PBS Drops Another Bombshell: #WallStreet Is Gobbling Up Two-Thirds of Your 401(k)

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32. Tax deferral works even when tax rates are the same in retirement

[font color = blue]Why does the tax deferral look so good on paper?

Because the income of an ordinary person falls so drastically after retirement. And that sudden crash in income means you have to prepare in more meaningful ways than putting money into a 401(K).[/font]

Please see my example in #21 again http://www.democraticunderground.com/12527227#post21. It assumed the same tax rate in retirement as when working. And in that case, the tax-deferred account, after withdrawal and paying taxes was 23.766/15.247 = 1.56 X larger than the regular not-tax-deferred account. So it doesn't require that taxes be lower in retirement to work out. It is just plain math. (As you indicate and as I said in #21, tax deferral works even better if one's tax rate in retirement is less than when they were working)

[font color = blue]But "nobody could have known" that the stock market would crash just as baby boomers were about to retire.

Fact is, it did crash just as baby boomers were about to retire. [/font]

SOME baby boomers. And it recovered most of its value in 3 years, and is now setting new all-time highs 6 years after the crash.

When people with significant nest eggs retire, they don't take all their money out and put it in a mattress or a bank CD, unless they are very poorly advised. They keep their money pretty much where it was, withdrawing only living expenses. (People with a 401(k) should roll it into an IRA, in my opinion. It's not rocket science).

[font color = blue]And if anyone trusts what is going on now with the unknowns about the outstanding derivatives in default and the computerized trading, I still have that bargain on a bridge. [/font]

Perhaps. When I started out in the early 1980s, I remember seeing a handout listing about 2 dozen reasons not to invest in the stock market (and instead to invest in gold). The doom and gloom gang has been around forever.

[font color = blue]I worked for and was deeply insulted when a prospective employer sat me down and advised me (in my 50s) that I just didn't look like a person who could read a corporate financial statement. [/font]

I wonder why that was. Actually, I never read a corporate financial statement. Yet I've done quite well with investments. Mostly because I invest in diversified mutual funds and ETFs so that if one company (or even a whole sector) goes down the tube or performs poorly, it doesn't have much impact on me.

[font color = blue] Inflation since that time has been tremendous. A house in the Southwest in an unremarkable location and city that was worth a little over $13,000 in the 1960s is now worth $170,000 plus. ... Overall, there are better investments than a 401(K). [/font]

I bought a townhouse in 1980 in a nice suburb of Minneapolis. 33 years later, it is now worth $1,500 less than when I bought it. And it has nothing to do with any particular problem with my townhouse -- it’s the same story for all the townhouses in the complex. And it's not any overall problem with location or some other factor either, other than, for some reason, townhomes aren't popular right now (a few years ago, in 2007, it was worth about $100,000 more than what I bought it for, a near tripling). So it's not a sure-fire investment.

I also don't think successfully owning rental property is any easier than owning an IRA or 401(k) for 90-year olds or busy soccer moms.

By the way, you don't need the Internet to have mutual fund investments. It still works just fine by phone. My father did quite well with investments with just the phone and snail mail into the early 2000's. Having an account with Vanguard and buying the Vanguard 500 index fund isn't any harder than having a savings account, and a lot lot more lucrative if one doesn't listen to the doomers and gloomers.

[font color = blue] But if you take your money out of your 401(K) before the official date, you pay a penalty. And many people have needed to cash out their retirement funds early in recent years thanks to the mismanagement of our banks and Wall Street and job losses. [/font]

It's not any easier selling rental property in a down market, especially like the one we have had. And a 10% penalty is not the end of the world. After a 42-fold increase, like the S&P 500 index fund had since 1976 (http://www.democraticunderground.com/12527227#post29 ), I think I could afford to give 10% of that back. (The 42-fold increase doesn't represent my performance, I might hasten to add. I don't have a clue, frankly what my overall return has been since the early 80's other than a several-fold return).

I could do more tax deferral examples where after only a few years, one is better off withdrawing and paying the 10% penalty and the taxes than he/she would have been sticking to a regular non-tax-deferred account.

[font color = blue] The "recovery" on Wall Street is a slap in the face, a terrible affront to the many people who lost their homes in the Wall Street mortgage fiasco. [/font]

Or perhaps a reason to invest in equity mutual funds instead of real estate?

The recovery of my equity mutual fund investments sure doesn't feel like a slap in the face to me. It consoles me for the loss of value in my townhouse.

[font color = blue]Sorry to go into such a rant, but I have seen people who have suffered in the past few years from the irresponsibility of the banks and Wall Street investors. I do not trust them for 10 seconds. It is unbelievable to me that virtually none of the banks and managers of the people's money on Wall Street have had to answer personally for the fact that their salaries have burgeoned while ordinary savers in their senior years receive almost no interest on their conservative accounts. [/font]

I agree wholeheartedly.

I also don't want people to be hurt by the doom-and-gloom advice that tell people not to buy mutual funds, or to not take advantage of tax-deferral and tax free investing (through Roth IRAs and Roth 401k's) and miss out on the historical doubling - every - 7 or 8 years - on average returns since WW II.

[font color = blue]And back to the 401(K)s, what concerns me the most is the simple fact that if the baby boomer demographic bulge is likely to create a future shortfall in Social Security funds, what is it going to do to the stock market?

What happens if baby boomers actually have to start withdrawing and spending their savings? What happens to the value of stocks? I'd like to see the conversation turn from the dangers the baby boomers pose to the solvency of Social Security to the dangers that same generation proses to the solvency of our banks and Wall Street. [/font]

Good points. I've been shifting some of my investments more to international funds and particularly towards countries with younger populations. But I also consider that lots of young investors overseas are and will be investing in the U.S. stock market too. So I think the concern of some on this issue is excessive. I'm more into diversity than into shunning U.S. stocks.

[font color = blue]Will the hedge funds and computer traders continue to manipulate stock values so that they appear higher than the material values and investment returns they should reflect? [/font]

Any reading of Wall Street history is that they've been doing this since the stock market began, yet it keeps doubling and quadrupling and 64-tupling in spite of all the doom and gloom we've been subjected to all of these ages. http://www.democraticunderground.com/12527227#post29