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Time to Rethink Retirement Savings?

In business school finance students are taught the stock market historically goes up and financial advisors/planners will advise people the same.  However, as we know and are experiencing the stock market does have periods of decline.  Sure, we can achieve high returns in the stock market but that comes at a risk.  People have lost trillions of dollars in retirement savings over the past year.  For some people they may never get those losses back before they actually need the money for retirement.  Even more, no one can tell younger people with absolute certainty that they will gain back some losses without losing the money again and possibly lose more before they retire in 20-40 years.  What is the point?  Why are we risking our retirement savings - our nest egg - in the stock market?  My thoughts on investing retirement savings in the stock market have changed.

Sure, the stock market increases but it also has periods of decline (called bear markets) and the problem for people who are saving for retirement is getting caught in a bear market.  Here is a graph of the price level for the S&P 500 from 1950 to 2009. (Click to enlarge)

Source: http://www.moneycentral.msn.com

What is interesting about the graph above is take a look at 1985-1990.  Notice how stock market via S&P 500 starts to increase.  This is the time period when 401ks and IRA start increasing in popularity due to favorable changes in the tax code.  Did this batch of new money for the stock market foster growth in the stock market?

All that talk of potentially high returns means nothing to a person ten years from retirement and the majority of their savings has been wiped out in a bear market.  Take a look at the S&P 500 over the last ten years. (Click to enlarge)

Source: http://www.moneycentral.msn.com

Just like in life, the stock market offers no guarantees not even a minimum of a return on investment.  Here today gone tomorrow.  This is our “nest egg” we are talking about - that chuck of money we will use when we decide to stop working and enjoy our remaining years on this planet.  Are we unjustifiably risking this money?

The 401k and IRA business is very lucrative for financial conglomerates and other financial services companies such as Fidelity and Charles Schwab.  But is it doing us any good.  We are paying various fees, sometimes rather high, to these financial services companies regardless of our return on investment. 

The original intent, or at least that way it was sold, of 401k and IRAs was for these accounts to be supplements to any pension plans (defined benefit plans).  However, the consequence of the changes in the tax code and other federal laws allowed for the abandonment by employers of pension plans in favor of 401ks and the proliferation of IRAs.  With this proliferation in 401k and IRAs came a flood of new money for financial services companies to pursue and invest in the stock market.

Please excuse me for the following rant: the sad reality is, and we definitely won’t hear this from money managers such as Fidelity, Vanguard and JP Morgan Chase, that most money managers and the mutual funds they manage don’t even match or beat the investment yields/returns in the S&P 500.  So, we are not only paying various fees for these financial services companies to manage our money, the investment yield/return is not even being maximized.  Often, times if we invested in stock index funds (such as S&P 500 Index Fund) or an Exchange Traded Fund (ETF) we would achieve better investment yields/returns and at a much lower cost - again something these financial services companies don’t want us to know about.

An individual would have been better off investing their money in 5 year Certificates of Deposit (CD) and continued to reinvesting them and purchase and hold U.S. Treasury Securities - reinvestment interest payments in a savings account than investing in the stock market over the past 10 years.  But these financial services companies don’t want us to realize that.  And our tax code actually discourages this type of very conservative investing since all the interest earned would be taxable.

We need better ways and more conservative investment options for our retirement savings.  We need some type of “fixed rate annuity” account where our money is at least guaranteed a minimum return and we can get an annuity paid to us upon retirement.  Currently, fixed-rate annuities don’t have the favorable tax treatment of IRAs or 401ks.  Maybe this needs to change.