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What Has Wall Street Done to Our Retirement Plans?
I’ll discuss retirement more thoroughly in Chapter 5. But according to a recent study by the Employee Benefit Research Institute, two-thirds of all workers say they’re behind schedule in saving for retirement and plan to continue working to support themselves.9 Even many of those who carefully did “all the right things” ended up with only sleepless nights and broken retirement dreams to show for it. Instead of achieving the financial peace of mind they hoped for, they’ve dug themselves into a financial hole so deep they may never be able to retire.
The stock market will continue on its endless roller-coaster ride, but you have only a limited amount of time to take control of your financial future. It seems that almost every week, a new Wall Street scandal gets exposed, doesn’t it? Insider trading, high-speed computerized trading that stacks the deck against you, corporations cooking the books, giving investors the shaft. And as soon as the government cracks down on one scheme, Wall Street invents a new, obscure way to separate us from our money that nobody can figure out until it’s too late.
Play the Tortoise and Hare Savings Race Game
Wall Street has conditioned us to believe that the only way to get inflation-beating returns is to risk your money in the market. To find out if that’s really true, we created a fascinating little game for you to play.
You can give the tortoise and the hare whatever amount of money you choose. The tortoise will put that money in a savings vehicle earning a steady 5 percent interest, year after year. The hare will put the money in an investment account earning a more exciting 8 percent return every year … except one. In the one year you select, the investment account will suffer a 30 percent loss.
I figure a one-time 30 percent loss is pretty realistic, when you consider the typical investor lost 49 percent or more in the market twice since 2000.
Which “loss year” will let the hare be ahead of the tortoise ten years from now? The first year? The tenth year? Or somewhere in between? Here’s a clue: If the 30 percent loss happens in the fifth year, the tortoise wins by more than 16 percent. But will the hare win if the loss is in the second or eighth year? You can choose different years and different starting amounts by going to www.BankOnYourself.com/race and playing the game yourself.
Is Your 401(k) on Life Support?
Government and industry statistics tell us that about 50 million Americans participate in employer-sponsored retirement plans. On the face of it, 401(k)s have it all—matching employer contributions, tax deferment, and professional administration and fund management. Workers are led to believe they can simply choose a fund, decide on a contribution amount, and then forget about it. Don’t give it a second thought. Just let the money grow over time.
Why wrestle with the time-consuming, risk-prone task of managing your own retirement financial planning when you can simply push the autopilot button and check back again in two or three decades to see how large your financial stockpile has grown? A Greek chorus of government regulators, Wall Street executives, financial planners, and media commentators regularly advises us that only professional retirement investment planners can hope to get the best long-term outcome for our nest egg.
Because Americans can’t possibly successfully grow their own retirement funds themselves, the government has instructed employers to offer their workers a variety of retirement plans, most commonly 401(k)s. And most of us assume that because the government gives its blessing to these plans, and employers offer them, they must be good for us, right? After all, they were “designed to make it easier for investors” to avoid the headaches and inherent risks of managing our own retirement accounts.
Easier? Yes. But wiser and less risky? Often not. The problem is that getting good returns depends on picking the right stocks, funds, or money managers. As we just learned, 80 percent of all mutual funds and 80 percent of all investment newsletters and advisors underperform the market over the long term.
But what wage earners don’t yet understand is that many of those personal retirement accounts we’ve been paying into will bleed tens, even hundreds of thousands of dollars in taxes, fees, and commissions—regardless of how the markets perform over the coming decades.
John Bogle, the founder of Vanguard, the world’s largest mutual fund company, has stated, “No mutual fund has yet reported on the returns that it actually earned for its investors.” Why? He explains, “Fund investors do not earn the full market return … because fund investors incur costs, and costs are subtracted directly from the gross returns funds earn.” Bogle also notes that during the 1990s bull market, “the 6.5 percent annual return earned by fund investors was 3.3 percent behind the 9.8 percent annual return reported by the funds themselves.”10 Wow! Investors received one-third less than what the funds advertised.
During the 1990s bull market, investors earned only a 6.5 percent annual return—one-third less than what the mutual funds advertised, according to John Bogle, founder of Vanguard.
And the 401(k) fee creep is hidden. Few people realize the compounded costs of high fees paid out over decades. These charges, paired with taxes and inflation, can all but consume a retiree’s capital appreciation.
Doesn’t it seem like the government ought to step in and fix this?
Well, it has—sort of. In 2006, Congress approved legislation to provide protection. But Congress didn’t protect you! Instead, Congress approved legislation that protects your employer and their 401(k) administrators, just in case you wake up one day and finally realize how much you have lost. The legislation says you can’t sue for damages as long as your employer automatically invests your 401(k) money in certain types of mutual funds!
As long as your employer automatically invests your 401(k) money in certain types of mutual funds, you can’t hold them liable for your losses, thanks to a law Congress passed in 2006.
Would it surprise you to learn that these “automatically invested” mutual funds impose some of the highest fees while underperforming the overall market (often significantly), and that the mutual fund industry heavily lobbied Congress to ensure their best interests won out? Didn’t think so. Just one more example of how the deck is stacked against you.
I’ll get into more detail on the problems of 401(k)s in Chapter 5.
CDs and Other “Safe” Investments
In recent years, the Federal Reserve Board threw seniors and savers under the bus by keeping interest rates at historic lows, and returns on CDs, savings, and money market accounts have been so low you need a magnifying glass to see them. Those who sought safety in these vehicles have a negative yield after taking inflation into account.
But you’ve got options. Throughout this book, I’ll show you a better alternative to traditional savings vehicles and unreliable conventional investments. And if you’ve had enough, you can join the hundreds of thousands who have already opted out of a system where the odds are stacked against you.
The “Home Sweet Home” Investment Plan
The stock market gives you no guarantees