CCFan wrote:I'll grant that most people shouldn't rely on their house as their sole vessel of retirement funding, but what's wrong with a 401k? What about the people that don't live in a McMansion and still lost $$$ in their retirement funds?
Great question! Part of the reason pensions were so popular with employees is because the employer provided them, the employee didn't have to think about how to secure their retirement funds, and the pension was a steady stream of income. When employers (rightfully so) started figuring out this system wasn't going to work much longer and migrated employees to a 401k system and put the burden on the employee to figure out their own retirement, lack of education in this area has left the 401k ineffective as an adequate program to secure one's retirement.
As I see it, there are three distinct problems with 401k programs.
Problem 1. Overall, they are severly underfunded.
Choose your reading material, but any way you look at it, people do not have enough stashed away in their 401k to survive. People hardly contribute to their program because they don't make a lot to begin with, pull money out when hard times hit, etc. It was just reported last month that the median 401k account balance is only $23,000. That means there are just as many people with less than $23,000 in their account as there are people with more than $23,000 in their account. Last year it was reported that the average 401k account had $75,000 in it. Either way you look at it, that's not going to last a long time.
Let's take a really aggressive approach and say that someone at 25 years of age is saving $200/week in their 401k and does that for the next 40 years. That's $416,000 right off the bat, but the 401k people will run their magic calculators and say that an 8% return over 40 years will turn your $416,000 into $2,694,187. The three problems with this razzle dazzle is that 1. a very small percentage of people could really sock away $200/week for the next 40 years, 2. you're going to have to pay taxes on that cool 2 mil, and 3. 40 years from now 2 mil won't be what it's worth today.
http://news.goldseek.com/RickAckerman/1331046000.php
http://www.bloomberg.com/news/2011-05-1 ... -says.html
http://abcnews.go.com/Business/colorado ... d=16264550
Problem 2. The employee generally is still on an auto-pilot mentality when it comes to their retirement, thus not looking at their quarterly statements, switching funds to maximize return, etc.
The general public simply is not taught how to manage this stuff in school. Capital gains, passive income, etc is not part of the course materials. And even if it was, what student is going to believe it coming from some low-salaried teacher that probably doesn't even have a retirement plan started themselves? Every quarter people should be looking at their statements, seeing what funds are performing and which ones aren't. That simply doesn't happen because it's not fun. If my auto-pilot fund performs, great. If not I have something to bitch about at the watercooler (like that even happens!).
Problem 3. Any program that is based on a capital gain and not a passive income stream is subject to market volitility and will eventually run dry.
As you mentioned in your post that it's not smart to rely on your house as an investment, the 401k program is in the same boat because they both rely on a transaction that results in a capital gain. Everyone has heard of "buy low, sell high" but it's more complicated than that. For one thing your retirement strategy relies on the market. I feel awful for those poor souls who were looking to retire in 2008 and had their lives ruined because their 401k lost 50% of their value right before they cashed out. Even though the stock market is almost back to pre-recession levels doesn't mean those people's retirement programs are too. So the goal is to wait until the market bounces back to the level that you need it to so you can cash out. But when is that going to be? What if you need to retire now because of some medical condition or something? You shouldn't have a retirement program that is based on the timing of a market that you have no control of. But let's say that you did cash out at the right time. Now you have your golden goose (in the form of your retirement savings) and each year you carve a piece out of that golden goose so you can live. Now the goal is to die before you run out of the golden goose! And with people living longer than ever retirement years keep stretching. Not a good place to be!
Compare that with a passive income-based approach. Money coming in whether you go to your 9-5 or not. Rental properties, stocks that pay dividends, interest from loans that you make to others, etc. Now instead of carving into your golden goose each year, you are simply eating the eggs it lays each year. You still have your golden goose and it will continue laying eggs as long as you have it. It's also not subject to market volitility. I am making just as much money now with my rental houses (more even) than I did pre-2008 even though the value of my properties dropped 30-50%.
When your retirement strategy is based on passive streams of income, it also doesn't matter when you start retirement and when you die. I plan on having enough passive income to meet and exceed my monthly bills by the time I'm 40. When that happens essentially I'll be retired and can quit my job. And all I need to do is manage those passive streams of income to make sure that retirement will continue indefinitely.
Sorry for going on and on, but I really do think 401k programs don't benefit the people they're designed to help. You would be hard pressed to find an average Joe who was able to take his own money and put it in the stock market and over time end up with a comfortable retirement. Those people are few and far between. The only people I know that make it big in the stock market are those that manage a bunch of other people's money (hedge fund managers) or those like Mitt Romney that start off already in money.
