I read this article today on MSN money and I couldn’t help but shake my head at the silliness of it. There are so many issues with it that its difficult to find a place to start. I’ll describe generic ideas that will support my assertion that many of the ideas put forth in this article are rubbish and then get into the specific quotes from the article.
First, the general ideas:
- Beginning of year 2008 stock market was near a peak and so the 2008 yearly numbers are skewed. People seem to keep looking at their % loss values for 2008. Yet, they continually ignore that fact that around the beginning of 2008 was near the peak of the market. Of course everyone’s numbers for 2008 are going to look bad. But I’ve got news for everyone who says “my retirement assets have been chopped in half!” Much of that value you claim to have lost was never there in the first place. It was the result of an over exuberant market that was seriously inflated. Not only that, but its likely that the market is undervalued right now. (Look at current market P/E compared to historical)
- Buy low, sell high, right? Right? So, why are people moving their money out at the low point? Yes, it could go lower, it could always go lower, but buying now is the best opportunity than its been for about 5 years.
- Retirees don’t (or at least shouldn’t) pull all their money out at once. There will still be plenty of time for them to allow their assets to come back in value. Yes, they will take a hit currently on the value they withdraw, but anybody who’s retired for more than 10 years has taken a significant hit at some point.
“But even when workers make good choices, a market meltdown near the end of their working careers can still blow their savings to smithereens.” — Melodramatic much? See point 3.
“There’s just no guarantee that when you’re ready to retire you’re going to have the money,” she says. “You either put it in a money market which pays 1%, which isn’t enough to retire, or you expose yourself to huge market risk and you can lose half your retirement in one year.” — Right now its “huge market risk.” A year ago and likely a year or two from now it will be “huge market upside.” If you’ve done the research, you know that consistently putting your money in a broad index fund instead of a money market will always beat a money market over the long run. Always. The key is to not panic like most people are doing right now and sell after a significant drop.
“That seems like such a fundamental flaw,” says Alicia Munnell, the director of Boston College’s Center for Retirement Research. “It’s so crazy to have a system where people can lose half their assets right before they retire.” — Wow…just wow. She’s the Director of Retirement Research and she’s spouting this nonsense? See points 1 and 3.
“Some proposed setting up “universal” retirement accounts, which would cover all workers. One such plan called for establishing accounts that would receive annual contributions from the federal government and would offer a guaranteed, but relatively low, rate of return. Another proposed automatically investing contributions in an index fund that holds stocks and bonds, with the mix getting more conservative as workers approach retirement.” — Oh please god no. Both of these options would totally kill 401(k)’s usefulness (the first one moreso). The government shouldn’t handle our personal investments.
How about the computer programmer that decided losing money in options trading (pretty much everybody does) is better putting money in his 401(k). Yeah, thats smart. Most people are guaranteed to lose money in options. Its a complicated financial instrument that should be left to “experts.” Go ahead and try your luck at it, but the few people that I know who’ve tried it have had the same experiences as said programmer. See point 2.
“Over the past year, about one in five workers age 45 or older has stopped contributing to a 401(k), IRA or other retirement account, according to a recent survey commissioned by the AARP, an advocacy group for older people.” — Because of uneducated articles like this one. See point 2.
“Peg Kelley, a 58-year-old small-business consultant in Watertown, Mass., didn’t contribute anything to her 401(k) last year. Instead, she’s focused on paying down credit-card debt and building an emergency fund in case the bad economic times turn worse. She’s also still paying off an $8,000 loan she took from her 401(k) plan four years ago to buy a new car.” — Ok, so she’s 58, has credit card debt and a 401(k) loan…clearly she’s not someone to be taking financial advice from. Although, paying off credit card debt is almost always a good decision. Again, point 2 applies.
“Fund companies raced to roll out target-date products, often stuffing them with their own pricey mutual funds and adding an extra layer of fees on top.” This is true. You have to look at the fees for each fund within your 401(k). — Luckily, there are some broad-based index funds in mine that have low fees. See Vanguard.
“As stocks climbed, some fund companies increased the stock allocations of their target-date funds, setting them up for a steep fall if the market headed south.” — Demonstrating that many “experts” don’t know what they’re doing or aren’t acting in the interests of their clients intentionally.
“Boston College’s retirement research center recently ran scenarios that assumed workers had contributed 6% of pay to a plan for 40 years, had invested in a target-date fund, had never touched their savings until retiring and had annuitized the assets at retirement. The chunk of pre-retirement income these savers could replace in retirement varied dramatically depending on when they retired. Those retiring in 1948 could replace just 19%; those retiring in 1999, 51%; and 2008 retirees, 28%.” — Don’t take people’s statistics at face value. Of course people retiring in 1999 (near a peak) are going to have a higher % than people retiring in 1948 or 2008 (near a valley). But, its not like they cash out all that money at once, so if they’re smart, they live frugally or work a little longer (an actual good suggestion from the article). See point 3 again.
Everyone that decides to invest or save money in any manner should read this book first. Reading Benjamin Graham will stop anyone from being swayed by anything resembling the ignorance of the aforementioned article. The next best authors are Peter Lynch (read his 3 books in order) and John Bogle.
