Thursday, January 24, 2013

Our National Ponzi Scheme

This post should be considered an open call for comments. Is there anyone that can convince me that the 401k my company signed me up for (I was out on maternity leave or it wouldn't have happened) ISN'T a giant ponzi scheme?

I'm being told that a 401k is THE BEST way to plan for my retirement.  *blink blink* Most of this is coming from the bankers who are profiting off of "managing" my money. But even my parents seem to think that a 401k is a responsible thing to do. And in their defense, the market has worked well for their parents, and it didn't completely fail for them, so they are trying to do right by me. I just can't believe that the ginormous debt the US (and many other countries) have stacked up won't come roaring back through the markets sucking the wealth right out of everything it can. As baby boomers start taking more money out of the markets than they are putting in, how is that NOT going to contract things?  And a contracting market means any money I put in will be depleted.  Sure my "Money Managers" will play some shell games and put more of "my" money into bonds or something, but those too are largely propped up by faith, faith that governments will pay the debts those bonds represent, plus interest. And when the last of that faith is pissed away by those in power, the bond markets will find themselves short of customers. Again, there goes my money, since the bonds won't be worth the paper they're printed on.

I don't own the house I live in. I don't own the land I grow my family's food on. I don't own the business that pays for the rent and clothes and food. But, some funny-money scheme that locks up my cash and feeds it into the giant national ponzi scheme, (The Stock Market is what they're calling it) is really the best use of my hard earned money? I'm not buying it.

It's not Federally Insured, it can't be, it's gamboling. I'm supposed to have faith (hmm, sounds like a religion) that the stock market is going to keep growing for the next 50 years, and trust that a crash won't happen and wipe out my "investments" completely. The whole stock market is dependent on the influx of new money, (that's where young wage earners like myself come in) in order for the Wall Street and banker types to make their millions. No where in the whole Stock Market system are there benefits for young people like me.  Not unless I've got one of those fancy computers making the fast swap deals churning through millions of short sales a day. Which I don't have. Or unless I believe that repeated invocations of "Eternal Growth" are going to somehow make that wish a reality. As my favorite Archdruid is fond of saying, "magic doesn't work that way."

Unless someone can talk me out of it, I'm going to cash out the couple of thousand that has built up in the past 9 months. Whether it's vested or not.  I'm not saying I'll turn it into gold or bury it in my super secret bunker. But I can't shake the feeling that we have more bumps ahead of us, and a thousand dollars in my savings account is going to be much more useful to me than 2 or 3 thousand in funny money locked away in some imaginary market.

Thoughts? Arguments for or against?


Becky said...

Personally, I'd figure out some way to buy some land, instead...That's always a good deal--even when land values fall, you've still GOT THE LAND, Katie Scarlett! :-)

Bob said...

I don't know where to begin with your assumptions. If the full faith and credit of the US Treasury is lost, then you and the entire rest of the world will be living in Mad Max. Anything but canned food and guns will be shiny junk. This is ridiculously unlikely. Period.
Most of the Treasury/Government debt you're talking about is owed to the American public. Treasury bonds that pay less than the rate of inflation actually remove money from the economy, but not value(two different things). Treasury bonds sell at record low rates right now, but people, institutions, and world governments buy them like crazy because they're still the least volatile place to put money, ever.
There's ways of owning securities that are easily accessible and don't involve a large cut to a money manager(Vanguard index funds, it was expensive for me to learn that lesson). Those big investors with the millions of trades? 1) Their money comes from commissions on trades more than the cost of each trade. 2)Passive indexes beat them 80% of the time(after costs), the academic consensus is clear. Everything else is finance industry marketing.
When the Boomers retire, they'll move their money over time to safer investments, not cash out en masse. This will make those assets a better buy for you. The benefit for you is that you have time for those cheap assets to return to average.
Yes, there's risk. There's also no return without risk. A ponzi scheme is a specific kind of scam, and the US/global economy isn't it.

Andy H said...

I’ll try to respond to your post point by point.

A 401k is a responsible things to do given the future uncertainty of your life. A 401k (amongst other retirement options like IRAs) offers protections from bankruptcy (so if you’re sick or lose one or both incomes your creditors are screwed), it may defers taxation depending on traditional or Roth (Roth’s use after tax income and allow for tax-free withdrawals, so you could hedge what you expect future taxation would be), and there could be company matching.

The size of the US debt doesn’t really matter. Yes, it’s ginormous but so too is the US economy. You may believe that is a system of collapse but other countries have had even bigger debt to gdp ratios than the US and have paid them down without losing the full faith and credit of their currency. The UK dropped the gold standard in 1931 and as a result UK exports became more competitive and they weathered the Great Depression better than those who remained on the gold standard. Furthermore, UK Debt to GDP ratio peaked at around 1950 and at about 275% and they are now around 85%.

As far as contracting money due to retirees cashing out their retirement funds, I don’t know what market you’re referring to but a contracting market isn’t necessarily a bad thing. For instance, if old people completely cash out their bond and equity funds they’ll be flush with new cash, new cash to buy stuff and since there will be more old people than young people wages increase allowing you a wage earner to buy equities and bonds on the cheap. I know it can be difficult but money is circular, one man’s cost is another man’s income. And as far as fees and “Money Managers,” we’d need to know the specifics of the 401k but if you moved your 401k to an IRA where you could control it, ETFs are cheap and you’d only pay the commission of the broker.

As far as investing as gambling, well it is and it’s not. Outside of an end of the world scenario or some really bad timings (like hitting retirement age and then boom financial crash, panic sell, destitution) if you’re well diversified your boat will rise or sink with the rest of us. I suspect it would be considered the responsible thing to do to speculate on the future, hoping for the best rather than say the world’s going to end let me spend it all today, and probably the worst thing to do is put retirement money into a savings account.

So the reason why a savings account is a bad thing is that generally the interest rate you get is less than inflation. So lets take for an example my bank TCF right now the best interest rate that I can get on savings is 0.25%, now that may look better than losses due to market volatility or fees but that’s not the real rate that you’re getting. The real interest rate equals thenominal interest rate minus the rate of inflation which is, according to the Fed, 1.7%. So your real rate of return is -1.45% if you were to put your money into my bank.

So I’ve made a spreadsheet that I can email to you if you want about what you could expect using some assumptions. First, I’m assuming you’re contributing $250 a month for $3000 a year for the next 25 years. Secondly, I’m assuming three interest rates, one for a fictional 401k or IRA, one for a savings account, and an inflation rate they are 4.7%, 0.25%, and 1.7% respectively. And lastly a tax rate of 25%. If we go with your plan of a savings account, you will save a total of $47,469 and if you stay invested with a traditional 401k that results in a nominal 4.7% per year return you will have saved in 25 years $82,033.

Here’s the question are you willing to bet $34,565 that retirement funds are bullshit and employer matching is bullshit and the world’s going to end in the next 25 years?

Andy H said...

Oh, and the 0.25% is TCF's best rate if and only if you have a minimum balance of %225,000, otherwise the interest rate would vary over the life of your account from 0.03% to 0.05% which would change your final savings on the savings account to $46,400. I also assumed that the interest rates didn't change and if you had bought stuff instead of saved, you would've bought $75,000 of stuff. And the final numbers did include tax, I didn't make that obvious.

Jennie said...

Thank you all so much for your comments! Becky, Land is actually where I'd prefer to invest for retirement. Andy, I love numbers, I will review yours a couple of times, thank you.
Bob, your points about the US treasury and how boomers will move into retirement mode are well taken.
You've both given me much to mull over.
I'm no economist, and my father is fond of telling me I see the world through Doom colored glasses. :-D
So, again, thanks for the comments.

Jon Lorisen said...

I can't comment on a 401k all that much as we don't have the same thing in Canada. I believe our RRSP plan would be a lot more to your liking as guaranteed investments (CDIC insured) are available. RRSPs provide significant tax savings, can be withdrawn without penalty (if repaid) for a house downpayment or for education costs.

But, it's 401k we are discussing :)

The main issue with the stock market and the economic system we use is that it is all based on continual growth, which certainly appears to be ridiculous. Unless we suddenly develop a warp drive and take our show on the road to the next galaxy, we should be focusing on contraction not artificial expansion. Should someone utilize a market-based investment as a long term saving strategy? I don't think so. Not sure if you have any control over this money or not but while mutual funds can present good numbers over a 10-20 year period, they also can be completely wiped out. Family members of mine lost a huge amount of pension money a few years ago, right at the time they planned to retire. A lot of that loss has been recouped but they were forced to work years longer than they wished.

People have been crying doom for so many years, for so many reasons, that it can be hard to take it seriously today. Even I sometimes think I am being a bit silly, that it will all work out and things will truck along just fine - for the rest of my lifetime at least. It may be a good strategy to use a traditional savings plan, to cover your bets in case their isn't an economic meltdown at some point in the future.'s what I consider the best way to plan for your retirement:

1. Pay off debt. The rate you pay in interest is probably a lot higher than you would get as an investment return.

2. Secure affordable, long-term housing.*

3. Be educated

4. Develop practical skills

5. Grow your (real) social network for friends and family

6. Attempt to help your children secure the same as above

If you have money left over after that, my hat is off to you. Awesome. Then I would consider taking a flier on the stock market or something else. Hedging your bets probably isn't the worst thing in the world and I do have some savings but they are either in a pension I can't control (and which is looking rather shaky) or in guaranteed funds. When I had money I could "afford to lose," I took some gambles in the past. They didn't pay off and they didn't break me but I sure would rather have the money now that things are a little (a lot!) tighter.

* I would focus on one or more of the following:

1. A small, inexpensive apartment in a good location. Probably high-density urban, hopefully with rooftop gardens, balcony/good windows for more gardening. Walking distance to everything. Reduces transportation costs, less overall expenses, chance to develop very close relationships with neighbours, etc. Probably the best option for most of us in the rat race.

2. A home with a rental suite, or a duplex, or whatever. Something which allows you to reduce your cost of living, have that larger outdoor space, and perhaps lend support to family by letting them stay with you without having them staying in the complete same space as you. Small apartment buildings are ideal or larger homes converted to apartments.

3. Outdoor space, land, hobby farm, etc - only worthwhile for those who will actually use it, can be a huge money pit for those that won't. Probably better for larger groups.

Jennie said...

Jon, the paying off of debt is one of my sticking points here. I should try to run some calculations on how much I'm paying in interest on my massive student loans, and add up the interest I've earned on my 401k for a set time-span and see which is bigger. That could yield good data, which could be useful in making this decision. It's tax time, I bet I can find some of that data really easily. If I get around to doing that calculation, I'll report back.

Jon Lorisen said...

Sorry, I should also you have said I meant that my little list wasn't addressed to you in particular, it's more my list and perhaps a general starting point for people. Reading it again, I sound pretty pushy :( oops, you obviously have 3-5 nailed down better than anyone I know and are doing 6 already.

Is a 401k merely an untaxed investment or is it also a tax deduction? A lot more worthwhile if the second, especially depending on your tax bracket. I still hate market-based investments though....

Anonymous said...

Fuck 401k