Retirement planning in Interesting Times
One of the things I've noticed while taking care of the octogenarian's finances is how many vultures are circling them, swooping down to take a chunk here and there. With all the Baby Boomers about to retire, there just is no asset in the world as rich as the retirement savings of the Baby Boomers and their never-dying parents. And, guess what. The brightest minds in the world are working feverishly to figure out how to get it.
Much of that money is tied up in tax-deferred accounts due to a combination of pressures that squeezed more and more of the wealth into that particular avenue. It's worth thinking about how bizarre this is for a moment. It used to be that people's life savings were in the form of tangible assets. Land and buildings they owned outright. Gold they stored up. If you were *really* rich you bought yourself an annuity, i.e., a private pension. Now Americans move so often that they cannot conceive of staying in one place long enough to pay off a 20 year mortgage. (Yes, mortgages used to be 20 years, not 30.) Now the cash that common people could put in an envelope to save is based on fiat currency - has been since the 70's - and grows more worthless every passing year. In fact, in an environment we've spent the last forty years in, clinging to the side of the exponential cliff of the depreciating dollar people don't want annuities anymore. A $200/month pension in 1980 won't buy a whole hell of a lot in 2010. So, instead of fixed annuities or land or saved up cash, now people have to invest in the stock market, because that's the only option that stands a chance of beating inflation.
So, millions of uninformed uninterested uninvolved investors show up in the market to plunk down their money. How could *that* ever go wrong? Well, for one thing, each and every one of those mutual funds charges fees. They're totally upfront about it: it's in all the expense ratios. Look on Morningstar.com and it's right there: the American Funds Growth Fund of America has a .69% expense (on top of the 5.75% load.) For the "no-load" Fidelity Contrafund, another one of the largest funds in America, it's 1.02%.
But, what does 1.02% mean? It means if you have $100,000 in that mutual fund then you paid them $1020 this year. Every year. $1020 that just got shaved off the top, money you didn't even know you were supposed to have, it just never showed up. It's an almost invisible gift to the mutual fund industry. That's pretty equivalent to paying real estate taxes, except when you pay real estate taxes you increase the overall well-being of your local infrastructure: getting water and sewer, schools and police, library and parks. When you pay the financial industry you get... uh... rich Wall Street Financiers. How nice for us all.
If you hadn't put the money in a tax deferred asset and it earned, say, 3.36% (the current U.S. Treasury 10 year bond yield) then you'd have $3360 and the tax on that would be approximately $504. Wuhoo, weren't you clever to make 4.9% avg yield in Contrafund instead? (You made slightly more in yield from the mutual fund but paid more in fees to the financial industry than you saved in taxes.)
For reasons having nothing to do with public policy or good government, there is huge government collusion here in making sure you pay the financial industry thousands of dollars each year in hidden ways. The main attribute of any tax-deferred retirement savings account is that they MUST be held by a custodian. You cannot just buy land or gold with it. And no one in their right mind would buy a fixed annuity anymore, either, which is really a major astonishing shift in the way people fund their retirements from *all* previous generations to this one.
It is terribly hard to figure out how to AVOID the tax-deferred retirement accounts. They're super easy to save in: your employers are taught to make it patronizingly easy. You are given a big smack kiss on the cheek at tax time if you do it, and slapped around harshly if you try to take money out. It's heavily incentivized behavior, and saving for retirement is something you actually WANT to do, so people do it.
I want to save for retirement. I anticipate a day when I will no longer be as productive a worker, and furthermore suspect that I'll have a bunch of medical expenses showing up about then, too. I want money for long-term care. I want money to carry on a lifestyle somewhat similar to what I could earn for myself with my labor. I am capable of doing excess labor over my needs right now. But... where to put the money so that it is there later when I go to use it? The smartest minds in the world are trying to pry my nest egg out of my hands and into theirs. It's a formidable problem.
And I'm supposed to be telling my clients how to solve it.
Shit.
Much of that money is tied up in tax-deferred accounts due to a combination of pressures that squeezed more and more of the wealth into that particular avenue. It's worth thinking about how bizarre this is for a moment. It used to be that people's life savings were in the form of tangible assets. Land and buildings they owned outright. Gold they stored up. If you were *really* rich you bought yourself an annuity, i.e., a private pension. Now Americans move so often that they cannot conceive of staying in one place long enough to pay off a 20 year mortgage. (Yes, mortgages used to be 20 years, not 30.) Now the cash that common people could put in an envelope to save is based on fiat currency - has been since the 70's - and grows more worthless every passing year. In fact, in an environment we've spent the last forty years in, clinging to the side of the exponential cliff of the depreciating dollar people don't want annuities anymore. A $200/month pension in 1980 won't buy a whole hell of a lot in 2010. So, instead of fixed annuities or land or saved up cash, now people have to invest in the stock market, because that's the only option that stands a chance of beating inflation.
So, millions of uninformed uninterested uninvolved investors show up in the market to plunk down their money. How could *that* ever go wrong? Well, for one thing, each and every one of those mutual funds charges fees. They're totally upfront about it: it's in all the expense ratios. Look on Morningstar.com and it's right there: the American Funds Growth Fund of America has a .69% expense (on top of the 5.75% load.) For the "no-load" Fidelity Contrafund, another one of the largest funds in America, it's 1.02%.
But, what does 1.02% mean? It means if you have $100,000 in that mutual fund then you paid them $1020 this year. Every year. $1020 that just got shaved off the top, money you didn't even know you were supposed to have, it just never showed up. It's an almost invisible gift to the mutual fund industry. That's pretty equivalent to paying real estate taxes, except when you pay real estate taxes you increase the overall well-being of your local infrastructure: getting water and sewer, schools and police, library and parks. When you pay the financial industry you get... uh... rich Wall Street Financiers. How nice for us all.
If you hadn't put the money in a tax deferred asset and it earned, say, 3.36% (the current U.S. Treasury 10 year bond yield) then you'd have $3360 and the tax on that would be approximately $504. Wuhoo, weren't you clever to make 4.9% avg yield in Contrafund instead? (You made slightly more in yield from the mutual fund but paid more in fees to the financial industry than you saved in taxes.)
For reasons having nothing to do with public policy or good government, there is huge government collusion here in making sure you pay the financial industry thousands of dollars each year in hidden ways. The main attribute of any tax-deferred retirement savings account is that they MUST be held by a custodian. You cannot just buy land or gold with it. And no one in their right mind would buy a fixed annuity anymore, either, which is really a major astonishing shift in the way people fund their retirements from *all* previous generations to this one.
It is terribly hard to figure out how to AVOID the tax-deferred retirement accounts. They're super easy to save in: your employers are taught to make it patronizingly easy. You are given a big smack kiss on the cheek at tax time if you do it, and slapped around harshly if you try to take money out. It's heavily incentivized behavior, and saving for retirement is something you actually WANT to do, so people do it.
I want to save for retirement. I anticipate a day when I will no longer be as productive a worker, and furthermore suspect that I'll have a bunch of medical expenses showing up about then, too. I want money for long-term care. I want money to carry on a lifestyle somewhat similar to what I could earn for myself with my labor. I am capable of doing excess labor over my needs right now. But... where to put the money so that it is there later when I go to use it? The smartest minds in the world are trying to pry my nest egg out of my hands and into theirs. It's a formidable problem.
And I'm supposed to be telling my clients how to solve it.
Shit.
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