Insidious? That’s a bit rich. You can allocate money in your 401k however you want. It’s self-directed. If you don’t like stocks keep it in bonds or cash.
This is disingenuous advice considering all financial vehicles for savers have been gutted. You can't even hedge inflation without the stock market (or real estate, if you can afford the buy-in).
Take a look at some historical CD rates. https://www.bankrate.com/banking/cds/historical-cd-interest-...
See also: treasury inflation-protected securities (TIPS).
Second, go compare the past year of VIPSX vs inflation you'll see that VIPSX is shit. Inflation has steadily increased by 5%, but VIPSX has been all over the place (it was actually down 2% last month) and is currently only up 1%. This is, again, not what normal people need.
1. There's no way to hedge against inflation (you didn't know TIPS existed)
2. Having learned about TIPS you assert they're illiquid and can't be traded easily (you didn't know about TIPS funds)
3. Having learnt about TIPS funds you don't the recent returns of a specific fund (you don't know that TIPS adjustments lag reported inflation numbers)
And your assertion that TIPS funds lags inflation doesn't hold water. Again, go compare the past year of inflation vs VIPSX. They don't track. By simply being a market traded product, a TIPS fund has speculation built into the price. Which, I'm arguing, is against the best interest of the average person just trying to save for their future.
When you say "all financial vehicles for savers", you're really just referring to liquid savings products tied to the federal funds rate, right? Of course when the government stops handing out money to savings account holders, savings account holders will no longer be making money.
Corporate bonds are an alternative way to earn some interest in a low-rate environment without owning stocks.
Also, REITs are an affordable way to gain exposure to real estate without a minimum buy-in. For people who need real estate exposure but can't afford to buy a whole building, they are really underrated.
Finally, the market is pricing in several rate hikes this year, so your savings account interest rate may actually be revived soon anyways.
I've been watching the rate hikes. The cynic in me says borrowing rates will rise, but consumer savings rates will not rise in step, nor will housing prices fall accordingly. But I guess we'll see.
I agree that it would be great to add more simple savings products, but you have to ask the question of where the yield will come from. If yields don't come from the fed (dictating inter-bank lending rates), and they don't come from the private sector (wall st), then where else can yields come from? What novel yield stream could a new savings product be built on?
At the end of the day, people wake up and go to their jobs to produce things, and every penny you earn in value in a savings account (past inflation) has to ultimately come from them, but not until it filters through the wall st machine.
It’s not advice. It’s reality. You don’t need to hold stocks in your 401k if you don’t want to. What happens as a result is your responsibility.
If this is driven by demographics, e.g. old people saving for retirement while there are no young people willing to provide for them when they are old, then really the problem isn't the fact that the bank doesn't want to lie to you any longer (the bank is currently lying btw), it's the fact that nobody will be there to take care of you.
> According to the Profit Sharing Council of America (PSCA), up to 77% of 401K plans include a provision for in-service 401K rollovers. Many of these only allow plan rollovers when a worker reaches a triggering event such as reaching retirement age, disability, plan termination or reaching the age of 59 ½ years.
So even many of those who are in the 77% who have in-service rollovers available don't qualify for them.
The entire system is completely broken. It is literally designed to make the markets keep going up, which as usual benefits the wealthy far more than the average person. And people who are even middle class barely really benefit from it. While the lower class and poor don't benefit at all.
I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
Instead of real retirement plans, higher guaranteed social security.. they have shifted nearly all the risk to the individuals and essentially forced them to just put money in the markets which artificially inflate the value of everything. And they just hope the ponzi scheme continues.
You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will collapse... sounds like a Ponzi scheme.
But every other proposal sounds worse or unworkable.
Did we forget we just changed the corporate tax rate from 35% to like 22%?
We stop taxing self employed people social security/medicare after about ~140k.. where many crazy rich people make WAY more than that, so they could continue to contribute a hell of a lot of income.
We have an insanity of tax loopholes.. including long-term capital gains which just incentivize the ponzi scheme further.
>You're saying stocks are a Ponzi scheme, but as a solution you're proposing something that constantly needs more people paying in money or it will collapse... sounds like a Ponzi scheme.
Do you consider current social security a ponzi scheme? All I'm talking is extending it.. tax people more, more money goes in, more money can go out.
I call the markets a ponzi scheme because it's literally fake valuation to a degree. I'm not saying fake as in fraudulent at all- don't get me wrong. But if the entire market valuation is let's say $1 trillion. If the S&P goes up 1% on the day, that entire valuation (and let's say the sum of peoples retirement, even though it's not nearly this simple) goes up $10 billion. Then the market drops 10% and all the sudden people lost $100 billion in retirement.
Money can literally disappear in that kind of system. That's why I call it a ponzi scheme. It only works if people keep making it go up.
Social security doesn't work like that.
You're describing fluctuations in the market as making it a Ponzi scheme, and you say "Money can literally disappear in that kind of system." That is incorrect. Money doesn't disappear when stock prices go down - stocks prices change based on people buying and selling. If you buy stock, your money gets transferred to the person selling it. Money doesn't disappear.
What's worse is that a lot (most?) countries use exactly this model. Mandatory social security contributions are the reason why income tax percentages in many EU countries are so much higher than in the US. Look at https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I4.
You have a lot more faith in our government than I do.
If you choose not to invest, do you keep all of your money in a savings account that loses value to inflation?
In my country, Argentina, the state manages the retirement funds of the people. And they have been destroying their savings for decades.
People who worked for 45 years get into retirement to learn that all their savings got destroyed by the inflation. There used to be, alternatively, private systems, but they were nationalized so the state took the retirement funds of all the people who trusted in the privates more than in the state, and now they are giving them pennies. So all that people feels that they were right by not giving their money to the state in first place.
Your retirement system might be flawed, but at least you have the freedom to decide what to do with your own money. And, thanks to that, American people is way more savvy about finances and investment, and how money works. In my country, the average person knows nothing about basic economy, or even about how to save money. Otherwise, no government would be able to keep a 30% base of the votes despite getting us a 50% of inflation year after year.
If you have money, you need to allocate it in some way - how are you allocating yours in a way that isn't investing, isn't gambling and gives you control over the performance of your assets?
Why do you "need" to allocate it? This is my whole point. Everyone acts like "oh my god, I must have my money making more money!"
What the hell do you think 80% of the country who has no substantial assets do? They can't do anything. The whole concept of getting rich off your own money is honestly sickening to me.
>how are you allocating yours in a way that isn't investing
I'm literally not. Even my house, for example.. I don't consider an "investment". Will it probably 'make money' over the long term? I guess (and well, it has substantially over the last few years, but again I had nothing to do with that- simple luck, just like it would be bad luck if it went down substantially). But that's not the point of me having a home.. I have a home as a place to live with my family.
This mentality of everything being an investment and our whole lives revolve around trying to accumulate assets so those assets can make more money... it's just sad.
I see your point, but I honestly think it's a nuance you say it's an "investment decision" to say keep it in cash instead of the stock market. Am I almost making a decision to keep money in cash instead of beanie babies? Yeah I guess, but that doesn't really change my argument.
Even from your viewpoint, you personally probably feel that you "need" to invest yourmoney to keep making money so they have more money in the future. Most people think that you have to. And hey, they aren't really wrong. The system basically forces you to "invest" in the market because that's the only way you will have any money for retirement.
But that is where I think the system is completely broken. It SHOULD be a choice, but it's not. And it's my entire point, the system was shifted from company retirement/ss to putting ALL the risk on the individual (to hopefully make money in the market) AND they artificially make the market keep going up which benefits wealthy people even more.
And I'll reverse the problem here- I don't think you are "choosing" to invest in the stock market. You are investing in the stock market because by design it's basically the only choice. That is the issue.
You don't "need" to allocate it. If you don't allocate it though, the buying power of your saved cash will decrease every year from inflation.
You can argue whether low inflation should be a policy goal of the FED in the first place - I believe it should personally, it incentivizes economic growth - but regardless, you have to take the situation as it is. Inflation exists and no amount of wishing will make it go away.
In the face of inflation, what can you do to at the very least preserve the buying power of your cash. If you do nothing, you can watch it wither away.
Currently, there are few viable options that will help you preserve cash; interest rates on savings accounts are 0, CDs are extremely low, bonds are low but starting to move up, etc. The only remaining option is equities (stocks, bonds etc).
> The whole concept of getting rich off your own money is honestly sickening to me.
What do you find sickening about it?
> Even my house, for example.. I don't consider an "investment".
I agree with this mindset. While you can take out a loan with your house as collateral, it's a bad idea to consider your home as an investment IMO. As you say, you ned a home to live in.
But housing that you own that don't live in can absolutely be considered an investment (as an alternative to equities) and this can be far more liquid since you don't need it to live in.
Not everything has to be thought of as an investment though. That's up to you as an individual to decide.
This comes out in practice as PAYGO, or "pay as you go". A lot of countries use this model, and it goes bad quickly when tax receipts aren't enough to cover retirement outlays. With poor demographics in almost all large economies, PAYGO plans are going to cause a lot of pain in the next couple of decades.
> They have shifted nearly all the risk to the individual...
The risk comes down to 1. is either the individual, their employer, or the state investing for that individual's retirement and 2. how is that money invested.
The US has more than 150% of its GDP invested in retirement savings. Some of these savings are invested in equities. It has to go somewhere.
But that's all by design, which is my point.
Let's say from.. I don't know, 50 years ago. Taxes were increased such that social security is 2-3x what it is now. Some level which basically guarantees you have descent money for retirement. Sure you should still save some more over the years, but you won't be completely fucked.
In that situation, there is no way 150% of the GDP would be invested in retirement savings. The social security pot would be massive, instead of inflating the stock market.
Trust me, I get what you are saying.. but that is also my point. It was all designed to do this, and it was designed to benefit the rich- NOT individuals.
Individuals (as a whole) would be FAR better off being able to depended on social security. And I think what's lost here, is we are discussing on HN- a place where most people (myself included) make FAR more than the median income. Like many multiples. I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income. So for the solution to be "hey, no retirement plans and low SS for you.. but don't worry, throw your money into the markets and over time it will be great!" is meaningless when you don't have a high income to begin with.
Social security is, essentially, a de facto PAYGO system*. The issue with PAYGO is that you need a stable ratio of working aged taxpayers to retirees who draw income from the program. This is untenable with current US and OECD demographics, which is why countries that use PAYGO in part or in full are 1. raising retirement ages and 2. transitioning to a mixed model where income replacement comes as much as possible from savings and investments.
> In that situation, there is no way 150% of the GDP would be invested in retirement savings.
Retirement in the US is much more than social security. This figure includes pension plans, 401Ks, and IRAs. It's also a cumulative amount, so the annual input to grow the proverbial pot is significantly less than this.
However, if you were to take the expected outlays from this and, instead, fund them through direct taxes, you're likely looking at an additional 1.2T USD in social security taxes each year, which would more than double the social security tax rate. This looks remarkably similar to how much workers in countries that rely almost entirely on PAYGO programs currently pay. This is also with current demographics - the picture becomes significantly bleaker once you project out several more decades.
> I guess that just makes it a foreign concept- but most people in this country can't throw 10-20k a year into retirement funds. That's a massive part of most peoples income.
Other countries actually do require forced contributions into employer pension or invested retirement accounts. The idea being that, if you start early enough, you only have to contribute an small portion of your salary each year to replace a large percentage of your salary in retirement.
> The social security pot would be massive, instead of inflating the stock market.
Social security funds are actually invested. Government debt is an asset class and, as with everything else, a large amount of demand for an asset class has supply side repercussions. The same applies for private retirement investments. Also keep in mind that only portion of any good retirement plan will be invested in equities, and that pension plans are increasingly turning to alternative investments, such as private equity and real estate.
*The social security "pot" will be insufficient to cover expected outlays in a couple of years, which is why it's better to think of it as a PAYGO program.
Yes and no. Inflation/markets going up is a way to prevent boomers/gen X from sitting on stacks of money hidden away as a rainy day fund. It does benefit newer generation as it allows them to be paid more than their parents and give them access to credit to do stuff like buy houses.
You want markets to keep going up, there is nothing good about deflation.
> I choose not to participate in "investing" because it's not investing. It's literally gambling. You can't control what a company does. You can't control if a pandemic hits just when you want to retire and your assets as cut in half.
You need to transition your assets progressively as you get older. If you hit 60 years old and your assets are still only in the S&P500 index then you have failed to diversify and yes, your high-risk portfolio is still high-risk. That's not gambling, that's poor planning. There are securities that can offer a lot more stability, at the cost of smaller overall returns.
> Instead of real retirement plans, higher guaranteed social security.. they have shifted nearly all the risk to the individuals and essentially forced them to just put money in the markets which artificially inflate the value of everything.
I've already addressed this above.
> And they just hope the ponzi scheme continues.
The stock market is not a Ponzi. The profits of the companies are what you are buying when taking a share of said company. It's an overall straightforward understanding. If you don't want to speculate on higher-risk assets such as tech stocks, you can buy banking/industrial/natural resources stocks which usually pay dividend based on their revenues.
Imagine running a ledger, you are owed 50 years of work by person A. Person A dies. You are still owed 50 years by the rest of society. Society just lost 50 years of work because person A died so the rest of society must work harder to honor your ledger. That's where the ponzi scheme originates from. The idea that you are owed something that is no longer in this world.
A gold standard is a ponzi scheme and since modern day fiat is just a stretched gold standard it is a ponzi scheme too.
So what else would you base a retirement based upon? Empty promises from politicians whose have no incentive to deliver on them because their term ends long before these promises are fulfilled? We have that in the public sector already, that's why there's dozens of pension crises looming, from Sacramento to Boston and half the states in between. We also have that to a limited extent with Social Security, which is likewise heading for a major shortfall. And nobody really actually likes Social Security — I mean, they may be in favor of it existing, but everyone who can afford it has a private pension with a lot of holdings in the stock market, to supplement Social Security, and cover its shortcomings, and no one would trade that for more Social Security, because it would mean they end up with a lot less in the end.
Further, my 401K allowed for indexes tracking foreign markets, real estate....
I don't doubt that the majority of people exposure to stocks are U.S. markets, to be sure. But perhaps, to that end, the government (Feds) are more likely to respond to collapses in the U.S. Stock market than other forms of investment.
I don't know that I believe it myself, but I'm proposing that maybe the "safe" money is in U.S. Stocks.
Also, what alternative do you propose? You need an investment vehicle that can handle enormous sums of money from people who will potentially have no understanding of how it works. That doesn't leave many options.
We should be taxing people more, and guaranteeing much higher social security so we don't have to gamble our savings in a giant ponzi scheme. It shouldn't be on the individual to be lucky that a massive recession doesn't hit when they want to retire.. or depend on the market making a few percent a year just to survive.
Your 401k depends way more on people continuing to inflate it upwards. And you have ZERO guarantee, anything can happen.
At least social security is a government backed program, and they can ALWAYS find more money. Maybe it's the best solution at the time, but they can. They can raise taxes, borrow, simply print more money. And don't nitpick these points, because yes I understand there are issues and it's more complicated.. but they can do it.
How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Even just increase the standard tax on people. If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
There are a billion ways to do this. I am not an expert, but I'm not clueless either. Plenty of other countries tax more and provide guarantees to the people. This country wants to make it seem like everything is a "choice" but it's completely to benefit the rich. "Oh I get to choose my healthcare and how much risk I want to take that I have to pay this year, great!" "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
No argument there.
> How about taxing self employed people social security/medicare without a cap instead of stopping at ~140k?
Why limit this to self employed people? The cap is there for all workers. And self employed people pay double the tax - if you are not self employed, your employer is paying half of it. Self employed people already have a larger burden.
> How about massively increasing long-term capital gains, or even just getting rid of it. Income is income- tax it the same.
Because then people won't invest in ... much. My guess is the majority of current investments that are profitable would no longer be if taxed as regular income.
That then means many businesses will stop existing since people will not invest in them.
> If the average person paid 10% instead of 7.5% into SS/medicare but their SS doubled in the long run, are you really saying the average person would be against that?
Definitely. Even though it likely is a good solution.
The real problem is that the US government, by law, is not allowed to keep the excess SS funds they collect in an "SS bucket". If the SS payouts are less than SS tax collected, the excess is required to be spent elsewhere. We've lost decades of excess SS collections because of this.
> There are a billion ways to do this. I am not an expert, but I'm not clueless either.
The CBO exists to do such calculations. Increasing SS/Medicare tends to work. Removing incentives to invest, however, is disastrous.
> "Oh I get to choose what investments to put my money into even though I have zero control over the actual outcome, great!"
There's a disconnect between saying "long term capital gains benefit the rich" and "investments are bad because I have zero control over the outcome." The latter statement is as true for you as it is for rich people. If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I know, I am self employed. I didn't think there was the same cap for all workers? If there is, then I agree it should be removed (or at least substantially increased).
>Because then people won't invest in ... much
Yes they will. There are always people who still want to make more money.
>If you think investing is such a bad thing with low returns, then let them have their long term capital gains tax.
I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
And look.. the LT capital gains is not my first go to exactly.. but, I do think it's far too low and again it's something that just disproportionately advantages the rich.
Honestly that's my whole point on the investing front. This entire system was created to benefit people who already have lots of capital. My view is hoarding capital to make more capital should not be the goal of life.. but greed knows no bounds.
"There are always people" is a very different statement from "most people who invest will continue to".
Any time you lower taxes, you significantly increase investment opportunities because suddenly many unprofitable investments suddenly become profitable. In the investment circles I'm in, most people invest in things that perform lower than the S&P 500 because these are both safer, and more profitable due to the tax benefits. Remove the tax incentives, and easily 90% of the folks I know would pull out.
> I never said it's low returns- I said it's a bad thing that this is supposed to be the default way to make money. There's a huge difference there in philosophy.
It's not the "default" way. You can choose not to put in any money in 401Ks and go to more traditional approaches - things like real estate and other businesses where you have much more control over the outcomes. You can even use IRA money to do this, as well as some 401K plans.
And then you'll find out you're more likely better off with the "traditional" investing.
BTW, raising SS tax to 10% to double the returns - it's still not enough. The estimate is that SS will fund only a quarter of the expenses for most retirees. Doubling the returns means it will fund only half of their expenses.
> This entire system was created to benefit people who already have lots of capital.
This should not come as a surprise. There's a reason it's called "capitalism". For pretty much forever, the system in the US benefited those with capital, and the path to riches is to find a way to acquire some capital to let it grow. Being well off just by virtue of an salary is a fairly recent trend, and always has taken the back seat with respect to capital based investments, and always will in the US. It took a while for me to realize this (in retrospect) obvious aspect of the US economy. I can whine about it and try to change the collective psyche of a whole country, or I can find another place to live, or I can make compromises and put more focus in acquiring capital.
What you're saying is young working age people should pay for those who didn't save for retirement? And what happens when a recession hits anyways and the tax base takes a hit?
Nice way to twist my words. If the system worked like I'm describing from the beginning, you wouldn't even be able to say that. Because you wouldn't need to save a substantial amount of money in a better system- everyone would have been paying it all along.
And a new young working age person would be paying more, but it's to benefit themselves in the future. So I don't even understand your point.
>And what happens when a recession hits anyways and the tax base takes a hit?
That should be planned for in whatever various ways it's being paid for. You pull in a little more money from taxes than you need to account for a buffer etc. This isn't rocket science.
I am pointing out the consequences of what you're suggesting.
> If the system worked like I'm describing from the beginning
I thought we were discussing the real world as it exists, not Narnia.
> You pull in a little more money from taxes
Even more taxes! Does it ever end?
Yeah because surely nothing could go wrong with having all your money in a volatile market you have no control over..
The government already guarantees social security, what is your point? If you trust the financial markets over the guarantee of the U.S. Government then I can't convince you otherwise.
We have already seen that in other countries.
The idea is basically the same as any insurance system: the bigger the pool of people participating, the more "shocks" can be absorbed without affecting the long term viability. If you have a tiny pension fund for just one person (e.g. your typical 401(k)), if it has invested its value in a way that makes it impossible to fund that person's retirement, then that person is totally screwed.
On the other hand, if you have 300 million people with upcoming retirements spread over a 45 year timeframe all as part of the same pool, the system can absorb short-term catastrophes without affecting the ability to pay people their expected pensions.
But you only get this by having a coordinated, centralized system. You do not get this by having every individual invest in the stock market, because there's no way to shift money from those currently well-ahead of expectations to those currently needing payout. There's also no way to "borrow" from the capital assets in the expectation that over a period of 30 years you'll be able to repay.
All of this was broadly understood in the 1930s-1980s. But then people were mislead to about the benefits of individual investing, of how their 401(k) would pay out more than the company or state pension plan. While that is certainly possible, it is also unlikely, and the side-effect is that the risk exposure to individuals is substantial. The only winner has been the financial services sector, which has made out like bandits on fees/commissions etc from managing these funds that used to be locked away in corporate/state pension organizations.
Centralized lets you move money as you said, but it leaves a major risk that the whole system is left in a bad state by the central manager. Particularly when they can gain stature by overpromising and leaving office before it’s time to deliver. Doubly so when they look at the investment opportunities as an opportunity to exert political control over the economy at large, like CALPERS currently strives to do.
The stock market doesnt keep going up because of the economy. It does so because of politics.
And they make more and more money thanks to the exponential forward march of technology, thanks in part to the people on this forum. This has held true through thick and thin from the Industrial Revolution on
That cheap labour isn’t so cheap anymore either, all those Eastern sweatshops are starting to compete for workers, driving wages up
The paper title is "Fueling Financialization: The Economic Consequences of Funded Pensions"
[1] https://journals.sagepub.com/doi/pdf/10.1177/109579602110622...
Nice bit of protectionism you got there.
Fair enough for the Maniforts/Bidens of the world wheeling and dealing on a global stage. Less fair for those of without spare thousands to burn on financial advisors.
I guess you're talking about PFIC. Are you also a US citizen? If not, iirc your wife is allowed to gift you 164K USD a year, which you can then use to invest however you see fit.
If you somehow still have access to a US broker, as far as I'm aware you're allowed to purchase and own US ETFs through them. PFIC only applies to non-US domiciled funds.