We read daily in the financial and general press about the grave retirement crisis we have in the U.S. These articles are usually accompanied by a scathing criticism of 401(k) plans citing high fees and low returns. Given all that, I found the chart below from JP Morgan interesting:
The chart compares anticipated pension short falls for our major trading partners, some with very developed economies, some developing. Note that among all the countries compared, the U.S ranks highest in how many years our saving will last into retirement and tops all but two as far as expected saving shortfall. My question given this data is, where’s the crisis? Andrew Biggs of the American Enterprise Institute published and excellent op-ed Piece in The Washington Post using different data and came to the same conclusion, it is well worth reading. https://www.washingtonpost.com/opinions/the-retirement-crisis-that-isnt/2015/12/29/b5d76dac-aa8a-11e5-9b92-dea7cd4b1a4d_story.html
The fact is that we have a very good, workable retirement system in the U.S. Part public (social security) and part private (401(k), IRA, Profit Sharing, SIMPLE IRA). The beauty of the systems is that it allows individuals control of their own assets, which is at the heart of our American philosophy of self-determination. Our system contains an effective safety net (all Social Security was ever intended to be) and the means to save effectively and tax efficiently for our retirement.
Freedom and self-determination, however always come with responsibility. Your retirement savings, in a 401(k), IRA or other tax-qualified account is the most important component of your retirement package, you must take very good care of it from your earliest working years until death.
The chart below (also from JP Morgan) shows that we are not doing a very good job of that:
The bar graph on the bottom shows that from 1995 through 2014 the average investor underperformed every major asset class, including a standard 60% stock/40% bond balanced portfolio. In fact, the average investor barley beat the 2.4% average inflation rate for the same time period. This “performance gap” has been evident and persistent for a very long time. The usual cause cited by the press is high fees. Note that the gap between the return for a balanced portfolio and what the average investor earned is over 6%. This is far too high to be explained by excessive fees. Most 401(k) participants pay fees well below 1%. Rather the prime cause is investor behavior. The tendency of investors to pour into stocks when the market is high and flee when stock prices collapse (this includes other asset classes, not just stocks.
What can you do to avoid having your retirement savings become a victim of “the gap”?
Don’t go it alone - find unbiased help in managing your 401(k) or IRA from a fee only financial advisor with legitimate credentials (CFA or CFP).
Individuals approaching retirement should engage a competent, fee - only planner to lay out a written retirement plan.
Be very discriminating about what you read regarding investing and retirement planning. Most of what you read in the press or on the internet is produced by individuals or entities trying to sell you something. Much of it is produced by people with little or no qualifications. Personally, I tend to trust people I pay, not people paid by someone else.