The Investment Thread

[nate82]

If you're concerned about outliving your wealth, you can always buy some kind of annuity. I'm not an expert, but that's pretty much the point of them. That basically allows you to pay in the actuarial average and get income for life, similar to what a pension would offer.

 

An annuity would be a better option than SS.

[DHonks]

The amount of money that wouldn't have to go to retirement under the 401K model if people didn't have to self insure against living too long is pretty staggering. It's one of the big reasons pensions are so much more efficient/ cheaper as an investment they can just assume the actuarial average.

 

I hadn't thought of that. That's money that could be tossed back into the economy quite easily I would imagine.

 

What would be even better? Let people control at least half of the 12.4% paid in under SS. Then there would be no need for pensions or 401k.

 

I always remember when Paul Ryan tried to make the case for greater use of private retirement options for ALL workers in a VP debate in 2012. Biden ranted about how Ryan and others like him always talk about the market, but "tell that to someone who lost half their money in the recession" (that's paraphrasing). I'm politically moderate and neutral on a lot, but that set me off as an Economist. Within a year or so of that debate, the market had surpassed pre-recession levels. People who kept their money in the market were ahead. But it sure made a great soundbite in the election

Edited April 18, 2020 by DHonks

[DHonks]

The amount of money that wouldn't have to go to retirement under the 401K model if people didn't have to self insure against living too long is pretty staggering. It's one of the big reasons pensions are so much more efficient/ cheaper as an investment they can just assume the actuarial average.

 

I hadn't thought of that. That's money that could be tossed back into the economy quite easily I would imagine.

 

One flaw with praising pensions is that they are subsidized by younger workers and the government. A 401k vastly outperforms a pension over time. The difference is that in a 401k/403b/457b/IRA it is MY money earning a return, but in a pension it's often an unfunded promise that falls on later generations backs. I'm very grateful that my state has one of the better funded pension programs for educators.

[igor67]

401Ks do substantially worse. I'm not aware of any pension that isn't invested so it is earning a return. So I mentioned 1 huge advantage above, but there are 2 others that do it yourself will never top in a systematic way (so yes lucky individuals will occasionally out perform but not most). Reason number 2 is lower fees, than an individual can get. Reason 3 is that a pension never has to adopt the more conservative approach needed when you get older to manage risk. They can always participate in the market in a similar way. There are some cautions.

1) Rapidly changing the number of workers especially downward in a pension plan is problematic, this was a big one a few decades ago for the autoworkers.

2) Apparently in some states rules made it easy for lawmakers to raid the public pension fund. To my understanding this is not possible in MN or WI

3) I don't know how often private pensions are required to do the actuarial studies to adjust as people live longer or the inevitable variations in market returns.

[superfly]

 

FWIW, I'm 37, own investment property, have been maxing 401ks and IRAs for 7 or 8 years, have taxable investments, and still do not feel financially secure.

 

I'm a decade older than you, have been doing the same with IRA, 401K, and feel the same way. I'm terrified of outliving my retirement funds...I probably won't but it's why I live very frugally. I can't really make up lost ground when I'm 80 but I can while I am still able to work.

 

This is why I’ve been working the past several years toward being able to sustainably trade stocks. Zero desire to work for the man, I want to be financially independent, and I want to know that I can work when I want to work, anywhere I want to work. Taking a paycheck from somebody else for the rest of my life is going to leave me right in the position you feel insecure in in 15 years (I’m 31).

 

If you have interest in the markets in general look into it as a second hobby, maybe you find you love it and maybe you won’t. There’s no better feeling I’ve ever experienced though than a hard day “at the office” and going home with high 3 figures-4 figures to show for my work. I then cut lawns for exercise and extra income in between watching our little one ($450-500/week for child care with 6-18 month waitlists is asinine to us). I have a couple friends working the 9-5 and doing the same, strategy just has to be adjusted a bit.

[MrTPlush]

Saying 401Ks are substantially worse is really inaccurate, especially without fine details of said person. When one gets into the pension (and leaves it) is a pretty important detail and how much they contribute is a pretty big deal (which tends to be a lot more than 20+ years ago).

 

If we are being technical one would probably want a 401K for the first half of their career and then a pension for the later half. That probably is the most beneficial.

[igor67]

Trying to extract maximum individual benefit is a short term gain though at best. If there is some sneaky hidden inefficiency, eventually it will show up in the actuarial studies and then you have to make adjustments to payouts and/ or contributions. I'm getting close enough that the various calculators give close enough results without having to completely sweat about how sensitive they are to assumptions. Between SSI and our pensions we are on pace for our retirement income to at worst match our working income. We effectively contribute 13% of our income to pensions. Once you account for not having to make SSI or Pension contributions in retirement we come out ahead. People work hard enough by and large they all deserve that.

[nate82]

Pensions are bad as they require a younger workforce to continue pouring money into it. What happens when that industry is no more? For example what if there is an invention tomorrow and it makes cars obsolete. The people that are relying on the pension are now out of new workers contributing to that pension and no new money is being put into the pension. Without the infusion of new money the pension will fail or the amount of money that is handed out from the pension is diminished greatly. You could go from $4,000 a month from your pension to $2,000 a month or whatever the amount would be to keep a positive or neutral value in the pension.

 

A 401k or any other type of investment is not reliant on a younger workforce to contribute. If you can have both a pension and a 401k that is probably the best way to go or if you can't get a pension a 401k and an annuity is the way to go. If you can afford more get more like rental properties.

 

Having only one investment like a 401k or just a pension is just not a good idea. Also if you are relying on social security as an income source you are setting yourself up for failure.

[DHonks]

A 401k or any other type of investment is not reliant on a younger workforce to contribute.

 

I hear teachers in AZ talk about how they used to contribute 5% of their pay to our pension in the 90s. Next year it will be 12.22%, despite pay increases the contribution rate goes up every year. Sadly much of the pension promises fall on younger workers, robbing these low wage newbies of money they need right away.

 

But it's better than the alternative, as most would never fork over 12% of their salary to a retirement plan at age 24. I try EVERY year to get people so sign up for one of our 403b offerings, and many don't see the point of even $10/pay, even though I show them the spreadsheets. The main benefit to a pension is that a person doesn't have to be accountable for their future...it's just there for them

[igor67]

Workforce age is not really relevant as pensions give you credit based on years worked, so swooping in at the end doesn't get you much. As I mentioned above a shrinking pool of workers does cause problems. Pension funds have an FDIC type insurance program, but solutions aren't hard to imagine since we have more workers than we did years ago, namely instead of tying pensions to jobs you could group pensions across worker classes and make sure things are staying stable. We know 401ks don't work as policy. They benefit some individuals, but after decades of telling people to save more it's clear that ain't working. If there wasn't so much money to be made in fees investment banks wouldn't try so hard to get a hold of the pensions. Aside from the rise of the 401k coinciding with rapid Wall Street growth my coworker who lived in NYC can vouch how eager they are to get their hands on the money. So I play the game a little bit to spread and hedge against what is really just a political risk.

 

MN most recent actuarial study had to increase funding just a bit because people are living longer, I would guess that is the biggest driver of increases in most states.

[MrTPlush]

Well there is a difference between a pension being good because it is actually good and a pension being good because the person is financially illiterate. The later is why social security even exists, because people cannot voluntarily make good decisions for themselves.

[DHonks]

MN most recent actuarial study had to increase funding just a bit because people are living longer, I would guess that is the biggest driver of increases in most states.

 

And the investment returns of defined benefit plans fail short of funding promises.

 

Public Pensions in most states--including Minnesota (as mentioned)--are really a ponzi scheme. Like I said, they're good for us workers, but will come back to bite future workers and taxpayers down the road. Courts have also ruled that cities and states (Illinois in particular) cannot retroactively change the benefits in order to make the systems more viable long-term. This isn't just pensions, as many consider Medicare to be a gov't sponsored ponzi-scheme as well. The common denominator in these options is politicians that won't be around when the programs go bust

[nodakfan17]

I challenge anyone to add up their Social Security contributions from their 20s and 30s and consider what a difference that 6% would have made in terms of paying student loans, buying a first home, paying for child care, or enabling other investment opportunities. Personally, I think we’re making one generation more secure at the expense of another.

[igor67]

We didn't have any problems lowering the benefit growth rate along with increasing contributions to improve the fund ratio. Calling it a ponzi scheme doesn't make any sense since it does not rely on ever increasing numbers of participants. It invests in the market just like individual.

 

The reason it became easy to sell people against the idea is the dark side of compound interest. When you build your various budget forecasts extending 5,10 or 20+ years into the future any small amount of mismatch be revenue and costs will get magnified like it is compound interest, which turns into huge numbers pretty quickly. But forecasts are not destiny in the public sector anymore than they are in the private sector. You just have to manage the projection/ budget every year. I've sat through board meetings for well over a decade, and most of those years some new board member becomes convinced healthcare expenses are going to sink everything. At the end of the day though, with competitive bids and some other things we kept the impact close enough to inflation so that we've only had to increase employee contributions $25/ per check in that span.

[AmFamFan]

A barrel of oil is now cheaper than a meal at McDonald's. WTI down over 30% today.

[nodakfan17]

A barrel of oil is now cheaper than a meal at McDonald's. WTI down over 30% today.

[sarcasm]Perfect time for a road trip![/sarcasm]

[homer]

 

FWIW, I'm 37, own investment property, have been maxing 401ks and IRAs for 7 or 8 years, have taxable investments, and still do not feel financially secure.

 

I'm a decade older than you, have been doing the same with IRA, 401K, and feel the same way. I'm terrified of outliving my retirement funds...I probably won't but it's why I live very frugally. I can't really make up lost ground when I'm 80 but I can while I am still able to work.

 

This is why I’ve been working the past several years toward being able to sustainably trade stocks. Zero desire to work for the man, I want to be financially independent, and I want to know that I can work when I want to work, anywhere I want to work. Taking a paycheck from somebody else for the rest of my life is going to leave me right in the position you feel insecure in in 15 years (I’m 31).

 

If you have interest in the markets in general look into it as a second hobby, maybe you find you love it and maybe you won’t. There’s no better feeling I’ve ever experienced though than a hard day “at the office” and going home with high 3 figures-4 figures to show for my work. I then cut lawns for exercise and extra income in between watching our little one ($450-500/week for child care with 6-18 month waitlists is asinine to us). I have a couple friends working the 9-5 and doing the same, strategy just has to be adjusted a bit.

 

For the record I think I understand investing as well or better than the average Joe. And I am comfortable with how much I sock away and how much I will have when I retire. My fear, which is probably irrational, is that the cost of healthcare will continue to rise dramatically and that what I am putting away now won't be enough should me or my wife get a serious illness.

 

I don't have the stomach to day trade. I dollar cost average into equal weighted S&P funds so I tilt a little more towards small caps. I am 100% invested in stocks so I do take more risk than most people my age. I do wonder, though, how people like you who are day traders and have never experienced a bear market are approaching things. This is my third big downturn since I started investing (dot com crash, great recession being the other two).

[AmFamFan]

You can make as much, if not more, when the stock market goes down once you understand shorting. I by no means have a full understanding of how everything works but I am separated my investing (non-work related) into 3 sections. Long stock investments (buying and holding certain stocks for dividend payment and long time growth), Short stocks (watching trends and researching for stocks that I feel are on a downtrend and shorting), and options (this one is completely new to me and I am just starting to dabble in it)

[FVBrewerFan]

I challenge anyone to add up their Social Security contributions from their 20s and 30s and consider what a difference that 6% would have made in terms of paying student loans, buying a first home, paying for child care, or enabling other investment opportunities. Personally, I think we’re making one generation more secure at the expense of another.

 

You are exactly right. And that's not even hidden, it's by design. That worked when baby boomers were all in their peak earning years supporting the previous generation. Now the math doesn't work, and it's exploding the debt. Al Gore was right, there should have been a lock box. It truly is a Ponzi scheme, but it likely will never be changed. Old people vote.

 

Regarding pension vs 401k, one very important point is being missed. Taxes. You can have a Roth 401k and pay no taxes on it later in life when you need it. Pension income is taxed, of course. Beyond that though, having direct control is the most important thing- and that's why I far prefer 401k to SS or pension where someone else has the account.

[umphrey]

You can make as much, if not more, when the stock market goes down once you understand shorting. I by no means have a full understanding of how everything works but I am separated my investing (non-work related) into 3 sections. Long stock investments (buying and holding certain stocks for dividend payment and long time growth), Short stocks (watching trends and researching for stocks that I feel are on a downtrend and shorting), and options (this one is completely new to me and I am just starting to dabble in it)

 

Shorting is a losing strategy though since markets go up over time, unless you can reliably outsmart the market, something most people can’t do in their free time.

 

You can make money in a down market by rebalancing into cheap stocks though.

[DHonks]

I challenge anyone to add up their Social Security contributions from their 20s and 30s and consider what a difference that 6% would have made in terms of paying student loans, buying a first home, paying for child care, or enabling other investment opportunities. Personally, I think we’re making one generation more secure at the expense of another.

 

Regarding pension vs 401k, one very important point is being missed. Taxes. You can have a Roth 401k and pay no taxes on it later in life when you need it. Pension income is taxed, of course. Beyond that though, having direct control is the most important thing- and that's why I far prefer 401k to SS or pension where someone else has the account.

 

regarding 401k/403b/IRA vs Roth versions, one key is to understand that depending on your current and future tax rates, the regular or the Roth version could be better for you. If your income tax bracket will be higher later in life, pay the taxes now with the Roth.

[AmFamFan]

You can make as much, if not more, when the stock market goes down once you understand shorting. I by no means have a full understanding of how everything works but I am separated my investing (non-work related) into 3 sections. Long stock investments (buying and holding certain stocks for dividend payment and long time growth), Short stocks (watching trends and researching for stocks that I feel are on a downtrend and shorting), and options (this one is completely new to me and I am just starting to dabble in it)

 

Shorting is a losing strategy though since markets go up over time, unless you can reliably outsmart the market, something most people can’t do in their free time.

 

You can make money in a down market by rebalancing into cheap stocks though.

 

 

Totally agree long term shorting is not a good strategy, however the question was posed directly to day trading where a significant amount of money can be made on the short side.

[superfly]

I don't have the stomach to day trade. I dollar cost average into equal weighted S&P funds so I tilt a little more towards small caps. I am 100% invested in stocks so I do take more risk than most people my age. I do wonder, though, how people like you who are day traders and have never experienced a bear market are approaching things. This is my third big downturn since I started investing (dot com crash, great recession being the other two).

 

I began in late 08-09 as a college kid, made double on Las Vegas Sands and Ford preferred stock and it hooked me. I’ve taken time off a few times for other things, and the first 4-5 was basically a donation to tax writeoff, but now that I can consistently be profitable I actually prefer these volatile situations (election 2016, fall 2018, now etc), it allows us with smaller accounts to grow it with the volatility. I have no problem shorting, enjoy it more actually because there’s a lot of scam out there, but I do everything except my investments via options. Much less capital risked rather than buying 50 AAPL and then just staring at it for months on end.

 

New people without a doubt would struggle, but I’d argue there’s no better time to learn than during a market like the one we’re in...exposed to the worst right off the bat.

[igor67]

I used to rant about Boomers and Social Security, complaining that all their money was parked on the shores of Vietnam. It's kind of true afterall. But I changed my mind for a few different reasons. 1) as mentioned above the drumbeat of empirical data that most people don't save enough. Second though was the realization though that most of the cost increases were driven by life span increases and demographic transition. Life span increases may continue incrementally, but the demographic transition is nearing maturity (aka the percentage of the population in different age categories is closer to stabilizing). Three no one complains when private companies fail to meet 10, 15 or 30 year projections. With my school budgeting experience I came to viscerally appreciate the importance of modest year to year corrections. Without that level of adjusting any 30 year projection for any company or government is going to end up either controlling the world because they have made so much money or be bankrupt many times over.

Also remember our SSI is 13%, 6.5 from you and 6.5 from your employer. Very small changes in the program now would have a very large impact on how long there continues to be a SSI 'surplus'

 

The surplus is actually one of the last things I realized is problematic. What would happen to the stock market if a mythical investor let's call him Warren Gates, suddenly bought 3 trillion dollars in stocks(AKA the value in the trust fund)? Of course it would over inflate prices on tons of stocks, Buffet has made a lot of comments during the last Bull market for not having enough places to park merely Billions in cash because the value isn't there. So there is reason to be concerned about over supplying the stock market with capital, when there are plenty of very useful investments like roads, bridges and public health that generate huge economic benefits.

[DHonks]

Also remember our SSI is 13%, 6.5 from you and 6.5 from your employer. Very small changes in the program now would have a very large impact on how long there continues to be a SSI 'surplus'

 

6.2% + 6.2%= 12.4% for Social Security

 

And yes, when the alarm bells started ringing a decade ago, we could have made minor changes that would have bought the current structure decades of viability. It will always exist, but in 2034 it will have enough for only 2/3rds of its current projected payouts since the Trust Fund will be drained. Heck, today we could still make minor changes to make it viable. I warn my students that if they are living off Social Security checks, they did something wrong. $5/paycheck into a retirement account starting at age 20 would yield over $50k at retirement. They get excited and want to know what $20 would do, or $50. Since they all make $12/hour, it's easy to think of skipping one fast food meal or one Starbucks per pay period.

 

While it made minimal impact for stimulus, Obama's SS tax cut hurt the viability a little. I believe we dropped our portion from 6.2 to 2.2% for a year or so. Maybe it impacted the longterm projections by a few months or years, not much in the greater scheme of things.