April 24, 2013
I still recall the very first “real” paycheck I received, courtesy of Ray & Kay Eldridge and their Merchandise Mart. Real in the sense that it had entries for FICA and State Taxes and other standard deductions that I had not previously seen while mowing lawns for cash. I remember looking closely at the entry on the check that detailed how much was being deducted from my pay for Social Security, and thinking, “I will never ever see that money.” I was only 16 at the time, but I read enough news and could do enough basic arithmetic to understand that Social Security was a benefit that I was likely never to see. So when a 16-year-old in 1986 understands this concept and makes this assumption, you have to forgive him when, 27 years later, he laughs out loud when he hears someone refer to Social Security as an “entitlement.”
Last night PBS aired an episode of FRONTLINE that focused on the “retirement crisis” we face in this country. The broad message of the program was that an overwhelming majority of Americans don’t have enough retirement savings (newsflash). The more interesting parts of the program, however, were the segments focused on the lack of tools available to the individual retirement investor, and the revelation that an entire financial industry exists to do nothing more than stack cards against their customers. Much of this focus was directed at the 401K, a tool designed to put retirement savings control in the hands of the individual investor, and supposedly make up for a lot of the expanding gap between cost of living expenses and dwindling Social Security. The episode made a lot of good points that I agree with about 401K’s, specifically that they are often the best option available to retirement investors, but also that many 401K’s are junk, and much of the industry delivering the product could be branded as criminal.
On the program, FRONTLINE interviewed Jack Bogle, founder of Vanguard and architect of the very first index mutual fund. I had what I would call a spiritual awakening last year when it came to my family’s finances, and if I were to identify a guru who guided me through this awakening (without him ever being aware of my existence), that guru would be Jack Bogle. At some point last year it dawned on me that I had placed unwarranted faith in unworthy sources to make decisions that I trusted were being made in my family’s best financial interest. I was assuming a fiduciary responsibility where one did not exist. It became clear to me that my advisor and plan administrators and I were working at counter objectives: I was looking to place our savings into a healthy nest egg, and they were looking to place our savings into their pockets. Mine was not a unique situation, in fact it’s standard operating procedure for an entire industry. Absolutely no one outlines these problems, and presents solution-based alternatives better than Jack Bogle.
“You put up 100% of the capital, you take 100% of the risk, and you get 30% of the return.” – John C. Bogle pointing out the totally ludicrous nature of most 401K plans.
I would advise anyone with the slightest bit of interest in retiring at some point before their dying breath to watch the FRONTLINE episode. It’s available online here: http://www.pbs.org/wgbh/pages/frontline/
There is an excellent wiki with a tremendous amount of information, as well as a forum of very helpful Jack Bogle disciples here: http://www.bogleheads.org
The message is simple: You can’t control the market. You can’t even predict or time the market. What you can control is cost. Eliminate fees, sales loads, fund turnover. Cut any cost that comes out of your pocket. Index the total stock market and hold shares of business in perpetuity. Keep it simple.
“Don’t do something, stand there!” – John C. Bogle on the proper approach to retirement investing.
Most of us have had that meeting arranged by Human Resources with our 401K plan administrators, where they review our options and show us an impressive bar graph that illustrates a 7% return over 20 years, at the end of which we are a millionaire. This bar graph shows the glory of compounding interest, while ignoring the sh*t sandwich of compounding fees. Compounding interest is a heavenly light that will make your heart glow. Compounding fees are a force of evil in the universe, enslaving civilizations, swallowing planets whole, and they will drag your retirement savings into the black abyss. 401K plans are still the best tool for retirement savings, especially if your company matches contributions (the match is a better return than the market can offer). If the 401K has the right funds (translation: low cost index funds), a participant can set up their own allocation plan to maximize returns and eliminate cost. Funds should be chosen by their expense ratio, not based on past returns.
Look, we have a retirement crisis in this country because there is an impossible gauntlet of pick-pockets, highwaymen, cutthroats, and bandits to navigate through on our way to retirement. While we stand their shouting about the bandits in Washington, the pick-pockets at our bank are rounding the corner down the street with our wallet. The 401K absolutely puts the control of retirement savings in the hands of the individual investor, but it also puts all of the risk and responsibility in those same hands. Educating ourselves about our own money is the only defense.
- Even Harsh Frontline Program on Retirement Investments Understates How Bad They Are (nakedcapitalism.com)
- The Retirement Game – 401k Complexities Just Like Health Insurance Have Consumers Screaming for New Models With Transparent and Accurate Mathematical Realities – More Attacks Of The “Killer Algorithms” (ducknetweb.blogspot.com)
- Can This Retirement System Be Saved? Five Experts Advise (bloomberg.com)
- “The Retirement Gamble” Facing Us All (pbs.org)