There Is No Plan

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How About Them 401k’s

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We think it’s going to continue to go lower. We don’t think people are scared enough. They’re just not showing enough fear. People are numb to this, they’re almost immune to it.

So says Ryan Detrick of Schaeffer’s Investment Research, as quoted in Today’s NYT. Just another analyst on just another day of carnage in the American Markets.

omg we're screwed

omg we're screwed

With stocks down well over 40% from the year’s highs, most people have stopped even looking at their 401k statements. That’s not a bad idea. I mean what are you going to do. Cash out? You’d be taking a massive hit on the price and tax too. And where are you going to put the money you have left? In T-bills? In Art? In a Bugatti Royale? In a safe at home?

You’ve got no choice but to take the hit. And that’s the last piece of good news left on Wall Street these days. We were sold this genius idea of 401k retirement accounts, which went into effect in January 1980. Brought to us, like many other Wall Street friendly ideas by the counter-intuitive Carter Administration (more on the Reagonomic Carterites in another post), they were an instant hit – just in time for the Reagan not quite so revolutionary Revolution.

Since 1984 when 401ks achieved widespread recognition by employers as the cheapest way to bypass pension commitments to their employees, and by government for passing the pension buck to employers, the 401k has had an “interesting” performance history.

Let’s use the Standard and Poors 500 index as the most representative.

If you started your 401k in early 1984, you’re looking decent. In January 1984 the SP500 stood at 170. Now it’s at 750. If however, you started in 1996, you’ve made no gains at all. And if you started your 401k in early 2000, your 401k has halved in value. It’s not an unqualified catastrophe, but considering the 401k is your retirement nest-egg, you’re not exactly in the money, as just about every silver-templed retirement-based financial product says you will be.

Without the vast amount of people parking their cash with fund managers all over the country, the traders would have had an awful lot less of other people’s money to play with, and the price increases we’ve seen over the years wouldn’t be nearly what they were. In other words. 401ks were a big part of what made Wall Street sexy. They loved them, so they made you love them. And then came…now.

Suddenly, the idea has lost an awful lot of steam. Millions of people who dutifully put their money into their 401ks have watched their retirement incomes shrink dramatically. That has a number of negative effects. Firstly, confidence in the 401k concept is reduced. Secondly, With less money coming for retirement, people are saving more which means less money in the consumption economy. And thirdly, lots of people are going to have to forget about retirement altogether.

One solution is a revised social security system to act as a base to a revised 401k system, which is built more around saving than it is about investing. Another is to create a competing system that offers lower but safer returns via government bonds, which would feed, say, into infrastructure projects. The investments of this generation would build a better America for their children and grand-children.

I’ve always been slightly dubious about the idea of “retiring” at 60 or 65. That doesn’t seem remotely old enough to be swanning off on boring cruises, or playing golf at the retirement community. 75 or even 80 is a better time to start kicking back with a good book. Now, whether Americans like it or not, that is going to become the new conventional wisdom.

That’s good news in many ways. First of all, retirement kills, so people will live longer, more fruitful lives. Secondly, the bogus retirement industry will take a huge hit, and we’ll see a rise in multi-generation living and cooperation. Thirdly, our elders will become more and more part of the respected mainstream, rather than forgotten afterthoughts. Finally, the resistance to hiring older people will gradually reduce

As for Wall Street, the amoral paper-shufflers who got us into this mess will have less and less control over what we do with the autumn of our lives. That is a pleasant thought indeed.


Written by coolrebel

November 20, 2008 at 8:50 am

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