Laying The Nest Egg

One of the hardest lessons to learn when I was a young person and just beginning my career was the value of immediately saving money for retirement. At the starting salary level, money is so tight, the amounts that can be put toward retirement are so small, and the earliest possible retirement is so far into the future, it’s easy to rationalize deferring the commencement of retirement savings until next year–or the year after that. And even if you do follow the advice of retirement planners when you are in your 20s, the periodic reports of the balance in your retirement fund show very small amounts and very modest increases, and you wonder if you will ever get to the point of having enough for retirement.

But if you keep your head down, and keep at it, and make that monthly contribution standard practice–and, hopefully, you see the benefits that can come when your retirement fund is boosted by a few good years in the stock market–you realize that your elders were right. As the likely date for retirement draws nearer and nearer, and the end of your work career comes increasingly into focus, you see the value of those modest payments you made way back when–and even more important, the value of checking the box to start that retirement plan withholding and then accepting those regular paycheck deductions in the first place.

That’s why it is sad for me to see a report on CNN about falling 401(k) balances. The latest annual report by Vanguard, an investment firm that manages retirement plans for millions of people, states that average 401(k) balances fell from $141,542 in 2021 to $112,572 in 2022. That’s a 20 percent decrease, caused largely by the poor performance of the equity and fixed income markets last year. Even worse, the median balance in 401(k) plans–the median being the point at which half of all plans have a higher balance, and half have a lower balance–fell from $35,345 in 2021 to $27,376 in 2022. And most troubling of all, the number of people who are making hardship and non-hardship withdrawals from their retirement savings accounts increased, too. Those people are eating their seed corn.

From these statistics, it’s not hard to imagine the people starting out in these careers seeing their retirement fund balances go down, feeling dispirited, and wondering whether the immediate sacrifice is worth the hoped-for future gain–or whether it wouldn’t be better to just use the money now, when times are tight. I hope those individuals have people in their lives who can advise them that a little belt-tightening now will pay significant dividends later, and that you need to take the long-term view, and recognize that the markets will have down years and up years. It’s wise not to become too exuberant during the flush times and too despondent during the down times.

As any hen would tell you, laying a nest egg is hard work. But if you start early, and keep at it, you’ll be surprised at what you can accomplish. Your older self will thank your younger self for the sacrifice and for being the ant, and not the grasshopper.

Merry Market

If people seem merrier than normal this holiday season, here’s one potential reason for that:  the stock market.

For all of its other issues, 2019 has been a banner year for the stock markets.  One recent estimate calculates that, worldwide, stock markets have gained more than $15 trillion in value this year, and the United States has led the way, with the major U.S. stock indexes all achieving double-digit gains.

That’s good news — very good news — for most Americans.  Although the stock market once was the province of the wealthy, the advent of 401(k) plans, mutual funds, and other investment devices have broadened the base of stock market investors.  According to one recent survey, more than half of all Americans own stock, either directly or through an ownership interest in a mutual fund, and that number is growing.  The increase in the number of investors obviously has helped to fuel the run-up in the markets — according to the law of supply and demand, increased demand means higher prices — but it also means that more Americans are enjoying the fruits of the strong market performance.  Whether it is retirees who are thrilled to watch their nest egg grow, or working people who are seeing their 401(k) investments making an earlier retirement a possibility, many people are now touched by the stock market — and when the markets go up, they’ve got a smile on their faces.

And it’s pretty clear, too, that a stock market surge runs in parallel with strong economic performance.  There’s a chicken-and-egg element to what causes what, but clearly growing stock portfolios make investors more optimistic and willing to spend — and their spending, in turn, helps to fuel job growth, better corporate performance, and better stock performance.  That may be part of the reason retail sales this year were very strong, with analysts estimating that Saturday’s sales set an all-time, single-day record.

Of course, markets go up, and markets go down, and a downturn is inevitable.  For now, though, many Americans are very much enjoying the stock market roller coaster ride.

40 Years Of 401(k)

Last year, 401(k) employee retirement savings plans hit a venerable milestone — the 40th anniversary of their creation.  401(k) plans were born during the Carter presidency, with the passage of the Revenue Act of 1978, which established Section 401 of the Internal Revenue Code.

The language of the statute is the dense, definition-filled content that tax lawyers love, but the concept of the 401(k) is simple:  workers can salt pre-tax money away in protected funds and invest it, thereby enjoying some tax savings and having a vehicle to save for retirement.  Many employers offer 401(k) plans as a part of their benefit package and facilitate the program through payroll deductions.  According to the Investment Company Institute, in 2016 there were almost 555,000 401(k) plans in the U.S. and more than 55 million Americans were active participants.  The ICI also reports that, as of the end of the third quarter of 2018, 401(k) plans held $5.6 trillion in assets — up from $2.2 trillion in 2008 — and represented 19 percent of the total amount of U.S. retirement assets.

Some people raise questions about the 401(k) option, arguing that its availability has helped to produce the virtual disappearance of employer-funded pension plans, in which the employer totally funded the plan and, in many instance, provided the employee with a guaranteed retirement benefit.  I think that’s wishful thinking.  Even at the time the 1978 legislation was passed, many American companies were looking to cut costs, and guaranteed pension plans were disappearing into the mists of history.  Most of us have never worked for an employer that offered a true pension plan.  To be sure, 401(k) plans are based primarily on employee contributions, not employer largesse — although in many cases employers offer some kind of match to employee contributions.

Unless you’re an investment advisor who pines for the long-lost days of funded pension plans, though, you’re probably grateful that Congress was far-sighted enough to create the 401(k) option 40 years ago.  And it’s not hard to argue that 401(k) plans are, in some respects, superior to pension plans.  The 401(k) option gets the worker directly involved in her own retirement planning; employees have to elect to participate in the plan, after all, determine how their contributions will be invested, and then have their contribution withheld from their paychecks.  The 401(k) mechanism makes that as painless, relatively speaking, as withholding for federal and state taxes and Social Security contributions — because it comes out automatically, most people don’t notice it.  And then, after a few years, workers realize that they’ve actually made progress in starting to save for retirement, and for many people that realization opens the door to additional efforts to save, invest, and get ready for the retirement years.  The 401(k) option has made many Americans take personal responsibility for their own financial affairs, rather than relying on a company pension plan to do the trick.

And you can argue that 401(k)s have had a broader benefit, too.  So much automatic saving has to be invested somewhere — principally in the U.S. stock market.  In 1978 the Dow was well below 1,000; now it stands above 25,000.  No one would argue that 401(k) plans have been solely responsible for that run up, but there is no doubt that they have contributed to buy-side pressure that has helped to move the stock market averages upward, which has the incidental benefit of helping all of those 401(k) participants who’ve put their retirement savings into the market in the first place.

Happy anniversary, 401(k)!  Beneath that Tax Code jargon lurks an idea that has been helpful to millions of Americans.  I’d say we need to give credit where credit is due:  the 401(k) is one time when Congress did the job right.

The Big Short

The Big Short is one of those movies that is intended to make you uncomfortable — and it succeeds, twice over.

The film tells the story of the housing bubble and sub-prime mortgage fiasco that led to the economic collapse and stock market crash of 2008. It begins with the handful of loners and clear-eyed if vulgar realists who investigated, read what others didn’t, identified the unsustainable reality, and then figured out a way to make lots of money, even as the financial and political establishment was smugly convinced that the impending disaster couldn’t possibly occur.

Don’t worry if you don’t know much about finance or economics — as the movie progresses you’ll get humorous little tutorials on the key concepts from exotic-looking women taking bubble baths, Anthony Bourdain figuring out what to do with old fish, and a prize-winning economist and Selena Gomez playing blackjack.  And, of course, all along the viewer knows the catastrophe is coming.  Even so, it’s uncomfortable to watch it unfold and to hear once again about Bear Stearns and Lehman Brothers and Countrywide and bailouts and the other events that made some people wonder if the American economy and capitalism would even survive the cataclysm.

It’s a powerful story, and The Big Short tells it well.  Its ensemble cast, which features Christian Bale, Brad Pitt, Ryan Gosling, and Steve Carell, is excellent, but it’s not an ensemble movie in the traditional sense, because some of the principal players never interact on screen.  They’re each running their own funds, dealing with their own investors and institutional pressures and insecurities, seeing the overall mess from different perspectives and wondering whether they are witnessing fraud or imbecility or incompetence.  And, as the movie reaches the point where the world economy teeters on the brink, they convincingly portray the sense of astonishment and shaken wonder at how the hell it all happened in the first place.

So, reliving those grim days when fortunes were lost and the country plunged into recession is uncomfortable, for sure.  And the second uncomfortable moment comes when the movie ends — because the final message of The Big Short questions whether the same thing could happen again and whether new bubbles are percolating even as we speak.  One of the core themes of the film is that most of the Wall Street wizards really aren’t so wizard-like after all — just greedy hustlers who don’t really sweat the details or even fully understand why they’re making the obscene amounts of money they’re making and are oblivious to the risks they are creating for the rest of us who have to deal with the aftermath.

It doesn’t exactly make you feel super secure about your 401(k) plan, now does it?

401(k) Follies

Many of us have tried to save and plan for retirement.  We’ve read the books about how investing in mutual funds is one of the best ways to maximize your return and grow your nest egg over the long term.  We’ve followed that advice, and many of us have stayed the course, through up years and down, trusting in the historical fact that the stock market will produce long-term gains that outstrip every other investment vehicle.

As I sit here tonight, amazed that President Obama and congressional leaders have taken us to the brink of apparent default, I wonder:  If the debt ceiling is not increased, if the United States defaults, and if ratings agencies downgrade the investment value of United States government securities — with the likely negative ripple effect of those developments throughout the economy — does anyone doubt that the stock market will plunge and our carefully considered long-term investments are going to take a huge, unnecessary hit?  And if that inevitable hit occurs, how long will it take for our retirement funds to recover from it — if ever?

I think the dumb brinksmanship we are seeing from every one of our political leaders right now is infuriating, but I cannot imagine how angered I would feel if I were on the eve of retirement and saw those leaders taking absurd risks with the value of my hard-earned, soon-to-be-needed retirement nest egg.  It’s one thing to believe that our elected representatives are unconcerned about the average schmoe, it’s quite another to see that they are gambling with your money and your future solely to further their partisan political positions.

Hard Times And Hardship Withdrawals

CNN has a story about hardship withdrawals from 401(k) plans reaching the highest level in 10 years during the second quarter of 2010.  Fidelity Investments, which manages $844 billion in retirement funds, disclosed that, as of the second quarter, 2.2% of 401(k) participants had made hardship withdrawals over the past 12 months.

I’m not sure how many inferences you can draw from a rise in hardship withdrawals, but the increase clearly is not good news.  Anyone who takes a hardship withdrawal is not simply raiding their retirement fund and thereby decreasing their retirement security.  Hardship withdrawals also come an an enormous price — by some accounts, up to  40 percent of the amount withdrawn — because federal and state taxes are levied on the amount and a 10 percent penalty is imposed as well.  If you assume that people tend to behave rationally when it comes to their finances, then you have to conclude that anyone who would take a hardship withdrawal from their 401(k) plan must be desperate and have no other options.

One of the individuals quoted in the article linked above noted that 2.2% is a relatively small percentage and that the vast majority of 401(k) participants therefore are not taking hardship withdrawals.  That is of course true, but it also is likely true that people who have 401(k) plans with sufficient funds to be the subject of hardship withdrawals are the most prudent, careful savers.  (Although it is not clear how many people have saved for retirement, recent surveys indicate that 27 percent of Americans have saved less than $1,000 and less than half of Americans have more than $25,000 saved to fund their retirement years.  If you have less than $1,000, you probably aren’t going to take a hardship withdrawal because, even if you withdrew your entire fund, the amount left for you to use after taxes and penalties would be negligible.)

If even the most careful savers are so desperate that they need to take hardship withdrawals, rather than reducing their annual contributions or taking a loan from their saved amount, it indicates that times are tough, indeed.

Wall Street, Main Street, and 401(k) Plans

In the wake of the Massachusetts special election loss, President Obama has struck a more populist tune.  He and his supporters have been talking about “getting our money back” from “fat-cat bankers” on Wall Street who took TARP money.  Siding with “Main Street” rather than “Wall Street” is a time-honored theme in American politics.

I wonder whether the “Wall Street vs. Main Street” pitch still has resonance, however.  The reality is that many working Americans have 401(k) plans or some other form of retirement savings or pension plan that is invested in stocks and bonds.  According to the Investment Company Institute website, in 2008 49.8 million Americans had 401(k) plans that held an estimated $2.4 trillion in assets.  In short, lots of American families are invested with Wall Street.  They watch the Dow and the S&P 500 and hope that their 401(k) plans will appreciate in value and allow them to retire earlier and wealthier.

As a result, in the 1930s or 1950s there may have been a bright-line distinction between “Main Street” and “Wall Street,” but that bright-line exists no longer.  People may be upset by the size of the bonuses paid by banks that took TARP money, but I think many Americans not only aren’t reflexively opposed to Wall Street bankers, they hope that those investment bankers do their jobs well and create wealth that their 401(k) plans will share in.

If I am right in that perception, then politicians who want to rip into Wall Street should proceed with extreme caution.  In the last few days, the stock market has fallen at the same time President Obama has attacked Wall Street bankers and Senators have declared they won’t vote for a second term for Federal Reserve Chairman Ben Bernanke.  It may be coincidence, but it may cause many Americans to wonder why the President and the Senate seem to be playing politics with their retirement funds.