1/12/2012 12:05 AM ET|
Can you build a $2 million 401k?
Experts say workers will need ever-larger nest eggs to retire. It's possible to save enough, but only with stocks and not without risk. Here's a look at the road that might lead to a big payoff.
Will you be able to retire comfortably?
Like so much in life, it depends. Will Social Security still be around, and if so, will it provide more than a pittance? Will Medicare cover the costs of health care as you age?
More immediately, will you be able to keep working until you're ready to retire? And if so, will you earn enough to keep socking money away every month?
And, most important, will you be able to earn enough on your savings to fund a retirement?
When I wrote on this topic back in late 2010, in "How to build a million-dollar 401k," I picked a number often cited by financial planners that seemed like a nice, round target. I said getting there would require buying stocks and mean accepting some risk, at a time when neither was very popular. I tried to be realistic, but I hope it made $1 million seem not so out of reach.
But there's a hitch. For the young, at least, that may not be nearly enough.
No wonder they're in the streets
A recent survey of investment advisers suggests that for members of the up-and-coming Gen Y cohort, $2 million is a better retirement target.
Those not born in that 1977-to-1994 window aren't off the hook, either. For the more seasoned out there, especially baby boomers who have postponed saving for fast-approaching retirement, a similarly aggressive strategy will be needed to make up for lost time.
Is this doable? I think it is. But it will require more diligence, dexterity and determination than was required in the go-go 1980s and 1990s, an era the entire financial advisory industry and its "buy and hold" mentality remains fixated on. And it will require people to end their long love affair with bonds, because those supposedly reliable fixed-income assets look set to underperform for years to come.
First, let's address the elephant in the room: skepticism that this is even possible, and a creeping feeling that unless you're a Wall Street trader or a hedge-fund jockey, the system is hopelessly stacked against you. Because paralysis is not going to get anyone to $2 million.
Yes, the market has failed us
It's easy to forget, with all the emphasis on CEO pay, banker bonuses, insider trading, scandals, fraud and such, but half of the stock market's two-part mission is to help average Americans build wealth, provide for their families and save for retirement.
(The other half of the stock market's mission is to funnel wealth to entrepreneurs and fast-growing businesses. I'd argue it's failing here as well -- witness the recent string of failed initial public offerings and the accumulation of idle cash on the books of America's largest companies -- but that's a story for another day.)
The stock market is also the institution by which the social contract of American capitalism -- that while not all share in the spoils of growth equally, all can participate in it -- is made manifest.
Yet, by just about any measure you'd care to use, Wall Street has been failing the average investor miserably for more than a decade. No wonder the Occupy Wall Street movement generated so much heat before the chill of winter and the holidays set in.
The Standard & Poor's 500 Index ($INX) is trading at levels first reached in 1999 and has been drifting sideways ever since, in a stomach-churning, dream-crushing trading range. Even accounting for dividends, the S&P 500 continues to flirt with levels reached in the closing moments of the 20th century.
But over this same period, the U.S. economy has grown by 21%, or $2.3 trillion. Corporate profits have trebled to a record $1.5 trillion. Average investors just haven't gotten their cut.
Income inequality has returned to Progressive Era extremes seen before Presidents Woodrow Wilson and Theodore Roosevelt reeled it in with stiff taxes and new social programs. Poverty is on the rise. Wages have stalled. Labor force participation has fallen to 30-year lows. Food stamp usage is off the charts. And inflation has devalued the power of the dollar by 34%.
So yeah, a pretty abysmal record.
Now, there are exceptions. Small- and mid-cap stocks have done well despite suffering two round trips to late-1990s levels during the 2001 and 2007 recessions. So have bonds, which are putting the finishing touches on a 30-year bull market. But these are nuances, and I don't think they reflect the realities for typical retail investors engaging in a buy-and-hold strategy focused on the largest, "safest" companies.
So what are people to do? As I've suggested in the past, one of the few ladders left with which to climb the social strata is to become a business owner and participate in the growth of American enterprise. Direct entrepreneurship is the best bet. But indirect investing in the stock market remains a good alternative.
Moreover, for those angry at the growing wealth of the top 1%, a majority of their riches are tied to business equity. In short, they own stocks or similar assets. If you can't beat them politically and through the tax code, join them.
If none of that convinces you, keep in mind that with the Federal Reserve pushing both short- and long-term interest rates toward zero, and into negative territory after adjusting for inflation, there are few good long-term alternatives for savers. Very few people can save $1 million or $2 million from their paychecks before retirement if they're earning only 1% or 2% interest.
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OK, I am 41. I share a similar story to JJ. At 30 I liquidated my 401k to have a down payment to buy my first home. Big mistake.
From 30 to 41, I've managed to start over and save 250k. I too avoided the downturn by being engaged with what is going on in the world, and the markets. During the same years, my wife has done the same. Are we making a killer income? No. Do I work part time jobs? You bet.
We have posts here that say you can't do it. Total BS. Some posts say you need to live substantially below your means. Again, total BS. You mention kids cars and other things. Try having one less kid- and you have your 250K. Buy 1 less car. Try not spending money on dinners out, and your daily coffee from Starbucks, and you have your 250K. That isn't asking for much. Substantially below your means to me means you stop mowing the lawn, and painting the house. Please.
The choice is and has always been yours. But do not complain when you made it the other way, and don't ask me for my money when you go to retire. I made the hard choices, and want to keep my money for myself.
You need to work hard, and never stop educating yourself.
I'll give you a head start. Think making 7% is tough? It isn't. Enter the symbol T in quotes, and you learn that ATT pays a dividend close to 6% right now. If that dividend never grows, (Which it is) I only need ATT to go up 1% per year. GE pays close to 4%. They are recovering their dividend, and if they bring it up to where it was before the crash, you'd be getting 1.32 a share, or your 7%.
Is buy and hold dead? No. What is, is patience, and thrift, and sacrifice, and tolerance for anything but instant gratification.
Keep on lying to yourselves. The you can't do it, is only you won't do it.
Calculate it. Even if you have a 4K square foot house, and the house is paid for, taxes each year, car taxes, plates and insurance. Food. utilities bills, gas. Think about it, you will not be driving to work every day therefore less fuel for the car(s), your clothing will go down no need you not working. Now the biggest cost and you have to agree is the big health insurance. That my friend is the biggest cos to you. I do budgets everyday for people when you just sit down and think about it and you plan to have 99% of everything you one paid for before you retire, how much do you need? Social security, guess what, until they change the rules and if they did it will not effect the people who have already paid into the system, social security will be there.
Now I ma not saying to relay on that, what I am say here is simple ask yourself and all these so called planner why do you need a million dollars or even two million to retire on. Unless you are in very bad health I get it. i.e. I retired the first time at 45 could not handle it. Had nothing to do about money had more to do with Borden. second time now at 55 I retired. If need be all I would need is 2K a month and I am fine 2K at the most. This pays all my expenses and a few nights on the town each month. Travel about 8 time a years. If I live another 20 years that 480K far cry from a million dollars and I haven't even started collecting Social Security yet which by the way will be an additional 2K income a month or better.
I still work just not nearly as hard and loving it. I kind of work part time for myself which makes things easier. So if you want to sit down and know the REAL figure you will need, then hit me up from someone who has been there and have clients who are there today. The world is not as grim as people make it out to be.
Oh the market tanked, and to me that's great because in the next 15 months I would be telling to buy, look at history it will come back its just not going to bounce back as in the past. And in a way that is good a slow growth would mean long and steady growth.
Two million you are CRAZY I will not have even earned one million in my life time. I don't need to go on four cruises a year or drive a vette around town. I am trying to have my house paid off and I will be happy to do volunteer work somewhere. I can't believe how MATERIALISTIC everyone is here living like the rich and famous. When you die it all goes back to dust. You just have to have food, shelter, and clothing. You don't have to spend 50K a year when you are retired. What are you doing with all that money?
When I was 25, a representative from my former company encouraged us all to invest our 401K funds into 100% index stocks. He had charts & graphs showing an average 7 - 8% annual return until we retired. He warned about the risks yada, yada but said stock always rebounded after a short-term dip... He did suggest that as we grew older we should accept less risk but no one warned us that we could lose 40% in one month and that it would take 8 years to recoup the loss...
Funny how today we are scrambling to find something that just protects our 401K from loss! I finally found a fund that provides 4.5% guaranteed this year and is FDIC insured. It is tied to my employer and not available to the masses, but I like the security combined with the modest gain... However, I won't be retiring with $2 Million! Maybe my wife & I combined may reach $750K, but how far will that go with inflation in 20 years?
I find it ironic (and a bit insulting) that Wall Street has the nerve to ask workers and small investors to commit to the stock market for their entire working life when they themselves won’t commit to any investment or market strategy for more than about two weeks.
At 40 I am still heavily invested in the markets through a combination of 401k, IRA and brokerage accounts. Stared investing for retirement when I was 28, two years after I got my Master's Degree in engineering and saved as much as I could every year while constantly looking for better opportunities for higher paying jobs. Always actively managed my portfolios, updating the allocations every 4 to 6 months and kept up on just basic financial news. Currently all investments sit at around $200,000. Could have lost a lot of money in 2008 if, like most people, I wasn't paying attention. But I educated myself about the markets enough to know that when the DOW started bouncing around 11,200 mid year it was time to get out and I did. Preserved most of my assets and was able to reinvest them at much lower values and have ridden the market back up. Maybe some people call that luck. I call it being prepared.
It isn't rocket science. Anyone with a brain can invest in the market. But they have to be willing to put in the time and learn about the markets. Most people don't and they suffer because of it. They think autopilot and randomly picking investments is a sound strategy and they wonder why their portfolios go sideways or down. You don't have to micro-trade to make money. You just have to revisit what you are doing every couple months or twice a year and take the hour or two out of your week to get it done.
Most of my investments over the past decade managed by other people returned about 6% per year. Investments I had direct control over returned 10% per year. Pretty darn good in an era where everyone complains about losing money in the market. Just step back. Spend some time learning. Don't panic at every 300 pt hiccup and you can still make money in the market. But if you are ignorant, uneducated investor who gets spooked easily, well, you're going to suffer.
Now, everyone who hates the markets, hates investors and thinks that the economy is a scam give me a thumbs down. Come on, you know you want to.
First, you don't need $2 million. Sure, you can live to be 100 but look around, how many people in their 80's are going to Churchill Downs for the Derby then jetting off to Milan to see the newest fashions? As you get older your living costs may go up but your discretionary spending is going to go way down. So start saving now, anything is better than nothing and it gets real easy to sleep at night when you have a half million dollar portfolio.
Second, you have to give the stock market a shot. True, some people have been burned but they are also the ones complaining the loudest. Thirty years ago I decided to make a big bet on a tobacco stock. Over a period of 5 years we put in about $50,000 into 401k and college savings directly tied to that company. Because my wife left that company after 5 years that investment has not had any further contributions and it has now grown to over $800,000. I will be the first to admit that it was all luck, it could just as easily been Enron or Worldcom and I could have nothing. But it wasn't and I for one have no complaints about the stock market.
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