patrick.net

MsBennet says

And btw, it's all TAX FREE MONEY! It's a great deal!

Tax-free money that you can not touch, and will stay tax-free only if the politicians allow it. They are already talking about national sales tax now!

It will be nearly half a century before your daughter can touch the money. What was the world like half a century ago? Gasoline was 20 cents a gallon. At this rate (good luck counting on that), $3.5mil at that time will have the purchasing power of $180k today.

I say, be patriotic, spend the money on things that you like before some politician spends it for you on things that you really don't like.

lot of problems with the "analysis".
the idea is right, fund your retirement consistently.

but they oversold it with completely unrealistic expectations.

you really think you'll average 13%/year compounded over 54 years? no way in hell that happens. even buffett is only around 22%/year compounded over 40 years.

In the year 2067, when your 18 year old is being shoveled into a prison-esque nursing home facility in which to draw out their dying days hopped up on a cocktail of pharmaceuticals while being force fed food substitutes, s/he will be lucky if 3.5M is enough to fill their gas tank.

I teach the kids to avoid all of yesteryears retirement scams at all costs. Do something useful for yourself and others, learn how to care for yourself, build a network abundant in human capital, and pour more into it then you take out, and you will come out just fine.

Every choice we make is an economic one, every action is a trade off. Yours best be hinged on the Net Future Usefulness of those actions. Never try to fit the mold that the System would prefer you be crammed into, and look at the potentiality of the consequences of your actions thru your own internal filters. Life is all about experiences, and embrace them as they come, never defer your life for the promise of a rich, tax free, retirement. Ask any 72 year old of their regrets, and id wager most would say not having lived enough, or having worked too much chasing a false dream, rather then regretting not funding their 401k enough

SFace says

What are you waiting for.

You have until April 2013 to make 2012 contributions.

Just have to sit down with my daughter and open and account. She is in college and works and is really busy.

As to all you naysayers and critics, what is your solution? Don't a buy house, don't invest your money because "they might change the rules," the economy will collapse, we will all end up a prisonesque nursing homes so who cares anyway, don't invest in money, invest in human capital only, have a bunch of friends and everything will be all right in the end?

All I am saying is start investing as early and regularly as you can, preferrably in a tax-free account. It's one of the best deals this goverment gives you, and it's a lot better than you are going to achieve by relying on Social Security.

Or maybe you will all die young and don't have to worry about retiring and getting old. One can only hope for a premature death.

MsBennet says

She is in college

Hysteresis says

...but they oversold it with completely unrealistic expectations.

New Renter says

MsBennet says

She is in college

Hysteresis says

...but they oversold it with completely unrealistic expectations.

It could be said they oversold it but getting 1.7 million at age 65 with a 7% return is not overselling it, since the market historically has done that well or better over time.

Also it is a bit understated because the amount you can put in a IRA each year will probably go up over the years as inflation increases, so you can put more money in.

Of course, this is all in addition to a 401(k) or pension one could get if and when they get a good job.

MsBennet says

New Renter says

MsBennet says

She is in college

Hysteresis says

...but they oversold it with completely unrealistic expectations.

It could be said they oversold it but getting 1.7 million at age 65 with a 7% return is not overselling it, since the market historically has done that well or better over time.

Also it is a bit understated because the amount you can put in a IRA each year will probably go up over the years as inflation increases, so you can put more money in.

Of course, this is all in addition to a 401(k) or pension one could get if and when they get a good job.

no.

you don't understand the average individual investor.
they are absolutely horrible with no analytic ability and no discipline.
to think an average investor will get market returns over the long term is ridiculous.
the average investor will return significantly less because they tend to buy high and sell low.

second, the market returns from the past are not going to repeat themselves. they may go up or down over the long term but they will almost certainly not be the same as in the recent past. valuations indicate they will be significantly lower.

third, $1.7 million is not inflation adjusted. if inflation is high it could be much less than $1M in today's dollars.

finally, the article thinks 9% is a conservative return, there is no mention of the 7% return you stated. the person is clueless. no way over the next 54 years the average investor will get a 9% --compounded-- return.

Hysteresis says

third, $1.7 million is not inflation adjusted. if inflation is high it could be much less than $1M in today's dollars.

Investing like this is how you try to beat inflation. If you took 5K for 47 years and put it under your mattress, it would be worth about 250K. Or would you rather have 1.7K?

Hysteresis says

finally, the article thinks 9% is a conservative return, there is no mention of the 7% return you stated. the person is clueless. no way over the next 54 years the average investor will get a 9% --compounded-- return.

If you read the article you would see the charts showing 5% returns and 7% returns.

And you are right people don't know that the only way to invest is index mutual funds with low costs.

MsBennet says

Investing like this is how you try to beat inflation. If you took 5K for 47 years and put it under your mattress, it would be worth about 250K. Or would you rather have 1.7K?

LOL. The article is published now to get you put in $5k now in a mutual fund, and its becoming $1.7k next year when you scream get me out here . . . is about right. Don't forget you pay all the tax on gain distributions in a mutual fund even if you lost money since the time you put your money in.

The more realistic one is the Imagine if you made $5000 contributions, each year, until the age 72 - and looked at 5% returns which gives a figure of $1,358,563.

When you figure that going forward, a 5% return is kind of high, and inflation, the $1,358,563 really won't buy you much in retirement. Probably something under 500K in today's money.

Reality says

MsBennet says

Investing like this is how you try to beat inflation. If you took 5K for 47 years and put it under your mattress, it would be worth about 250K. Or would you rather have 1.7K?

LOL. The article is published now to get you put in $5k now in a mutual fund, and its becoming $1.7k next year when you scream get me out here . . . is about right. Don't forget you pay all the tax on gain distributions in a mutual fund even if you lost money since the time you put your money in.

A person who would react like that has an extremely low risk tolerance and likely a very poor concept of "time horizon." A more logical reaction for someone who is far away from retirement would be to take advantage of lower mutual fund NAV prices, put in another $5500 and lower the mean price.

dublin hillz says

A person who would react like that has an extremely low risk tolerance and likely a very poor concept of "time horizon." A more logical reaction for someone who is far away from retirement would be to take advantage of lower mutual fund NAV prices, put in another $5500 and lower the mean price.

Don't worry, that will be advice from the mutual fund industry next year.

What's that old saying about someone and his money parting company?

And that PT Barnum expression about someone being born every minute?

zzyzzx says

The more realistic one is the Imagine if you made $5000 contributions, each year, until the age 72 - and looked at 5% returns which gives a figure of $1,358,563.

When you figure that going forward, a 5% return is kind of high, and inflation, the $1,358,563 really won't buy you much in retirement. Probably something under 500K in today's money.

More like $70k. The dollar has lost 95% of its value in the past half century as measured against gasoline, car and house. It actually takes a very optimistic person not to assume worse inflation in the coming half century compared to the half century just gone by.

zzyzzx says

When you figure that going forward, a 5% return is kind of high

I don't think 5% is high for the next 50 years. Pretty low probably.

But yeah, for the next decade maybe, it's pretty high (in the stock market).

Then again, I don't think 1.3 million in 2064 will be like 500K in todays dollars. Possibly far less.

I see I wasn't the only one with that observation.

Reality says

The dollar has lost 95% of its value in the past half century as measured against gasoline, car and house.

But if you are assuming this kind of inflation, you have to also assume he ratcheted up his contribution, to be worth 5000 in todays $$. And realisitically the contribution could be higher than that in out years, while being a smaller % of his pay.

marcus says

Reality says

The dollar has lost 95% of its value in the past half century as measured against gasoline, car and house.

But if you are assuming this kind of inflation, you have to also assume he ratcheted up his contribution, to be worth 5000 in todays $$. And realisitically the contribution could be higher than that in out years, while being a smaller % of his pay.

True, but then net return rate also needs to be adusted. The half century 95% purchase power loss translates to about 6.25% per year. That means the 7-8% nominal stock market return becomes 0.75% to 1.75% real return inflation adjusted. If you lose 50% in the first year you get in, it will take the a life time to get the real purchasing power of that chunk of money back.

MsBennet says

As to all you naysayers and critics, what is your solution?

Some other options might include, but are not limited to:

Tutti Frutti Franchise: http://tfyogurt.ca/franchise/

Victorville Residential Rental Empire:

Dent Repair/Tint Shop:

JodyChunder says

MsBennet says

As to all you naysayers and critics, what is your solution?

Some other options might include, but are not limited to:

Tutti Frutti Franchise: http://tfyogurt.ca/franchise/

Victorville Residential Rental Empire:

Dent Repair/Tint Shop:

Oh, my! I know you are kidding. Even Victorville isn't THAT bad. I have relatives who live in Silverlakes, so I have been to Victorville a few times, or driven past it anyway. But thanks for the levity!

Reality says

The half century 95% purchase power loss translates to about 6.25% per year

Well more like 6%

But also, 95% is high. Using a reasonable basket of items it's more like 85 to 90%. Say 87%.

If we were to assume that the dollar lost 87% in 50 years, then we only need around 4.087% growth to cover that.

Your point is still taken though.

My grandfather, a retired banker, sold mutual funds in the
mid 50's when the stock market was finally coming back up to its highs of the 30's. Two lost decades.

They were using mutual funds to lure the retail rubes back into stocks. They sold it to the schmoes like they sell corn flakes or shampoo.

Now it is millisecond trades for the inside money, "stocks for the long haul" for the bag holders.

Recent market gains are Fed provided liquidity and delusion.

Well, if those ventures are too ambitious, you might try baseball cards or rare firearms. Not as liquid, of course, but these are two of my past pet investments which did very well for me.

Also, celebrity dead tissue, like hair or toenails. Very lucrative, low volatility.

Reality says

Don't forget you pay all the tax on gain distributions in a mutual fund even if
you lost money since the time you put your money in.

Taxable capital gain distributions increase the basis. When you sell the effective loss will be greater, cancelling the captial gain distribution.

ie. $5000 purchased in Mutual Fund A. 3% capital gain distribution = $150. Basis is now $5150. Fund falls to $4000. Sell.

Total Capital Gain distribution: $150.
Total Capital Loss: ($1150)

Net Loss: ($1000)

Reality says

I say, be patriotic, spend the money on things that you like before some politician spends it for you on things that you really don't like.

Yep. A bird in the hand is worth two in the bush.

I say buy a drink for a bird today, besides, when that kid becomes a 72 year old man, the M:F ratio is so high in your favor, the birds will be buying you drinks.

"Fed Creating $4 Billion in New Money Each Day, Helping to Rig Stock Market"

Don't short change your future by not participating in this rigged debt extravaganza.
Ponzi would be proud.

http://trimtabs.com/blog/2013/01/30/fed-creating-4-billion-in-new-money-each-day-helping-to-rig-stock-market/

david1 says

Reality says

Don't forget you pay all the tax on gain distributions in a mutual fund even if

you lost money since the time you put your money in.

Taxable capital gain distributions increase the basis. When you sell the effective loss will be greater, cancelling the captial gain distribution.

ie. $5000 purchased in Mutual Fund A. 3% capital gain distribution = $150. Basis is now $5150. Fund falls to $4000. Sell.

Total Capital Gain distribution: $150.

Total Capital Loss: ($1150)

Net Loss: ($1000)

This is a Roth IRA. There are no taxes anyway.

In my judgement, Roth IRA is ranked #2 in priority for retirement. First, I would rank the 401K amount that is needed to max out the company match. Then, I would do roth IRA. But only if it does not impede the current lifestyle and ability to save emergency fund and near term expenses that may occur within a 5 year time frame such as vacations, cars, etc.

dublin hillz says

In my judgement, Roth IRA is ranked #2 in priority for retirement. First, I would rank the 401K amount that is needed to max out the company match. Then, I would do roth IRA. But only if it does not impede the current lifestyle and ability to save emergency fund and near term expenses that may occur within a 5 year time frame such as vacations, cars, etc.

Yes, free $ is free $. Keep in mind that contributions to a Roth IRA can be withdrawn for any reason at any time with no penalty or tax liability. So if you are eligible for a Roth, you are absolutely crazy not to have your money in a Roth vs. any taxable account. Besides, I would suggest that someone's lifestyle, vacations and cars should not impede on their retirement goals. Not the other way around.

I would also submit that the single best retirement vehicle available today is an HSA account. Money enters the account pre-tax, can be invested in anything like an IRA, and can be used for health related expenses at any point in your life with ZERO tax liability. This is the only vehicle I know of that allows you to contribute $, invest it and let it grow over a lifetime, and then spend that money without ever paying tax on it.

If you don't have health related expenses to spend the money on, after 59.5 you can withdraw from it as if it were a 401k and pay income tax on it to use the $ for non-medical reasons.

MsBennet says

A Fully-Funded Roth IRA At Age 18 Could Net You 3.5 Million Dollars

Contributing the maximum to Roth IRA is a good financial practice. However, your real purchasing power even after 60 years is not going to be anything near $3.5 million.

Historically, the U.S. stock market has returned a 7% real return. However, that was before globalization, the move of all production to Asia, the retirement of the Baby Boomers, the skyrocketing prices of health care, college, and housing, all of which decrease dollars available for investment. Oh, and microtrading, too-big-to-fail investment companies that the ordinary investor cannot compete with, and blatant encouragement of reckless gambling.

The U.S. stock market has had a 13-year run of a net 0% increase in nominal terms. To put that in perspective, it took 14 years for the stock market to recover from the first great depression in nominal terms, and that was with deflation rather than inflation! In real terms, the U.S. stock market has had a negative return over the past 15 years.

Given the continuing movement of economic resources out of America combined, the selling back of stocks by the Baby Boomers (who by sheer luck of birth got the best prices and growth years), and the lack of dollars for discretionary investments in Gen X, the Millennial, and the next generation, I suspect that over the next 30 years, the U.S. stock market will have a negative real return. If I were to be extremely optimistic, I'd give it a small positive real return of 2% or less.

So invest those IRA dollars overseas. International markets may still return a decent long-term term (7%ish real return), but I doubt the U.S. market will. However, I also doubt the phenomenal returns of emerging markets will continue as pretty much everything that can be shipped over to slave worker countries has already been done so.

Dan8267 says

Historically, the U.S. stock market has returned a 7% real return

This is cherry picked data for selling the "invest stocks for your future" concept.
For any rolling 25 year investing life period, one can be completely screwed with stocks. As many have been.
The Tax Reform Act of 1986, middle class participation in the stock market, sui bono?

I didn't pick the data, therefore, I could not have cherry picked it. The 7% figures comes from many independent sources including John Boggle, founder of Vanguard and author of the book Common Sense on Mutual Funds. He, and many others, looked at all stocks in the market over rolling 15-year periods and over an entire century of data.

However, the 20th century was very good to the U.S. and bad for the previous king of the hill, Britain. I think the 21st century is going to be bad for the U.S. and good for other countries.

Dan8267 says

I didn't pick the data

I know it's not yours, friend. It is the received wisdom.
But I have always wondered how it played out for an investor from 1900 through, say, 1950?
Or 1960 through the early 80's. Not well, without dividends, I would think.
(But of course stocks paid dividends back then, that was the point.)
Surely those periods represented the working and investing lives of many people.
I wonder what percentage of investors over the whole century earned 7%?
I think a lot of people who accept 7% at face value are thinking of the 80's and 90's.
Like you say, what are the odds of a repeat of that period?
What about all the folks who know nothing, and I mean nothing, about the market and are fully invested because of this "received wisdom".
I don't think all the risks are accounted for.

Robert Sproul says

I wonder what percentage of investors over the whole century earned 7%?

In Common Sense on Mutual Funds John Boggle explains how the long-term 7% real rate of return was calculated. It assumed re-investing all dividends and capital gains into a low-cost passive index of the entire stock market or a large subset of it. The Dow Jones Industrial Average is way too small for this purpose.

Boggle showed that over no 15-year period did stocks lose money in real terms (although this was before the year 2000). He also showed that running averages over all 30-year periods came very close to the 7% market after being adjusted for inflation. He did not say how he adjusted for inflation, so it was probably the faulty CPI method, but let's say real inflation is typically 1% more than that. The real return then falls to 6% over the long run.

Boggle's data set spanned the entire 20th century. Of course, as I stated, the 20th century was America's century, just like the 19th century was Britain's century, and the 21st century is probably China's.

Today's US stock market has sacrificed dividends in favor of rapid inflation of stock prices based on the principle of reinvesting in the company. Microsoft and other tech companies led this change in the early and mid 1980s. Now its pretty much expected for any new company.

What concerns me about the whole appreciation through "land grab" is that all the stocks have been bid up by Baby Boomers who will have no one to sell them to as they retire and cash out of the stock market. Gen X never bought as many shares because Gen X is smaller and poorer and the prices of stocks too high. The Millennials are too young, too underemployed, and have too much debt to buy stocks. Add to that the fact that discretionary spending is much lower today than it was in the 1970s and 1980s, and discretionary spending is the only money a family can put into the stock market.

All this adds up to pointing to the US stock market having negative or at least dismal real returns over the next half century, at least in the long run. I don't see foreigners buying up US stock when they can get better returns in their own countries or their neighbors.

Most of all, I believe in the reversion to the mean principle and the US stock market has been way above the mean over the past decade.

Luckily, you can invest in world-wide and foreign funds in an IRA. So it still makes sense to open one. Most importantly, retirement plan opportunities are use it or lose it.

IDDQD says

dublin hillz says

In my judgement, Roth IRA is ranked #2 in priority for retirement. First, I would rank the 401K amount that is needed to max out the company match. Then, I would do roth IRA.

...unless you earn too much to be eligible for the latter.

FWIW there are no income limits for Roth 401k participation and conventional to Roth IRA conversions.

Dan8267 says

negative or at least dismal real returns over the next half century

Yes, thank you. These are many of the risks that I alluded to. You are very clever and I am sure you can navigate these perilous times.
Many of the easily influenced masses, not so much.
Dan8267 says

Baby Boomers who will have no one to sell them to as they retire and cash out of the stock market

Bag holders. Does anyone in the financial industry or the government genuinely give a fuck?
The stock options are exercised, the commission checks cashed, the pensions claimed. It will be someone else's fault.

"Keep in mind that contributions to a Roth IRA can be withdrawn for any reason at any time with no penalty or tax liability."

@Rent4Ever,

FYI, that's not entirely correct. U have to wait 5 years before u can withdraw principal, not the gain, without any penalty unless you're 59.5 or older.

9% return annually, that's not conservative... that's overly optimistic.

So take 5% increase. You still get 1,000,000 at age 68. All for saving approximately 417 dollars a month. Once you make that kind of saving a part of your life, you don't miss the money too much. Granted, for a lot of young people it's tough.

I think it would be really important to do if you are not going to college and are in the work force right away. Your salary might be lower than a college graduate over your lifetime, so it's best to start saving now because that's a real advantage. You might be better financially in the long run than a lot of college graduates.

Reality says

Tax-free money that you can not touch, and will stay tax-free only if the
politicians allow it. They are already talking about national sales tax now!

It will be nearly half a century before your daughter can touch the money.
What was the world like half a century ago? Gasoline was 20 cents a gallon. At
this rate (good luck counting on that), $3.5mil at that time will have the
purchasing power of $180k today.

---------------------------------------------
Wait a minute..... Yes, the investments in a Roth-IRA will grow tax free, but IIRC, since contributions are AFTER-TAX, they can be withdrawn w/o penalty down the road. You can only withdraw what you contributed, not on the profits those contributions generated....

The Roth-IRA is a no-brainer for a kid or young adult. Fill it with Dividend growth companies (KO, MCD, PM, WAG), re-invest or DRIP the dividends into purchasing more of the same, and you'll be amazed how much $$ will grow. Plus, if you are in a jam, and need to withdraw some $$ for an emergency, it can be done w/o penalty....It's like shooting fish in a barrel, I say....

FortWayne says

9% return annually, that's not conservative... that's overly optimistic.

Yeah, I nearly laughed the blue off my ass when I read that.

MsBennet says

Granted, for a lot of young people it's tough.

Not everybody is a DINK and/or yuppie professional, nor could nor would they be. Someone must be collecting the trash and mining coal, and the US ain't Europe. $400 a month is a lot of money. .

According to the Fed's CPI deflator (far from perfect, I know), thirty years ago, a 1980 dollar is worth about $2.78 today. Using the last 30 and extrapolating forward, $1M will be worth, say, $350k?

At age 68 you're lucky if you get 4 good years left. You'd have been much better off creating memories with $400/month while you were still hale and hearty. The life expectancy of somebody born in the past few years is 73, and that carries no guarantee that those last few years will consist of golfing, cruises, and sailing.

I love boats, and if I had a dollar for every classified that I read that said "I got this boat 10 years ago as a project for my retirement, but I can no longer sail for health reasons", I wouldn't need to save for my retirement.

I don't need a million bucks (or $350k in mid 21st Century money, really) to lay in a hospice.

When my pop hit his late 60s, he went from an energetic guy full of P&V to somebody who has to prop himself up on furniture to move around the house, gets shortness of breath just walking to the mailbox, and is on 6 different meds. Every day in my dad's Florida community, some person is being wheeled out in a stretcher, those who return from the hospital ain't running marathons or on the beach a la an American Express/UBS commercial.

Many people in their late 60s/early 70s are in assisted living, some are in hospices. Very few people in their 20s and 30s are.

thunderlips11 says

And 68?! You're lucky if you get 4 good years left. You'd have been much better
off creating memories with $400/month while you were still hale and hearty. The
life expectancy of somebody born in the past few years is 72, and that carries
no guarantee that those last few years will consist of golfing, cruises, and
sailing

Yup, that's why I mentioned earlier in the thread that while I believe that Roth IRA is a good tool to utilize, I would only contribute if it does not interfere with my natural lifestyle such as taking vacations. I will take vacations now while I am young and have energy than bank on uncertainty of being able to take them when I am 65+ and possibly in poorer health. Not to mention that at that time the vacation packages are likely to be significantly more expensive.