Dave Hageman » Financial Times

Why It’s Time to Retire the 401(k) ~ Part 3

davehageman — Tue, 09 Mar 2010 03:30:10 +0000

Where 401(k)s Go Wrong

In theory, 401(k)s should provide much more of a retirement cushion than they do. A 2007 study from the National Bureau of Economic Research (NBER) estimated that, on the basis of historical returns, by 2040 the average 401(k) of a near retiree would grow to an inflation-adjusted $451,944. That money, spread over 30 years, could replace at least 50% of the average retiree’s income. Add Social Security and even highly paid workers will probably earn more than 80% of their preretirement income. “The only reason these accounts haven’t lived up to their potential is that they haven’t gotten enough time,” says James Poterba, president of the NBER, who co-authored the study.

In practice, 401(k)s haven’t been nearly so rewarding. When Boston College’s Munnell looked at the returns 401(k)s have actually produced compared with the projections, the difference was sobering. The average 55-to-64-year-old should have a 401(k) balance of $320,000. In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown.

Why don’t these accounts amount to much? Munnell found a number of reasons. Some people don’t contribute as much as they should — essentially ignoring free money from company matches and tax relief. And, as the original engineers of the 401(k) suspected, the less you earn, the less you are likely or able to contribute. For most employees, the maximum contribution to a 401(k) is $16,000 annually. She found that just 5% of people earning $80,000 to $100,000 maxed out, compared with 30% of those making $100,000 or more.

Additionally, to get the hypothetical higher returns over time and avoid investing disasters, you have to hold a diversified portfolio of stocks and bonds. Many of us don’t. Munnell found that 14% of workers held no stocks at all, leading to weaker-than-average returns. On the opposite end, more than a quarter of all 401(k)s were 100% stocks, exposing those accounts to big losses when the market dropped.

Earlier this year, mutual-fund company T. Rowe Price tried to determine the optimum retiree portfolio — the mix of stocks and bonds that would produce the highest returns without the risk of the nest egg running out. To do this, the analysts ran something called a Monte Carlo simulation, which mimics the real-life ups and downs of the market. Most of the time, the market goes up slightly. But some years — ka-pow! — stocks and bonds do spectacularly poorly. What T. Rowe Price found should frustrate anyone who has spent time wondering if 25% of a portfolio should be in international bonds or small-cap stocks. No portfolio is 100% safe from disaster.

Trying to boost returns by adding stocks can make matters worse. Even if you withdraw a mere 4% a year from your 401(k) and have an ultraconservative portfolio of 80% bonds and 20% stocks, you still have a chance of outliving your retirement account. Swap the bonds for stocks, and the chance of outliving your money actually rises. In reality, most of us don’t have nearly enough in our 401(k) to live off just 4%. At a 6% withdrawal rate, hypothetical retirees in more than a third of the Monte Carlo simulations crapped out.

Saving more, another common prescription for fixing the 401(k), has its downside too. That’s because of another unpleasant quirk of the 401(k), which was mentioned earlier: the older you are, the riskier a 401(k) gets. That’s because contributions make up a very big part of the account’s growth in the early years. Later on, once the account has grown, it is much more sensitive to market drops.

Imagine a worker who earns $100,000 a year for 30 years. Each year she puts 5% of her income into her 401(k). Through most of her working life, the market does pretty well, boosting her diversified portfolio 5% a year on average. When she retires, our worker will have $332,194 in her account. Now imagine a second, thriftier worker contributing 7.5% of his salary, or $2,500 more a year, to his 401(k). But in this scenario, the market does a 2008 in the last year before he retires, and his account drops 30%. Result? Even after saving 50% more a year for 30 years, worker No. 2 ends up with a balance of $327,194 — $5,000 less than the first worker.

The 401(k) Alternative
So what can be done to fix our retirement-savings mess? Most of the proposed fixes to our retirement plans have to do with getting people to save more or invest better. The most popular solution is the so-called automatic 401(k). Under that plan, all workers would be enrolled in 401(k)s when they’re eligible. Companies would establish default settings to boost returns and make the portfolios safer as workers near retirement. People who worked for companies that didn’t offer 401(k)s would be automatically enrolled in savings accounts. In other words, make inertia work for employees, not against them. However, a number of economists and policy experts think that while those changes would help, upgrading the 401(k) alone won’t save the nation’s retirement-savings problem.

Here’s why: Remember, the biggest factor in whether the 401(k) works as designed has to do with when you retire. If the market rises that year, you’re fine. If you retired last year, you’re toast. And the chances of your becoming a victim of this huge flaw in the 401(k) plan are pretty high. The market fell in four of the nine years since the beginning of the decade. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market. In fact, your chances of retiring into a down market are even greater than that: forced retirements spike in recessions just as the stock market is tanking.

The solution: a new type of insurance. Retirement savings, it turns out, are exactly the type of asset we need insurance for. We need insurance to protect against risks we can’t predict (when the market collapses) and can’t afford to recover from on our own. “People tend to meld savings and insurance in their mind, but they are not substitutes,” says Nancy Altman, a former Harvard professor and the author of The Battle for Social Security. “It’s fine to have a savings plan as a supplement but not as the main retirement protection for everyone.” She says the best way to guarantee a replacement for people’s wages in retirement is by pooling risk, and the way to do that is through insurance.

Other solutions: Invest in what you know and trust. You can utilize a self directed IRA and Self Directed 401k to invest in the non traditional invests you desire to invest in.

Real Estate, Land Acquistion, Tax Liens, Partnerships, Oil and Gas and other non traditional investment options are available to investors that want an out of the box strategy for their retirement plan savings.

Many vehciles are out there for you but which will be most benefical…. the one that you are in control of.

To get control of your retirement plans, visit our Informational site and get educated on the benefits of Self Directed Investing, go to: http://www.retirementconceptsblog.com

Why It’s Time to Retire the 401(k) – Part 2

davehageman — Tue, 09 Mar 2010 03:25:21 +0000

A Brief History of the 401(k)

Congress was trying to close a loophole on executive bonuses when it created the 401(k). Most companies intended 401(k)s — which were originally called salary-reduction plans but then renamed for the portion of the tax code that makes them possible — to be a perk for highly paid executives, not a pension replacement. That’s because lower-paid employees probably could not afford to defer a portion of their paychecks. So companies held on to their pension systems even as they added 401(k)s, which by law they had to make available to all employees. When the market took off in the 1980s, the rank and file clamored to get in.

With a 401(k), contributions came out of your pay but were not taxed, and you had control of them. Contributions could be added or suspended. Best of all, when you left your company, your 401(k) traveled with you, removing a penalty for switching jobs that had been built into the pension system. On the corporate end, a change in accounting rules made the growing cost of pensions more apparent to shareholders. Cutting the pension was a guaranteed way to improve the bottom line. The rise of the 401(k) began.

Around the same time, Occidental was having problems. In the late 1960s the company bought Hooker Chemical Co. in a effort to diversify. But in the 1970s, allegations surfaced that toxic waste that Hooker dumped into the ground during the 1940s and early ’50s was causing severe health problems in Niagara’s Love Canal neighborhood. Oxy Pete needed cash to shore up this and other problems, and its CEO, Armand Hammer — flamboyant, powerful and ultimately corrupt — came up with a solution: raid the retirement kitty. Amazingly, this was legal at the time, and Hammer wasn’t alone in doing it.

High interest rates in the inflationary 1970s produced solid returns for Oxy’s bond-heavy pension fund — so much so that Oxy’s accountants figured the plan was overfunded by $600 million. For Oxy to get at that cash, pension laws required it to close its fund and start again. It did so with a far cheaper option: the employee-funded 401(k). The company made it clear that with the high interest rates at the time, Oxy employees could see their 401(k) account balances soar with little risk. Few doubted it — Oxy, like most other big companies of that era, had always taken care of its own.

At first, Occidental’s union workers were not allowed into the plan. So when Ernie Lucantonio was offered a supervisor job in the fire-retardant division at Occidental, part of the reason he took it was to get into the 401(k). “The 401(k) forced you to save money, because you couldn’t touch it,” says Lucantonio. “I was making good money, but I wasn’t saving anything. I had three kids going to college. So the 401(k) forced me to save, which I needed.”

After 34 years, he left Oxy in 2005. Lucantonio, 61, is proud of what he has been able to afford in retirement. He and his wife bought a cabin in New York’s hilly Southern Tier. “It’s even got ceramic tile in the kitchen,” he says. He would like to spend more time there, but like many other former Occidental employees we talked to, he’s had to unretire into a new job. He is a real estate agent.

If Occidental had stuck with its pension plan, Lucantonio might not have to work. When he retired, he had a salary of nearly $80,000. That means he would have received a pension check of about $3,100 a month. It would be nice if 401(k)s could produce a guaranteed check as pensions do. But most 401(k)s don’t generate enough income, and Lucantonio’s is no different. He retired from Occidental with $350,000 in his 401(k). That’s a hefty sum, but he can withdraw just 4% of it annually, or about $1,200 a month, to limit the chances of outliving his money. That’s 60% less than what the traditional pension would have paid him.

Dennis O’Neil plays the part of a former HR executive well. You can find O’Neil, who left Oxy on disability a few years ago, on a golf course, clad in picture-perfect golden-years attire: a black Izod shirt with white shorts, faux-alligator-skin cleats, Ray-Bans, a gold shamrock hanging from a gold chain on his neck and a black baseball cap. But O’Neil’s retirement outlook is growing darker every day. He once made a six-figure salary, but the 63-year-old is fairly certain that his savings won’t be able to sustain him for very much longer. He has some $500,000 left in his 401(k) and spends about $75,000 a year. At this rate, he worries he will tap out his retirement savings within the next decade.
(See 10 things to buy during the recession.)

Unless, as O’Neil’s thinking goes, he can make something happen in the stock market. So he spends much of his day watching CNBC. “Right now, I want to know which area of the economy is going to recover first. Will it be retail? Commodities? Energy?” says O’Neil. Playing the market is probably the wrong thing to do, but he got divorced eight years ago, depleting a good portion of his savings, and his medical bills are likely to go up soon. O’Neil is going blind from histoplasmosis. These days he has to golf with a friend. He would like to buy a house in Florida before he loses his eyesight completely, but he just can’t afford it.

Under Occidental’s old pension plan, he would have gotten a monthly check of about $2,200. More important, he wouldn’t have to spend much of his remaining eyesight squinting at CNBC, wondering how he will afford the rest of his life. The pension check would have been guaranteed until he died. “I’m a pretty optimistic guy, but I’m still worried,” says O’Neil. “Ten years from now, where am I going to be after I burn through the cash?”

To see Part 3, click here: http://davehageman.com/investment-solutions/why-its-time-to-retire-the-401k-part-3

For more information from this story, please reference,

http://www.time.com/time/business/article/0,8599,1929119-3,00.html

Warren Buffet tells us when Real Estate will recover

davehageman — Mon, 01 Mar 2010 19:27:31 +0000

The U.S. dollar, the Swiss franc, the future of China, Acme Brick, and why Buffett always starts from a “position of fear.”

This is part seven of the transcript and video of Warren Buffett’s ‘Ask Warren’ appearance on CNBC’s Squawk Box on Monday, March 1, 2010.

The world’s second-richest person called on Washington policymakers to adopt fundamental reforms on such costs to address what he called a “national emergency.”

He said health care eats up 17 percent of U.S. gross domestic product, at a time when many other countries pay only nine or 10 percent of GDP but have more doctors, nurses and hospital beds per capita.

“It’s like a tapeworm eating at our economic body,” Buffett said on CNBC television.

“If it was a choice today between Plan A, which is what we’ve got, or Plan B, which is the Senate bill, I would vote for the Senate bill,” he said. “But I would much rather see a Plan C that really attacks costs, and I think that’s what the American public wants to see.”

Rising costs, Buffett said, are holding back an economy that faced an “economic Pearl Harbor” in late 2008 when capital markets seized up.

While he said “we got past Pearl Harbor” and “we will win the war,” he said the recovery remains slow, including in many businesses at his insurance and investment company Berkshire Hathaway Inc (BRKa.N) (BRKb.N).

Absent a major outside shock, “we will continue moving upward, but not at a very fast rate,” he said.

Buffett gave U.S. President Barack Obama “high marks” for helping the country rebound. Yet he said improved conditions may not make stocks more attractive to investors.

“My enthusiasm for stocks is in direct proportion to how far they go down,” he said. “Stocks are a lot less attractive now than they were a year ago.”

PRAISES GOLDMAN CEO

Buffett spoke two days after Berkshire published its annual report, including Buffett’s widely read shareholder letter.

Full-year profit at the Omaha, Nebraska-based company rose 61 percent. Berkshire has about 80 operating businesses that sell things from car insurance, carpeting and ice cream to industrial components, paint and underwear.

“There’s a few businesses that have really had a fair amount of bounce,” while others show no improvement, Buffett said. “It’s getting better, but at a very, very slow pace.”

A $26.5 billion takeover last month of Burlington Northern Santa Fe Corp, the second-largest U.S. railroad and Buffett’s biggest acquisition ever, cost Berkshire the last of its “triple-A” credit ratings.

While Berkshire raised about half of the $15.9 billion of cash used for the takeover in credit markets, Buffett said the downgrades perhaps cost the company no more than a few hundredths of a percentage point in extra yield on its debt.

“I think we deserve a quadruple-A” rating, he joked. Such a rating does not exist.

Buffett offered praise for Goldman Sachs Group Inc (GS.N) and Chief Executive Lloyd Blankfein, which advised on the takeover. Berkshire owns $5 billion of Goldman preferred shares and warrants to buy an equal amount of stock. The warrants are in the money because Goldman stock has risen.

Goldman still receives much criticism over the extent to which it may have contributed to the recent financial crisis, and the debt crisis now afflicting Greece.

Berkshire acquired the Goldman securities in September 2008, and Buffett said it was the right decision.

“It’s a very, very strong, well-run business,” he said. On Blankfein, he said, “You cannot find a better manager.”

An Unfair Advantage – The “Failure Shift”

davehageman — Fri, 15 Jan 2010 22:34:38 +0000

Click here to view the embedded video.

Success is 99% Failure.
~ Soichiro Honda

For many of us, success is something that we are constantly striving towards. Some of us are consumed by the idea of achieving success in whatever we put our minds to. It drives us forward onwards to bigger and better things. There are some people who take this too far and try to be successful at everything resulting in arrogance and a lack of respect for others.

Unfortunately everyone seems to forget that failure is part of achieving success and that failure is integral to not only achieving success but also to appreciating it.

When you look at some of the successful people in the world, you will see that at times they have experienced failure and learnt from it, which has helped them become more successful.

Richard Branson, for example, failed exams at school, had business ventures fail, failed in attempts to go round the world in a hot air balloon, and got into debt. But all of these failures, whether large or small, have helped him to be more successful. Why? Because successful people learn from their mistakes and failures and use what they have learned to radically change the future for themselves. Without failure success is harder to achieve. By learning from your failures, from what has caused them, from what you contributed to the failure, and from what you can change, you can become more successful too.

I too have experienced some massive failures in the last couple of years…. The key is what are you doing today to capitalize on solving the problems we are facing in today’s economy? And who are you working with not to put yourself in that same pattern as before?

Watch this quick update from Robert Kiyosaki and the Rich Dad Poor Dad Documentary:

Enjoy a great weekend!

10 Tips to make 2010 the best year EVER!

davehageman — Wed, 06 Jan 2010 21:20:42 +0000

I honestly wrote this at the end of 2008 for 2009 and thought…. this is still great advice and I am glad I found it…

Enjoy!

Many have acknowledged in recent conversations that the Holiday Season and the New Year is a time to sow, how there’s so much fear in our world right now and how it’s related to some of the universal laws that modern society has forgotten.

We have put together a quick, easy-to-apply Top Tips on how to THRIVE in this economy and how to apply knowledge you might want to know:

1. Clearly define what inspires you.

There’s a big difference between taking action out of inspiration versus desperation. Use this season as an opportunity to hibernate into the recesses of your own mind and define what you choose to create in your next spring.

2. Control your focus.

Energy flows where attention goes. Are you focusing on lack or opportunity?

3. Feed your mind.

What’s your constant mental diet? Do you spend hours in front of the scare news or are you reading good books, attending more positive classes/seminars, watching uplifting DVD’s and listening to powerful CD’s?

4. Strengthen your body.

Your physical health and vitality have a tremendous impact on your performance as well as your mental and emotional fitness. Exercise releases stress as well as strengthens your body and mind.

5. Inventory your friends : )

Doom and gloom attracts more doom and gloom. Jettison those “energy vampires” around you and surround yourself with opportunity seekers.

6. Quiet your mind.

Take time to meditate daily and to slow down if only for a few minutes. Ten to fifteen minutes of meditation will relieve hours of stress and increase creativity and resourcefulness.

7. Rid your life of escapist activities.

Overindulgence in TV, sleep and alcohol only accelerates the problems you’re attempting to avoid.

8. Make a daily gratitude list.

Focusing on all the good, gifts and God in your life puts you in the right line of thought, feeling and their subsequent actions, which will attract and create more good, gifts and God.

9. Change your attitude.
Realize that everything that’s happened in your life thus far is here to serve you, teach you and help you grow. Find the lessons in your past results, forgive yourself for anything you could have done better and apply the lesson to move forward and create a better future.

10. Get resourceful.

For the next seven days, go to a place where you can have uninterrupted time… Come up with 10 new ideas to grow your income, creat new results and improve your life. You cannot leave your spot until you have 10! And no editing! All ideas are good ideas.

Now take your list of ideas and pick the three to five most powerful and leveraged ones to put into action. Pick these 3-5 based on: ease of implementation, rate of return and speed of return.

Just like our friend Macgyver did…

So during this New Year and this New Decade I am blessed to be a resource to you! It’s all about resourcefulness. Get resourceful and get busy!

Inspiration for 2009!

davehageman — Sun, 18 Jan 2009 03:49:01 +0000

2008 has been a tough year for many individuals.

If you could use some inspiration for what you want to accomplish in 2009, this story about one of America’s greatest minds and inventors might help.

It is has been said that Thomas Edison tested more than 10,000 ideas and prototypes before he hit on a working example of an incandescent light bulb. At one point, one of his financial backers suggested that he give up.

Edison replied: “Each time an idea did not work, I got feedback on how to make it better. I now know 10,000 ways it does not work, and I get closer and closer to success.”

Edison was able to eventually triumph despite thousands of setbacks because he had the right mindset: He saw each “failure” as simply a step towards success!

There’s another lesson to be learned in Edison’s life, too: Don’t be concerned if others don’t believe in you. Edison was actually thrown out of school at an early age because a teacher felt he was “too stupid to learn anything.”

No one other than you can determine what your future holds.

Here are some other examples of people who achieved great success after meeting resistance or defeat earlier:

• Henry Ford declared bankruptcy before going on to found one of the largest automotive manufacturing companies in the world.

• R.H. Macy made several failed attempts at retail business before his New York department store chain took off.

• Bob Dylan was booed off stage during his performance at a high school talent show.

• Oprah Winfrey was once fired from a television reporter’s job and told, “You’re not fit for TV.”

• After Elvis Presley’s first (and last) performance at the Grand Ole Opry, he was banned and reported told: “You ain’t goin’ no where, son.”

None of these people let these early discouragements stop them from realizing their potential. The path to achievement and well-being is often far from easy, even for those blessed with raw talent or rare genius.

But no one makes it very far without determination and the ability to roll up their sleeves when faced with a challenge.

So go ahead – make that New Year’s resolution. And then set out a plan to do it. If you have the right attitude… and refuse to let a setback stop you… you too will achieve amazing things, just like other great people have.