retirement, that's an indictment of the policies and incentives put in place by policy makers, not of the population.

3. Are there *any* decisions individuals are responsible for in your universe?  If I quit my job and start smoking crack full time who's responsibility is it?

Jake has it right.  At the end of the day, you need social policy to work.  All good systems are good systems precisely because they're robust to idiot users.  If the system fails 5% of the people it's designed for because they're "meatheads", the problem is with the meatheads.  If the system fails for majority of the people it's designed for, then obviously the problem is with the system that demands more competence from people than practice shows they can deliver.

Blaming the "meatheads" can make you feel good, but at the end of the day, our goal should not be to feel good about ourselves.  Our goal should be to ensure that most of our society can have a secure retirement.

Quote from: OttoVonBismarck on July 19, 2013, 10:31:21 PM
With a 401k you can actually protect yourself from volatility though, if you're 35 years old it actually doesn't matter if your 401k is 90% in a S&P 500 index fund and the S&P 500 loses 40% of its value over night. Why? Because every time there's been a big loss like that it's rebounded at some point, sometimes years later, but it's always rebounded. The people that need to be concerned about that are the ones who don't have 20-30 years until they retire. With a 401k you can and should start moving your investments into assets which are not so volatile in the immediate years prior to retirement.

That's a very dangerous mode of thinking.  Just because the index always rebounded in the past doesn't mean that it will next time.  Conditions are always different, and so are the reasons for the crash.  The Nikkei 225 index is still only about a third of what it was in 1990.

Hmm, just got the hire packet for my new job.  I am able to put up to $17,000 pre-tax (fed and state) and pre-Social into a Vermont "457" plan, which I have no idea about, never having been a state employee.  Given 17k will be well more than half of my starting salary and slightly less than half of my salary if I ever pass the bar, the max is not a pressing concern.

I can put up to $5000 towards medical out-of-pocket expenses pre-tax also; guessing I should do at least a grand for contact lenses and teeth cleaning until dental kicks in at 6 months of active service.

I also have to choose from 4 of their health plans, from "SafetyNet" ($88/month) up to "TotalChoice" ($146); I think the HMO plan ($122/month) is best, with no deductible and free PCP/in-plan care, but I may need to get advice and/or make a Languish poll.

Quote from: DGuller on July 19, 2013, 10:43:20 PMThat's a very dangerous mode of thinking.  Just because the index always rebounded in the past doesn't mean that it will next time.  Conditions are always different, and so are the reasons for the crash.  The Nikkei 225 index is still only about a third of what it was in 1990.

It's not actually that dangerous, no. Deflation in Japan didn't sneak up on anyone, if you see prolonged deflation just put everything in cash and you'll get richer every year. But I think in modern economies deflation is usually linked with bad economic trends (unlike in the past when it could be linked with positive things.) Deflation in Japan is mostly a product of the fact Japan is dying of old age. So if we have a generational period of deflation I'd posit we'll have more things to worry about than our 401k balances.

You either put your money in something volatile that can give you a return, or you park it in cash which may be eroded by inflation. Those are your only real options, and at age 35 you could adjust your strategy as necessary. I'm not talking about my Plan A which will always work no matter what and some other Plan. There's no risk free place to park your money. The closest you can get is something like an I-Bond, but there are hard limits on how many of those you can buy and it's not easy to get them into a retirement plan.

I'm just saying that there are no financial investments which are guaranteed to not lose money in any relevant time period.  One reason is that if such investments did exist, then once publicized the overinvestment in that asset class would create a bubble.  Then the only guarantee left is that it would pop at some point.

Quote from: Jacob on July 19, 2013, 08:30:02 PM
Let me in turn ask you: are there any failed free-market policies where you accept that the policy was built on the wrong premise rather than blaming individuals for acting insufficiently like a perfect Randian Homo Economicus?

If you look back through the thread, you'll notice that I supported Biscuit's suggestion that 401k contributions be subject to a mandatory minimum.  There are bountious examples of people making meatheaded economic decisions.  You might also remember that I suggested limiting federally subsidized education loans to hard majors, curtailing a young person's ability to choose a meathead, non-financially sustainable major.

The point I was trying to make was not that the current system guarantees optimal outcomes, because it obviously doesn't, but that any concievable policy on retirement carries its own advantages and disadvantages.  You want to make it so that 401k money is subject to a mandatory minimum and absolutely cannot be touched, because otherswise meatheads will put all the money in the crack pipes?  Fine, but you just hamstrung your and Seedy's hypothetical hit-a-rough patch guy who needs the money for rent.  That guy is fucked.

Let's call a spade a spade, you and the other representatives of the progressive left want generous, comfortable-in-retirement DB plans to materialize out of thin air and solve everyone's problems.  That's not any more realistic than wishing that running the fryer at KFT paid 60K a year.  I sincerely doubt you'd be jumping up and down if every 401k or 401k equivalent were converted into a DB plan that paid out $250/month.  Do you want to require that all employees spend 20 years at a job before vesting?  Someone works 19 years and they walk away with bupkus?

So bottom line on our zone of disagreement: yes, if people are given the freedom to make their own choices invariably a signficant minority or possibily a majority will make meathead decisions.  Not because they lack financial sophistication, but because there are a lot of meatheads in the world.  No, if we mandate a generous DB retirement plan as a condition of employment our problems will not disappear.  Or we can tax the hell out of working people to provide luscious socialized retirement benefits but then workers will be paying out the wazoo.  There's just no free money out there that we can diivvy up and live happily ever after.

Question: once the boomers are dead, does Western society move back towards a more favourable age distribution?

Let's take it one thing at a time.

Quote from: Savonarola on July 19, 2013, 07:36:20 PM

Quote from: Baron von Schtinkenbutt on July 19, 2013, 05:18:01 PM
Wow, even here my retirement pile is in the top 50% already. :unsure:

I would have been surprised if you weren't in the top 50%.  I know how engineers are.  This is why I was so surprised by my co-workers.

I expected the distribution on Languish to be slanted towards the higher numbers, which is why I was surprised.  Also, I feel like I'm behind because I lost 8 months last year where I did not have a 401k and my contribution rate has been lower than I would like due to present expenses.

Quote from: CountDeMoney on July 19, 2013, 07:38:25 PM
Besides, vM married right.  She'll keep his ass on target.

She has no financial sense and defers to me on all those matters. :P

Quote from: Admiral Yi on July 20, 2013, 02:18:59 AM
If you look back through the thread, you'll notice that I supported Biscuit's suggestion that 401k contributions be subject to a mandatory minimum.  There are bountious examples of people making meatheaded economic decisions.  You might also remember that I suggested limiting federally subsidized education loans to hard majors, curtailing a young person's ability to choose a meathead, non-financially sustainable major.

The point I was trying to make was not that the current system guarantees optimal outcomes, because it obviously doesn't, but that any concievable policy on retirement carries its own advantages and disadvantages.  You want to make it so that 401k money is subject to a mandatory minimum and absolutely cannot be touched, because otherswise meatheads will put all the money in the crack pipes?  Fine, but you just hamstrung your and Seedy's hypothetical hit-a-rough patch guy who needs the money for rent.  That guy is fucked.

Let's call a spade a spade, you and the other representatives of the progressive left want generous, comfortable-in-retirement DB plans to materialize out of thin air and solve everyone's problems.  That's not any more realistic than wishing that running the fryer at KFT paid 60K a year.  I sincerely doubt you'd be jumping up and down if every 401k or 401k equivalent were converted into a DB plan that paid out $250/month.  Do you want to require that all employees spend 20 years at a job before vesting?  Someone works 19 years and they walk away with bupkus?

So bottom line on our zone of disagreement: yes, if people are given the freedom to make their own choices invariably a signficant minority or possibily a majority will make meathead decisions.  Not because they lack financial sophistication, but because there are a lot of meatheads in the world.  No, if we mandate a generous DB retirement plan as a condition of employment our problems will not disappear.  Or we can tax the hell out of working people to provide luscious socialized retirement benefits but then workers will be paying out the wazoo.  There's just no free money out there that we can diivvy up and live happily ever after.

In this particular case it's more accurate to call your spade a strawman, because while I can't speak for your rhetorical progressive left what you describe has nothing to do with my position, and definitely does not reflect what I've said in this thread. I agree with you that that providing generous, universal DB plans with non-existing money is practically impossible*.

My only point - and one which you seem to have mostly conceded - is that there's an entirely predictable hangover of epic proportions coming over the next decades as people face retirements with entirely inadequate resources at their disposal; and furthermore, that blaming that coming crisis on individual financial and moral failures - people being "meatheads" in your words - is obfuscation when it's the result of policy decisions.

I applaud you hitching your wagon to Otto's and start examining possible fixes to the problem. I don't know if any given proposal will fix the problem; perhaps the problem is to complex or it's too late and at best we can mitigate the worst results in the present and avoid them in the future. I don't know. Personally, in a Canadian context, I think the notion of expanding the CPP is worth exploring.

The point is, it's an issue of policy and it should be approached as such. It's the "it's their own fault so whatever" meathead bullshit that I think is bullshit.

*I mean, I don't rule out that masses of financially embarrassed seniors could organize politically and vote themselves wonderful benefits in the future; that could happen, and I expect that we'll both agree that that would just pass the buck and create massive problems elsewhere.

As for the complaints about how my ideas would hurt out of work people or people down on their luck by denying them access to their 401k, I respond, "so what?" Every national pension system and most corporate ones did not/do not allow you to just pull your money out because times are rough. If I lost everything and ended up in the street I couldn't go to the social security office and show how much I've paid into the system and demand they give it back to me because I really needed it. It's just not accessible.

What you're talking about is instead a discussion about how society should provide for (and to what level) the unemployed or underemployed, which is a totally separate discussion.

Jake:  I agree with you that a fix is needed.  Where we part ways is whether the fix is needed because people lack financial sophistication or because they are meatheads.  Sav's coworker "hasn't gotten around to it" not because of a lack of financial sophistication.

I'm not sure your vaguely defined "meathead" and my "lack of sophistication" are really delineated clearly enough for your point to be much more than the minor sort of semantic quibble that makes up the lion's share of discussion on this forum.

I just received an overview from my pension company. The prognosis is good, if I keep this or a similar job for the next 39 years.

Great.

Quote from: Admiral Yi on July 20, 2013, 02:35:59 PM
Jake:  I agree with you that a fix is needed.  Where we part ways is whether the fix is needed because people lack financial sophistication or because they are meatheads.  Sav's coworker "hasn't gotten around to it" not because of a lack of financial sophistication.

One of the reasons people don't get around to it is because it's utterly complicated, which can easily give financially unsophisticated people decision paralysis.

How in the world is it complicated to select a % of your income, then select a fund or funds from a list?

Quote from: Admiral Yi on July 21, 2013, 01:45:34 AM
How in the world is it complicated to select a % of your income, then select a fund or funds from a list?

What % do you need to set aside?  Not the default one, that's for sure.  What fund out of many dozens do you choose?  So you read up a little, and hear about money market, value, balanced, growth, real estate, international, stock index, bond index, blah, blah, blah.   :hmm: I'll get back to it.

I think you vastly underestimate how intimidating investing is to people not educated in it.  My dad is an economist by education, accountant by trade, and my mother was a bookkeeper, they always lived below their means, and yet even such people not unfamiliar with numbers came to the 401k party very late in the game (and they already started way behind, having come to the country in their 40ies).  None of us knew for a fact what we needed to do, and it's the kind of decision that is never burning on any particular day.  I still don't know what to do, but luckily my 401k had the target retirement funds, so I just went into that.  I imagine it just gets more intimidating the less educated you are, knowing how mismanaging your funds can lose you a lot of money.

It's paralyzing if you think there is some magical fund in that list that is going to explode tomorrow like a dot.com IPO and you're going to be a schmuck for missing it.  Once you get over that, who gives a shit?  Just plop some money in whatever fund and forget about it.

My 401k has one of those age geared mixed funds too, as a default.  Don't want to think about it, just let it go there.  No big deal.

Quote from: Admiral Yi on July 21, 2013, 02:02:17 AM
It's paralyzing if you think there is some magical fund in that list that is going to explode tomorrow like a dot.com IPO and you're going to be a schmuck for missing it.  Once you get over that, who gives a shit?  Just plop some money in whatever fund and forget about it.

Risk averse people are hesitant to put money into investments they don't understand, especially if such investments can lose you money.  It takes a lot of education to develop such a carefree attitude that you're comfortable just plopping the money and forgetting it.  Most financially uneducated people don't have the comfort level with such a strategy, they have to watch their hard-earned money and adjust (which we know is a very bad strategy, but that's because we're educated).  And speaking of education, personal finance is probably the worst field imaginable when it comes to the quality of self-help material.  There are plenty of charlatans and champion coin tossers sharing their steaming pile of wisdom in their books.

Quote
My 401k has one of those age geared mixed funds too, as a default.  Don't want to think about it, just let it go there.  No big deal.

Those are a relatively new.  I don't think there were many of those around ten years ago, if any.

What I could buy is if you were to say when you and your family walked off the gangplank you had no clue what a mutual fund was and thought half of them could be Florida swamp land.  I've talked to a lot with co-workers at my present job about our 401k.  99% of them took the default amount and the default fund (the age thingy) and never gave it a second thought.  Nobody had a stroke and swallowed their tongue because they couldn't choose an amount or fund. Actually, most of them probably never even gave it a first thought.  Which is too bad, because at the default amount you're leaving some matching money on the table.

Now what does sound a little trickier is the Canadian case.  My impression is that a company match is not very common, which makes choosing an amount a little more perplexing.

Again, default enrollments and targeted retirement year funds are a relatively new phenomenon.  They aren't going to help people in their fifties and sixties, though I guess better late than never. 

And if you invest default amounts, you may almost not bother at all.  Assuming someone gets $50k a year, a pretty nice salary for most people, the default contribution of 3% is going to amount to $1500 a year.  Let's assume a generous 100% employer match, so $3000 a year.  That'll help you upgrade from a store brand to Pedigree for special occasions, but comfortable retirement it would not make.

My default is 6%, 100% match up to 6, 50% match from 6 to 9.

Last time we talked that seemed closer to the norm than 3%.

And as I said before even if you don't have a default %, the matching policy gives you a pretty solid anchor. 

Quote from: Admiral Yi on July 21, 2013, 02:47:18 AM
My default is 6%, 100% match up to 6, 50% match from 6 to 9.

Last time we talked that seemed closer to the norm than 3%.

And as I said before even if you don't have a default %, the matching policy gives you a pretty solid anchor.

That is a very reasonable program that your company has.  I bet it's more generous than typical, with a higher default contribution rate than typical.

And, in any case, what you have to remember is that these things have improved quite a bit.  The people who you call meatheads did not have such things in the past.  We've probably learned some lessons, and dialed in soft paternalism big time to start people off with good choices by default, but that doesn't help the pioneers who already missed the boat.

The default % may be a relatively recent innovation, but I'm pretty sure the company match is not.  And as I already said the company match gives you a nice solid anchor for your choice.

Quote from: Admiral Yi on July 21, 2013, 03:19:46 AM
The default % may be a relatively recent innovation, but I'm pretty sure the company match is not.  And as I already said the company match gives you a nice solid anchor for your choice.

Well, the default % is really the key.  That's the game changing difference, between having to make a decision, some kind of a decision, and having it pre-made for you.  Investing up to at least a company match seems like a no-brainer to you, but without a default contribution, it's still a decision that needs to be actively made.

Quote from: DGuller on July 21, 2013, 03:24:49 AM
Well, the default % is really the key.  That's the game changing difference, between having to make a decision, some kind of a decision, and having it pre-made for you.  Investing up to at least a company match seems like a no-brainer to you, but without a default contribution, it's still a decision that needs to be actively made.

A decision which does not require massive financial sophistication.

Quote from: Admiral Yi on July 21, 2013, 03:26:45 AM

Quote from: DGuller on July 21, 2013, 03:24:49 AM
Well, the default % is really the key.  That's the game changing difference, between having to make a decision, some kind of a decision, and having it pre-made for you.  Investing up to at least a company match seems like a no-brainer to you, but without a default contribution, it's still a decision that needs to be actively made.

A decision which does not require massive financial sophistication.

We can go back and forth on this all week.  That won't change the fact that majority of near-retirees have little to nothing in their 401k plans.

Where are you getting that from?

We can quibble about "most" but I'm in the rare position of disagreeing with you here Yi and being in agreement with DGuller and Jacob in general here.

Alright, so here (http://www.fool.com/retirement/general/2012/10/15/17-frightening-facts-about-retirement-savings-in-.aspx), and here (http://www.pensionrights.org/publications/statistic/401k-statistic-sources) is a list of bad statistics about retirement savings in America. In particular:

• 21% of employees covered by 401k plans choose not to participate
• Average account balance for people aged 55-64 is $70,000

There's serious problems afoot, the first large generation of people who have mostly been either partially or not at all covered by traditional db pension plans and instead should have been saving in IRAs and 401ks are starting to retire. What they are mostly finding out, is hey guess what, 1-2 years salary saved at age 65 isn't enough to live on for more than maybe 3-4 years if you cut back to subsistence levels of living and take social security. So they aren't retiring, they're probably going to be involved in some low level of working for a long time. This is also part of the reason we now have a "lost generation" of young people. The "Millenials" who graduated college from 2008-2010 had one of the lowest rates of first time job placement in a professional path of any generation we've ever graduated from college. What we've seen since then, is those people are not being given a chance to make up for it. Instead employers have basically "skipped them." When employers started hiring again, they went for the new college graduates, not the 2008 college graduate who got very unlucky and missed that key hiring window after graduation because of a shitty economy. Part of the reason it was so rough for them is so few people who traditionally would have retired were actually doing so. Some of the ones who had saved a decent bit lost so much in the market crash they had to continue to work, but most had never saved much in the first place and simply were not able to retire.

I'm going to make a lot of assumptions, but this is an accurate "ballpark reflection" of what needs to happen if you're an average American.

Posit this: 25 years old, you make $50,000 per year, you salary roughly increases with historical inflation rate, and you contribute 6% of your income to a 401k that your employer matches at 6%.

After 40 years, you're 65 years old and decide to retire.

You will retire earning about $108k a year (that's basically inflation rate raises, not any real disposable income increase.) You'll end up, with historical average returns (assume you dumped everything in a index fund of the S&P 500 or something), a 401k balance of almost exactly $2m ($2.035m or so.) Let's say you do the simplest thing possible and convert it to a 4% annuity (at time s in the past few decades that'd be a low annuity yield but right now it may be high, I haven't looked into annuities personally but my parents have one from the 90s with obscene yield compared to today), let's also say you go with a fixed annuity of 35 years because you either don't want to live past 90 or don't care what happens after then. That means your annuity payments are around $104k a year and it's all gone in 30 years, and you also of course get social security.

So you actually most likely retire and get a pay raise from your annuity + social security. As you age your annuity income gets less relative to cost of living increases but your social security will go up gradually with COLA. So most likely you end up okay. [Reality is you wouldn't convert your entire savings to a fixed annuity, you'd go for maybe a part fixed annuity, part variable annuity that has market growth potential with minimum income riders, or you do part fixed annuity, keep part in the stock market or whatever.]

The guy in my scenario did ok, and he still ends up with exactly what he needs. But in all reality he should have been contributing 10-15% for a few reasons. The biggest one is that outcome posits "average market returns." There have been sliding 30-40 year windows (equivalent to a career length) where the market hasn't hit the average return people point to from 1929-Present. I read an article the other day where a guy said you should assume no better than a 4% return over your career. That reduces our guy's 401k balance to $800k, which changes his situations substantially. But if he was contributing 15%, even in that bad market scenario he still gets to retire with $1.5m--which may be enough. It would mean probably a minor pay decrease instead of a pay bump at retirement, but he could probably get buy. At $800k total savings it's questionable.

People with a few hundred thousand in 401k plans are so far off that it's basically a joke. If you're 65 with $100k in your 401k just cash it out and go on a fancy vacation and then move into the poor house, because you're fucked anyway.

What scares the shit out of me are people like my sister-in-law who don't understand the concept of saving money.... she makes peanuts, but whenever she does get money she blows it immediately on frivolous shit (yay! tax refund time!  time for a new widescreen TV! :bleeding: )  I'm guessing she'll end up begging Princesca and I for handouts eventually once her parents are gone and can't provide them anymore. :rolleyes:  It seems like there are a LOT of people out there like her.

I actually should correct something (aside from all the typos), my scenario where the guy ends up with $2.035m is based on a return of 8%. That itself is less than historical average but is roughly the historical average of a 60/40 stock/bond split. If you want to assume the S&P 500 historical returns persist through this guy's career and he invests fully in that, his end balance would be $4.4m at a 6% contribution rate (with 6% employer match.)

I personally think 8% is a "best case scenario you should realistically expect", and 4% is "what you should plan for because who knows what will happen." If yields are much lower than 4% for your entire career I don't really know that there is much you can do, maybe you have to put money aside and do riskier investments like real estate or something to try and burn your own path. I don't know that the average American can retire at average savings, employer match and etc rates if the market yields less than 4% during their working careers.

Quote from: OttoVonBismarck on July 21, 2013, 07:59:30 AM
We can quibble about "most" but I'm in the rare position of disagreeing with you here Yi and being in agreement with DGuller and Jacob in general here.

Alright, so here (http://www.fool.com/retirement/general/2012/10/15/17-frightening-facts-about-retirement-savings-in-.aspx), and here (http://www.pensionrights.org/publications/statistic/401k-statistic-sources) is a list of bad statistics about retirement savings in America. In particular:

• 21% of employees covered by 401k plans choose not to participate
• Average account balance for people aged 55-64 is $70,000

"Only 42% of private sector workers age 25 to 64 have any pension coverage in their current job. That's lower than the 50% who had pension coverage back in 1979."

I agree that 21% non-participation by 401k eligible employees is a huge number, but it seems to me if we're looking for the drivers of low retirement balances, the one above swamps everything else.  Although IMO the results in both links are compromised by excluding IRAs.

If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

Quote from: alfred russel on July 21, 2013, 05:54:41 PM
If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

Yeah, problem is that doesn't really work. If you actually do that to a point it would it basically impoverishes working people to give old people a 20-25 year retirement living at a guaranteed level of comfort. It only worked for a period of time before life expectancy shot up and before we quit having so many damn kids. There is a reason even Euroweenie countries have tweaked their systems, Sweden has defined contribution variable benefit which is simply the only system that might have broad applicability and would enable a country with an aging population and declining birth rate to actually keep such a scheme afloat. Then there are other approaches, Norway has a sovereign wealth fund that backs up its pensions, which is basically a really big state owned mutual fund that is worth like $700bn. However, much of the holdings are related to the Norwegian energy industry, so tis not an option for countries that don't fit the Norwegian mold (very small population, large oil reserves.)

Quote from: OttoVonBismarck on July 21, 2013, 08:59:25 PM

Quote from: alfred russel on July 21, 2013, 05:54:41 PM
If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

Yeah, problem is that doesn't really work. If you actually do that to a point it would it basically impoverishes working people to give old people a 20-25 year retirement living at a guaranteed level of comfort. It only worked for a period of time before life expectancy shot up and before we quit having so many damn kids. There is a reason even Euroweenie countries have tweaked their systems, Sweden has defined contribution variable benefit which is simply the only system that might have broad applicability and would enable a country with an aging population and declining birth rate to actually keep such a scheme afloat. Then there are other approaches, Norway has a sovereign wealth fund that backs up its pensions, which is basically a really big state owned mutual fund that is worth like $700bn. However, much of the holdings are related to the Norwegian energy industry, so tis not an option for countries that don't fit the Norwegian mold (very small population, large oil reserves.)

The tax cost of retirement plans is very expensive--if those were redirected to social security the math of the program would be quite different.

I also don't agree that social security doesn't work.

Okay.

Quote from: alfred russel on July 21, 2013, 09:05:54 PM
The tax cost of retirement plans is very expensive--if those were redirected to social security the math of the program would be quite different.

I dunno Fredo.  Average 20% income tax rate on c. 10% of earned income, only for those who are in retirement plan is not going to finance a lush retirement, particularly when we hit the Baby Boomer trough and each retiree is mooching off of 1.5 workers.

It would also put a big dent in national savings.

Quote from: OttoVonBismarck on July 21, 2013, 09:06:51 PM
Okay.

I was hoping you would look into the math for me.  :P

Quote from: Admiral Yi on July 21, 2013, 02:02:17 AM
My 401k has one of those age geared mixed funds too, as a default.  Don't want to think about it, just let it go there.  No big deal.

We're introducing an automatically opted-in national pension fund aimed at low-wage earners right now. I think they're going to have age based investments. They did a lot of research into the issue and it was quite interesting. They're being ultra-conservative with young people's money, for the first five years or so. Apparently young/new savers are really discouraged if they see their money suddenly fall. They're more likely to wonder what the point is and just opt out. So it's five years of conservative investment, then 30 years of varying risk and a few more conservative years at the end.

Quote from: alfred russel on July 21, 2013, 05:54:41 PM
If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

I support doing this plan. In roughly thirty years.  :)

Quote from: alfred russel on July 19, 2013, 09:29:09 PMIn theory that is great, but in reality most 20 year olds are going to have several stretches of serious hardship before they hit 65 (illnesses, prolonged unemployment, elder care, maybe even just the birth of a child, etc.).

And when they get back on track, the contribution limits keep them from being able to catch back up.

Quote from: MadImmortalMan on July 22, 2013, 11:21:55 AM

Quote from: alfred russel on July 19, 2013, 09:29:09 PMIn theory that is great, but in reality most 20 year olds are going to have several stretches of serious hardship before they hit 65 (illnesses, prolonged unemployment, elder care, maybe even just the birth of a child, etc.).

And when they get back on track, the contribution limits keep them from being able to catch back up.

In Canada, at least, the contribution limit is cumulative. But employer-matching doesn't increase it. Hence my surprise earlier in the thread at Sav having $600 K in his fund - in Canada, this would be impossible at his age without wild luck in one's investments.

I started putting money into investments and retirement plans in my mid to late 20s, and I kept that up in some way all my life. Either through my own IRAs, a company 401k, plus other savings. Now at 60 I'm glad I did, as I can look forward to retiring in a few years with a lot less worry. I'm so glad that I saved, and wish I had done more.

Quote from: KRonn on July 22, 2013, 12:20:30 PM
Now at 60

:blink:

Quote from: DGuller on July 22, 2013, 12:32:28 PM

Quote from: KRonn on July 22, 2013, 12:20:30 PM
Now at 60

:blink:

Kids these days....   :hmm:

Bubba should have put that lockbox money into a sovereign wealth fund.

Quote from: Admiral Yi on July 22, 2013, 02:45:07 PM
Bubba should have put that lockbox money into a sovereign wealth fund.

LBJ should have done that. Or FDR, really.

Quote from: MadImmortalMan on July 22, 2013, 02:47:11 PM
LBJ should have done that. Or FDR, really.

Don't think we were running a surplus under those guys.

There's no such thing as a deficit or surplus in social security, it's going to come from general taxation like everywhere else in the world and it's time people stop lying/deluding themselves about it.

Quote from: Sheilbh on July 22, 2013, 06:55:30 PM
There's no such thing as a deficit or surplus in social security, it's going to come from general taxation like everywhere else in the world and it's time people stop lying/deluding themselves about it.

So before the inevitable dipping into general revenue, how would you prefer to describe the current state of affairs?  The artist formerly known as the Social Security surplus?

Quote from: Admiral Yi on July 22, 2013, 07:02:13 PM
So before the inevitable dipping into general revenue, how would you prefer to describe the current state of affairs?  The artist formerly known as the Social Security surplus?

A nonsense distinction, it's a pay as you go system. But none of the 'lockbox' or 'trust fund' phrases work. It just means you're not using general taxation yet. As it is a surplus, can be used to help government finance in general (I believe it can be borrowed against by the Federal government) and a deficit will be met by general revenue. How that can meaningfully be a 'surplus', 'deficit' or 'trust fund' is beyond me.

If you put it into a separate national pension fund that was like a giant pension fund, investing and accruing gains as well as receiving employee and employer contributions then the language of surplus or deficit would matter.

It's precisely because it's a pay as you go system that it's not nonsense.  Right now we're paying more than we're going.

Quote from: Admiral Yi on July 22, 2013, 07:16:02 PM
It's precisely because it's a pay as you go system that it's not nonsense.  Right now we're paying more than we're going.

Not really. You pay more into it and that excess then goes into funding government in general. It doesn't build up any savings. It doesn't pay down debt. How is it meaningfully a surplus?

Edit: Also as it's pay as you go, what's the actual difference, apart from semantics, of funding it from general revenue?

Quote from: Sheilbh on July 22, 2013, 07:13:39 PMA nonsense distinction, it's a pay as you go system. But none of the 'lockbox' or 'trust fund' phrases work. It just means you're not using general taxation yet. As it is a surplus, can be used to help government finance in general (I believe it can be borrowed against by the Federal government) and a deficit will be met by general revenue. How that can meaningfully be a 'surplus', 'deficit' or 'trust fund' is beyond me.

If you put it into a separate national pension fund that was like a giant pension fund, investing and accruing gains as well as receiving employee and employer contributions then the language of surplus or deficit would matter.

You're correct that since it's not invested in a sovereign wealth fund similar to what traditional pensions in America are invested in, it is mostly an account matter and not an immediately important one. I think what Yi is saying though is we should have some words to describe a situation in which the 12.4% tax on gross earnings paid into social security for each person, in total, exceeds the total of benefits paid out during a given calendar year. I'd argue surplus is the only really obvious word for that.

As for 'can be used to help government finance' it's actually "must be." By law, any excess social security tax collected over and above the amount needed to cover benefit checks must immediately be used to purchase treasury bonds. So basically as long as we collect more than we use we actually continually go further into debt. This is actually why intragovernmental debt (and total debt) increased during the Clinton Presidency. Operating budget wise, we did good and paid down some debt held by the public. But because the economy was doing well and a lot of people were employed we were running big surpluses in social security taxes--and thus running up huge debt purchases throughout the 90s. So this means a surplus is essentially just general revenue cash that results in a notation indicating the SSTF has bought more treasury bonds or whatever.

Some people equate this to the trust fund being "stolen" or "used up." In some ways it's just government accounting tricks, but where it's sadly unfortunate is it means we really see virtually no return on the nominal amount in the trust fund because historically treasury bonds barely beat inflation. If we could take that money and instead create a SWF we could actually have grown it over time and who knows where it'd put us now. If a country like Norway can amass a SWF of $700bn I like to think ours would be immense. The nominal amount in the SSTF is like $2.8 trillion, and if it had been properly invested since the 30s it would have been immensely larger.

Quote from: Sheilbh on July 22, 2013, 07:21:14 PM

Quote from: Admiral Yi on July 22, 2013, 07:16:02 PM
It's precisely because it's a pay as you go system that it's not nonsense.  Right now we're paying more than we're going.

Not really. You pay more into it and that excess then goes into funding government in general. It doesn't build up any savings. It doesn't pay down debt. How is it meaningfully a surplus?

Edit: Also as it's pay as you go, what's the actual difference, apart from semantics, of funding it from general revenue?

Not sure if you're aware but technically:

Income Taxes + Certain Federal Excise Taxes + Federal Estate Taxes --> General Revenue for Budgeting

Social Security Taxes (12.4% of gross earnings) --> SSTF, first used to satisfy current benefit claims and excess is used to purchase Treasury Bonds. The cash used to purchase the bonds ends up in the Treasury account and is of course --> General Revenue

So the only material difference is it goes through an intermediary theoretical step before becoming part of general revenue for budgeting.

Quote from: Sheilbh on July 22, 2013, 07:21:14 PM
Edit: Also as it's pay as you go, what's the actual difference, apart from semantics, of funding it from general revenue?

The incidence of the tax, i.e. who pays it.  If it got thrown onto general revenue it would be Mitt's 53 per centers.

Quote from: Admiral Yi on July 22, 2013, 07:30:23 PM
The incidence of the tax, i.e. who pays it.  If it got thrown onto general revenue it would be Mitt's 53 per centers.

Okay. But that's the nature of payroll tax everywhere in the world. In this country it's called 'national insurance' and part of the reason for that is because they're normally tied to DC schemes.

I had to do the report on US social security in my old job and I just found the rhetoric of 'trust fund' and all the rest a bit of a nonsense.

QuoteSo the only material difference is it goes through an intermediary theoretical step before becoming part of general revenue for budgeting.

Exactly. I think the problem is there's really very few actual differences. But all of this language of 'surplus' and 'trust fund' make it far more difficult to actually reform pensions in the US, which is a shame because it would be helpful.

But then I believe in the public sector being in a permanent state of reform :mmm:

Quote from: Sheilbh on July 22, 2013, 07:53:55 PM
Okay. But that's the nature of payroll tax everywhere in the world. In this country it's called 'national insurance' and part of the reason for that is because they're normally tied to DC schemes.

What's in the nature of payroll taxes everywhere?

QuoteI had to do the report on US social security in my old job and I just found the rhetoric of 'trust fund' and all the rest a bit of a nonsense.

I thought the logic of collecting more in payroll taxes in the fat years to prepare for the lean Baby Boom years was impeccable.

Biscuit: you missed one crucial part.  When the federal government borrows to finance future SS obligations, that's not general revenue, that's deficit spending.

Would anyone happen to know if the headline deficit number that's reported these days is gross, or net of the trust fund?  For a while there they used to report two numbers, that seems to have gone by the wayside.  My Islamophobe Kenyan conspiracy theory is that the unattractive, bigger number stopped being reported right around the time the stimulus bill was saving us from extinction as a species, but I'm not at all certain. 

Quote from: Admiral Yi on July 22, 2013, 08:08:45 PM
What's in the nature of payroll taxes everywhere?

Wrong phrase I suppose, but I mean the normally tied employee and employer taxes that are 'social security' or 'national insurance' or whatever else rather than just the employer section. But it's always levied on different people at different rates. It's always got a wider tax base and is levied at a lower rate.

QuoteI thought the logic of collecting more in payroll taxes in the fat years to prepare for the lean Baby Boom years was impeccable.

But it's pay as you go and the rest of the money goes to the government. You collected more to pay current retirees and then to fund the government.

I'd agree with you if there was a national pension fund. During the fat years you collect more and build up a surplus that you'll need to deal with the baby boomers.

Quote from: Sheilbh on July 22, 2013, 08:14:45 PM
Wrong phrase I suppose, but I mean the normally tied employee and employer taxes that are 'social security' or 'national insurance' or whatever else rather than just the employer section. But it's always levied on different people at different rates. It's always got a wider tax base and is levied at a lower rate.

I still don't know what you mean.  You asked about the effects of throwing Social Security on general revenue.  I answered, then you lost me.

QuoteBut it's pay as you go and the rest of the money goes to the government. You collected more to pay current retirees and then to fund the government.

I'd agree with you if there was a national pension fund. During the fat years you collect more and build up a surplus that you'll need to deal with the baby boomers.

You pay retirees, fund the government, and create an offsetting liability on the government.

In order for it to work, people had to start thinking of the deficit and debt including the liability to Social Security as the real one.  Which is why i asked the question about which one gets reported.

Quote from: Admiral Yi on July 22, 2013, 08:29:21 PM
I still don't know what you mean.  You asked about the effects of throwing Social Security on general revenue.  I answered, then you lost me.

Well okay. Let's go back to your answer. I probably didn't understand it.

QuoteIn order for it to work, people had to start thinking of the deficit and debt including the liability to Social Security as the real one.  Which is why i asked the question about which one gets reported.

I think it works because of the promise and the political impossibility of getting rid of it.

As it is I think it works quite inefficiently and if people stopped talking about 'trust funds' and 'raiding the surplus' you'd have a better chance of creating a more efficient way of funding pensions.

Quote from: Sheilbh on July 22, 2013, 08:35:15 PM
Well okay. Let's go back to your answer. I probably didn't understand it.

If you keep the funding payroll taxes, then everyone with earned income pays for it.  If you fund it out of income taxes, then the 53% of the working population that pays income taxes pays for it.

QuoteI think it works because of the promise and the political impossibility of getting rid of it.

As it is I think it works quite inefficiently and if people stopped talking about 'trust funds' and 'raiding the surplus' you'd have a better chance of creating a more efficient way of funding pensions.

Of the three alternatives, they are in descending order of attractiveness:

1. Run a surplus and put it in a sovereign wealth fund.

2. Run a surplus and put it in an Algore box.

3. Don't do anything.

Quote from: Admiral Yi on July 22, 2013, 08:40:36 PM
If you keep the funding payroll taxes, then everyone with earned income pays for it.  If you fund it out of income taxes, then the 53% of the working population that pays income taxes pays for it.

Okay. General revenue includes all taxes. The 53% who pay income tax pay for it. So do the 19% who smoke.

Other systems fund their social security out of general revenue, but have a separate 'national insurance'/payroll/'social security' tax which contributes to general revenue like all the other taxes. I think that everyone pays for it is a benefit, but the real boon seems to me that it enables a contribution based welfare state.

But I don't think that's a significant difference or somehow impossible if it's funded from general revenue.

QuoteOf the three alternatives, they are in descending order of attractiveness:

1. Run a surplus and put it in a sovereign wealth fund.

2. Run a surplus and put it in an Algore box.

3. Don't do anything.

There's lots of options for pension funding and the structure of the system. It's an area where almost every developed country's been reforming significantly for the best part of twenty years. So there's loads of different models to look at.

Quote from: OttoVonBismarck on July 22, 2013, 07:25:39 PM
Some people equate this to the trust fund being "stolen" or "used up." In some ways it's just government accounting tricks, but where it's sadly unfortunate is it means we really see virtually no return on the nominal amount in the trust fund because historically treasury bonds barely beat inflation. If we could take that money and instead create a SWF we could actually have grown it over time and who knows where it'd put us now. If a country like Norway can amass a SWF of $700bn I like to think ours would be immense. The nominal amount in the SSTF is like $2.8 trillion, and if it had been properly invested since the 30s it would have been immensely larger.

Would it really be?  The entire S&P market cap is $15 trillion.  Forget GM, forget Bernanke, the government would own the majority of US equity market if it got decent returns.  I don't know what the implications of that would be, but they would be pretty weird.  And what if Jimmy Hoffa or Allen Dorfman get a political appointment to head that SWF?

Sheilbh, you understand the term "Social Security Trust Fund" is spelled out in statute. People aren't making this up. Now, functionally you have the right of it but this Trust Fund isn't something pundits made up. The theory has always been that the Social Security tax was a special payroll tax that had a "directed purpose." That differentiates it from income tax and sales tax or similar that just go into the government coffers and that are subject to regular budgeting.

The way social security taxes, as per statute, are supposed to be spent is to 1) pay current beneficiaries their entitlement and 2) buy treasury securities with the surplus. That surplus of securities has to be considered as something because it represents something that legally, the Social Security Trust Fund owns. The government has to pay those bonds back just the same way it does bonds you or I hold. Yi was right to correct me before, it's not so much that the excess go into "general revenue" but instead that they are deficit dollars that go into "general spending."

In the Canadian context it looks like there is a similar problem with RRSPs being insufficient to provide decent retirement for significant proportions of the population. The number being bandied around right now is that about half of people over 40 are looking at "a significant decrease in their standard of living" on retirement.

It looks like they're talking about expanding CPP (and QPP), but perhaps not enough to do make a big difference.

One - somewhat more drastic - proposal is to increase the amount of pensionable earnings (double it, basically), push retirement back to 68 or even 70, AND accept that benefits can be paid out even if the plan isn't fully funded (because otherwise it'll be five decades or so before it can really take effect).

Summaries here, for those who are interested:
http://www.irpp.org/en/research/faces-of-aging/not-so-modest-reforms/
http://www.benefitscanada.com/pensions/governance-law/%E2%80%9Cgrand-bargain%E2%80%9D-needed-for-cqpp-reform-41455?utm_source=EmailMarketing&utm_medium=email&utm_campaign=Daily_Newsletter

A number of the articles posted here paint a pretty bleak picture of a future where the elderly have no savings.  Just out of curiosity has anyone changed, or made plans to change their amount they contribute to their DC plan?

Barring unforeseen negative events, I plan to ratchet my contributions up to the before-tax maximum over the next year, and have my wife do the same.  At that point, I may start contributing to an IRA after-tax.

I'm happier putting my money in an IRA then into a taxable brokerage account than I am in putting it into a 401k without match because of management fees and my puny effective tax rate.

Oh right, and employee stock purchase.

Quote from: Admiral Yi on July 25, 2013, 04:37:23 PM
I'm happier putting my money in an IRA then into a taxable brokerage account than I am in putting it into a 401k without match because of management fees and my puny effective tax rate.

I must be lucky, because neither of my 401k accounts has any management fees beyond the fund expense ratios.

Quote from: Baron von Schtinkenbutt on July 25, 2013, 04:43:21 PM
I must be lucky, because neither of my 401k accounts has any management fees beyond the fund expense ratios.

That's what I'm talking about.  I'm not crazy about giving away 1.5-2% of principal every year to some schmucks who get beaten regularly by monkeys with darts.

Where do they have monkeys beating people with darts and is it open to spectators?

Historically if you pay the average 1.5-2.0% for the actively managed stock funds the average fund has only returned roughly an amount competitive with the S&P 500--when you factor in you've paid 1.5-2.0% privilege for that return you actually are worse off than having just invested in an index fund. This mostly can't be covered up these days, and is why investors are leaving a lot of the more expensive managed funds. I think the only really attractive managed funds are ones like the Windsor or Wellington that have a specific strategy that might appeal to someone willing to trade return for stability.

It's a crime that some people are at employers whose 401ks only offer expensive funds. Luckily that's one thing TSP gets right--all funds in TSP have a 0.027% expense ratio.

Quote from: Maximus on July 25, 2013, 05:02:04 PM
Where do they have monkeys beating people with darts and is it open to spectators?

I think some newspaper or magazine did it as an experiment a long time ago.

Quote from: Admiral Yi on July 25, 2013, 04:46:03 PM
That's what I'm talking about.  I'm not crazy about giving away 1.5-2% of principal every year to some schmucks who get beaten regularly by monkeys with darts.

All mutual funds are that way.  It has nothing to do with 401ks.  Besides, most of my money is in index and municipal bond funds, which have extremely low expense ratios.  The money that isn't is in products doing much better than monkeys with darts.

Interestingly, hedge funds, closed to all but qualified investors and utilizing riskier activities that have the potential for much larger returns are designed around the concept of providing substantial return versus the market as a whole and in exchange the fund manager reaps massive fees. Typically a 2% flat fee and up to 20% of profits over a certain threshold. But there's evidence even hedge funds which are supposed to be one of the ways the rich get ahead of the little guy, actually perform worse than index funds.

Right now Buffett has a $1m bet going with a hedge fund management company, it's Vanguard 500 Admiral Shares against a "fund of funds" (a hedge fund that invests in hedge funds) and as of this year the Admiral Shares have returned 8% since the bet started in 2008 while the hedge fund of funds is at just under 1%.

Quote from: Baron von Schtinkenbutt on July 25, 2013, 05:09:05 PM

Quote from: Admiral Yi on July 25, 2013, 04:46:03 PM
That's what I'm talking about.  I'm not crazy about giving away 1.5-2% of principal every year to some schmucks who get beaten regularly by monkeys with darts.

All mutual funds are that way.  It has nothing to do with 401ks.  Besides, most of my money is in index and municipal bond funds, which have extremely low expense ratios.  The money that isn't is in products doing much better than monkeys with darts.

It actually is relevant to 401k discussions. If I'm buying into a fund in my taxable brokerage I can pay for the highest management fees I want, or I can park everything in ultra-low expense ratio funds like the Fidelity Spartan Funds or the Vanguard Index Funds. But in a 401k if you choose to participate (and because of employer matches you essentially "leave money on the table" if you don't) and your employer has given you say 10-12 funds with an average expense ratio of 1.5% then you don't really have very many good options.

From everything I've read about the problem, most employers have started to "get it" and offer several low cost index funds in their 401k plans, but there are still people stuck in 401k plans that offer a small number of high-fee funds.

Quote from: OttoVonBismarck on July 25, 2013, 05:13:05 PM
It actually is relevant to 401k discussions. If I'm buying into a fund in my taxable brokerage I can pay for the highest management fees I want, or I can park everything in ultra-low expense ratio funds like the Fidelity Spartan Funds or the Vanguard Index Funds. But in a 401k if you choose to participate (and because of employer matches you essentially "leave money on the table" if you don't) and your employer has given you say 10-12 funds with an average expense ratio of 1.5% then you don't really have very many good options.

From everything I've read about the problem, most employers have started to "get it" and offer several low cost index funds in their 401k plans, but there are still people stuck in 401k plans that offer a small number of high-fee funds.

That's why I asked if I had been lucky, because 90% of my 401k money is in funds with an expense ratio of 0.20% or less, and my 0.84% fund is well outperforming the market at this point.  Perhaps I misunderstood Yi's response, because I took it to be an issue with 401ks in general.

Quote from: Baron von Schtinkenbutt on July 25, 2013, 05:09:05 PM
All mutual funds are that way.  It has nothing to do with 401ks.  Besides, most of my money is in index and municipal bond funds, which have extremely low expense ratios.  The money that isn't is in products doing much better than monkeys with darts.

That's nice for you.  My 401k has S&P 500 index fund as well, but they're charging something like a point to manage it.

Out of curiosity, what are the advantages of putting your tax free 401k money in a tax free muni bond fund?

Quote from: Admiral Yi on July 25, 2013, 05:37:17 PM
That's nice for you.  My 401k has S&P 500 index fund as well, but they're charging something like a point to manage it.

That's criminal.

Quote
Out of curiosity, what are the advantages of putting your tax free 401k money in a tax free muni bond fund?

Its insulation against downward swings, part of my asset allocation strategy.  I just checked, though, and its not all munis.  75% of my bond money is in a general fund that has muni and corporate bonds, the rest is in a TIPS fund.

Quote from: Admiral Yi on July 25, 2013, 04:46:03 PM

Quote from: Baron von Schtinkenbutt on July 25, 2013, 04:43:21 PM
I must be lucky, because neither of my 401k accounts has any management fees beyond the fund expense ratios.

That's what I'm talking about.  I'm not crazy about giving away 1.5-2% of principal every year to some schmucks who get beaten regularly by monkeys with darts.

Where do you get funds with 1.5-2% expense fees?  :huh:

Quote from: DGuller on July 25, 2013, 06:23:04 PM
Where do you get funds with 1.5-2% expense fees?  :huh:

I don't understand the question.

Quote from: Admiral Yi on July 25, 2013, 05:37:17 PM
That's nice for you.  My 401k has S&P 500 index fund as well, but they're charging something like a point to manage it.

:huh: Somebody in your HR department must've gotten one hell of a kickback from the administrating company.  That's just criminal.

Quote from: Admiral Yi on July 25, 2013, 06:25:44 PM

Quote from: DGuller on July 25, 2013, 06:23:04 PM
Where do you get funds with 1.5-2% expense fees?  :huh:

I don't understand the question.

I did not realize that funds with 2% expense ratios still existed, much less offered for 401k.  However, after I read that your S&P 500 index fund charges 1%, I can believe that.

Quote from: OttoVonBismarck on July 23, 2013, 07:23:38 AM
Sheilbh, you understand the term "Social Security Trust Fund" is spelled out in statute. People aren't making this up. Now, functionally you have the right of it but this Trust Fund isn't something pundits made up. The theory has always been that the Social Security tax was a special payroll tax that had a "directed purpose." That differentiates it from income tax and sales tax or similar that just go into the government coffers and that are subject to regular budgeting.

Yeah but that's my view. I think FDR lied at the start and sold it as a 'trust fund' because it made the system more politically palatable. It was never a 'trust fund'. The effect then lingers on, the very talk of 'trust fund' makes it very, very difficult to reform because it sounds like such a safe and solid option. It's actually pay as you go and, yeah, it's got ringfenced funding but may as well come from general revenue and, if there was a deficit, I have no doubt it would come from general revenue.

Yi, what company manages your 401k?

I'd rather not say, as they are a punching bag for Captain Occupy and I own some shares.

(But it rhymes with Macy Gorgan.  :secret:)

However I don't think they're the ones picking the funds.

Indirectly they may be.  My current company's 401k program is managed by Fidelity, as is Raytheon's.  Raytheon determines the fund lineup and investment restrictions for their plan; my company takes a pre-made plan from Fidelity, since we are so small.  My current fund lineup is not stellar, but it does include the excellent Fidelity index funds mentioned earlier (with their 0.07% expense ratios).

Pearson is a monster company, and I believe I read somewhere that the funds in our 401k were selected by a Pearson committee.

How do 401(k)s work? Are you bound to a plan or can you switch them around to find the best funds? I'm currently in a DC plan that is rather uncompetitive in terms of management fees (and, I suspect, lacklustre returns) but because my employer doubles my contribution, it's worth sticking with until I leave. What do you yanquis do from job to job?

Also, another question: why have no financial service providers tried to lure in more customers by charging a fixed sum management fee per year rather than a percentage? My money isn't more costly to the firm to manage because I have £1,200,000 vs £12,000 in it, but a percentage management fee differs remarkably between the two amounts. Surely in a competitive market someone will have worked out they could snaffle a lot of business by charging that richer person £1,000 a year rather than £10,000? Or does that impede the fund managers' purchasing of yachts?

You set a % of gross income you want to put in the 401k each pay check.  Different companies offer different matching formulas.  There is a gross amount you can contribute tax free (17K IIRC).

My 401k has around 12 funds to choose from.  I can put various percentages in one, some, or all the funds.  I can change the mix any time I want to.  I can also change the contribution amount any time i want to.

The management fees are charged by the funds, not by the 401k.  The company match is independent of the fund(s) chosen.

You can generally rollover a 401k into a private IRA when you go from one job to another, or you can roll money from a previous employer's 401k into your current employer's 401k--but your current employer has to allow for that and not all are set up for it.

I think if you combine Fidelity and Vanguard that's probably more than 50% of the 401k market in the United States all by itself. Vanguard is a unique investment management company in that the individuals who own Vanguard's mutual funds collectively own Vanguard itself. It thus has no shareholders looking for profit or private ownership group, and in a lot of ways functions very similarly to a credit union in that regard.

Fidelity is owned mostly by a family of billionaires, and for that reason I've heard Fidelity likes to setup 401ks so that people are more likely to buy into the more expensive, traditional actively managed Fidelity mutual funds. However, it's really all in the hands of your employers. HR/a benefits committee at larger companies set these plans up, and some of them basically do the equivalent of telling Fidelity "hey, set a plan up for us and don't bother us with the details." When that happens you're going to see the higher priced mutual funds as the primary plan offerings.

However, Fidelity despite being more of a traditional mutual fund company, has the amazing Spartan Index funds I mentioned. They are actually probably the lowest expense ratio funds on the market today, and if your employer cares enough to actually ask that those be provided in the 401k plan, those are solid options.

My Raytheon 401k has a Northern Trust S&P 500 index fund with an expense ratio of 0.02%, which beats the Spartan funds.  It does not appear to be available on the open market, though.

That is actually an advantage of a well-constructed 401k plan.  You may have access to funds through the plan that an open-market investor cannot buy into.  For a long time I was able to buy into Vanguard's PRIMECAP Admiral fund, which is one of their best-performing funds.

Quote from: Baron von Schtinkenbutt on July 26, 2013, 07:43:42 AM
My Raytheon 401k has a Northern Trust S&P 500 index fund with an expense ratio of 0.02%, which beats the Spartan funds.  It does not appear to be available on the open market, though.

That is actually an advantage of a well-constructed 401k plan.  You may have access to funds through the plan that an open-market investor cannot buy into.  For a long time I was able to buy into Vanguard's PRIMECAP Admiral fund, which is one of their best-performing funds.

Yes, you also get institutional share classes of Vanguard funds. Even Admiral class funds which typically are $10k+ holdings, are not as low cost as the institutional shares of Vanguard funds.