Ходжа Н. (hojja_nusreddin) wrote,
Ходжа Н.
hojja_nusreddin

Gary North, "401(k) Programs: Methadone for the Middle Class"


Methadone is a legal drug that is taken by former heroin addicts

- It eliminates the "rush" that heroin offers, but it also eliminates withdrawal symptoms
- It lets heroin addicts escape the need to buy the expensive illegal drug
- Methadone is for heroin addicts, who just cannot bring themselves to go cold turkey
- from an addictive drug that distorts their perception.

That is what a 401(k) retirement plan is for middle-class workers

- Most workers have no retirement program,
- other than Social Security
- About 55% of American workers are eligible for a 401(k) plan
- but only about 38% participate
- This, according to a 2014 CNBC article perceptively titled, "The right ways to get workers hooked on a 401(k)" (http://www.cnbc.com/id/101469896#)
- Plans offer as little as 3% of salary from the worker, which is matched by the employer: 3/3. The maximum is 6/6.

The first question that someone, being offered a 401(k) program, should be asking is this

- "What has been the rate of return for the program since March 2000?"
- Why March 2000? Because that was the month in which the heroin rush ended.
- It began on the weekend of August 13, 1982.
- The bottom was on Thursday, August 12, 1982
- when the Dow Jones Industrial Average was 777, and the S&P 500 was 102 (http://articles.latimes.com/2002/aug/13/business/fi-bull13)
- The S&P 500 peaked on March 24, 2000, when it closed at 1527

Why do I say it peaked?

- It is over 2000 today
- But we must discount for price inflation
- The best way to do this - is to go to the inflation calculator of the Bureau of Labor Statistics http://www.bls.gov/data/inflation_calculator.htm
- Insert 1527 into the box - Click "Calculate"
- As of 2014, you get 2099.
- That is the break-even point for an investment in the S&P 500
- Depending on dividends minus fees, that is a losing investment or close to it, compared with buying Treasury bills.

When you find out what the performance of a 401(k) program has been since March 2000

- discount it by another 15%
- That is what price inflation has done to the dollar's purchasing power
- But what if the fund's managers won't tell you - what the rate of return has been?
- Then they are also embarrassed by the performance of the program.
- So, why stay in it?
- Is the program keeping pace with price inflation?

Then ask this: to be relevant for retirement purposes, what rate of return do you need to retire at age 65?

- To do this, you need a nest egg that will fund your retirement in comfort.
- If you reduce this nest egg by the traditional 4% per annum,
- will it sustain you through retirement? That depends on your life expectancy.
- To calculate this, you need a life expectancy calculator. Actually, you need 2 or 3. Take the average.
- Set it for age 65. Then calculate, given your present weight and lifestyle.

http://media.nmfn.com/tnetwork/lifespan/#0
http://www.bankrate.com/calculators/retirement/life-age-expectancy-calculator.aspx
http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html

What will Social Security provide, if you wait until age 67 to retire? (Age 70 is better.) Find out

- The younger you are, the lower the likelihood that Social Security and Medicare will outlast you.
- Both systems are statistically bankrupt.
- The unfunded liabilities are over $200 trillion (http://bit.ly/Kotlikoff222)
- The trust funds are empty: IOU's from the Treasury.

Then there is your equity in your home

- This will do you no good, unless you move into low-cost housing & rent your existing home for income, or
- unless you take out a reverse mortgage. Will you have a mortgage at retirement?
- Prof. Alicia Munnell recently wrote an article for MarketWatch on home equity for people in their 60's
- http://www.marketwatch.com/story/retiree-housing-wealth-battered-but-still-significant-2015-02-04?link=mw_home_kiosk
- It reveals that the median equity -- half have more, half have less -- for Americans immediately before retirement is $110,000.

In 2013, 77% of households in their early 60s owned a house

- The median house price was $185,000.
- But 63% of households in their early 60s continued to have a mortgage.
- Subtracting outstanding mortgage balances from the gross house price yields median home equity of $110,000,
- which accounts for more than 40% of the homeowners' total wealth as conventionally measured.
- The fraction is lower, if Social Security wealth and that from defined benefit plans are included in the wealth measure.
- That is home equity.

So, what is the median value of a 401(k) program for the typical American, age 55-65?

- A pathetic $104,000 (http://www.marketwatch.com/story/how-to-save-1-million-in-your-401k-2015-02-04?link=MW_popular)
- Combined, the home equity and the 401(k) total about $215,000.
- But the home equity is being used for consumption: a place to live.

Now - retirement withdrawal rate

- Retirement experts for decades said that the typical family must withdraw 4% per year from capital
- in order to live comfortably.
- Today, everyone knows - this is fake.
- I did a Google search: https://www.google.com/?gws_rd=ssl#q=retirement+4%25+withdrawal
- But it was fake back then, too.
- You can't take 4% out of your 401(k) nest egg without getting taxed. It's not your money.
- It's the federal government's money and the state government's money.
- They hit you at ordinary income tax rates on withdrawals.
- So, you get maybe 3%, not the 4% you pull out:
- Now, let's see:
--- 3% of $104,000 in year one.
--- Then 3% of $100,000 in year two.
--- Then 3% of $96,000 in year three.
--- You think this is the road to comfortable retirement?
--- At the top (beginning), that's $3,000 a year.
- How far will that get you? Nowhere. Your goose is cooked.
- The "experts" who talked about 4% annual withdrawals were trying to sell the suckers investment schemes at high commissions.

Next, you need to estimate your expenses in retirement

- This requires a calculator. There are lots of them on the Web.
- For an introduction on which ones do what, read this Wall Street Journal article: http://www.wsj.com/articles/will-you-be-able-to-retire-1400880527
- For a comprehensive one: http://www.flexibleretirementplanner.com/wp
- If you don't have Java installed, use this: http://financialmentor.com/calculator/best-retirement-calculator
- Your future is on the line. You need to devote some serious thought to this issue.

Do not assume that Medicare will cover your medical expenses

- A good article on what Medicare will NOT cover: http://www.marketwatch.com/story/retire-happier-control-your-medical-costs-2014-05-01
--- Its conclusion: HealthView's calculations assume that:
--- the higher-earning member of the example couple receives the Social Security average of $1,294 a month in today's dollars,
--- while the spouse earns $817.
--- the couple will incur projected lifetime medical costs of $366,599 in today's dollars if retiring next year
--- and costs of $421,083, if retiring in another 10 years.

Then there is the cost of entering an assisted care home

- Excluded from the calculation is the cost of long-term care.
- An estimated 70% of adults turning 65 will eventually need help with bathing, dressing and other activities of daily living
- This type of care can be costly, whether provided in the home or in a facility.
- According to the Genworth, 2014 Cost of Care Survey, the median annual cost of a private nursing-home room is $87,600 nationally,
- while the median annual cost of a home health aide is $45,188.
- These expenses vary greatly from region to region
- in Alaska, e.g., a home health aide costs $56,125 & a private room in a nursing home costs a whopping $240,900.

This is why 401(k) programs are methadone

- People do not go through the exercise I have just summarized. They prefer not to.
- They get into the 401(k) program on this assumption: "I'm doing all that I can. This will sustain me." No, it won't.
- You must work much longer than you are planning.
- You must save far more than a 401(k) plan allows.
- You must get a much higher rate of after-tax, after-price inflation rate of return.
- You must actively manage your retirement program.
- That is a huge defect of a 401(k) program: you do not actively manage it.
- If your response is this: "But I don't know how", then you had better find out how.
- Better to skip the 401(k) strategy and either start a business or buy income-producing real estate. (Start with books by John Schaub.)

When you retire, you will leave the 401(k) program

- The methadone will be removed. You will go cold turkey
- If you assume that the 401(k) program is anything more than methadone,
- you will suffer withdrawal pains to a degree that you can barely imagine today.
- It doesn't hurt today. It will hurt greatly when you retire.
- If your 401(k) program has not returned at least 10% per year after price inflation since 2000, get out of it.
- It is methadone. It is numbing your judgment. Skip the income tax benefit and put the money to better uses.

If the program is not generating consistent 10% returns, what good is it?

- The money that you put in isn't yours alone. It's the government's.
- The government will tax it as ordinary income, when you retire.
- The only thing that isn't taxed is the rate of return.
- That's the only reason to bother with a 401(k): compounding capital with deferred taxes.
- If there are not substantial returns, then the 401(k) is simply a form of deferred income.
- The government says: "Pay us now or pay us later" Pay them now.
- After that, they can't tell you how to invest the money.
- They won't monitor, what you do with it. They won't force you to report to them.
- They do require fund managers to report to them. With a 401(k), you lose privacy.
- If you are not getting 10% per annum, tax-free, don't consider it.

It is far better to have nothing saved

- and therefore conclude: "I must work until I am 80"
- than to fool yourself into believing that your 401(k) will provide any meaningful support
- Bottom line: if you regard your 401(k) as anything more than chump change, you are making a mistake.
- Forget about it. It is distorting your judgment.
- It is not worth bothering about, one way or the other.
- So, pull it out, pay the taxes, pay the penalties, and buy something that will appreciate enough to make a difference when you retire.

____________________________________________________________________
http://www.garynorth.com/public/13421print.cfm
Tags: investment, американа, доллар, инфляция, налог, пенсия, план
Subscribe

Posts from This Journal “пенсия” Tag

  • Post a new comment

    Error

    Anonymous comments are disabled in this journal

    default userpic

    Your reply will be screened

    Your IP address will be recorded 

  • 0 comments