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The Investment Thread

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Online  Re: The Investment Thread
Posted: April 17, 2020, 12:16 PM Post
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igor67 said:
The amount of money that wouldn't have to go to retirement under the 401K model if people didn't have to self insure against living too long is pretty staggering. It's one of the big reasons pensions are so much more efficient/ cheaper as an investment they can just assume the actuarial average.


I hadn't thought of that. That's money that could be tossed back into the economy quite easily I would imagine.

"Dustin Pedroia doesn't have the strength or bat speed to hit major-league pitching consistently, and he has no power......He probably has a future as a backup infielder if he can stop rolling over to third base and shortstop." Keith Law, 2006


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Offline  Re: The Investment Thread
Posted: April 17, 2020, 2:24 PM Post
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homer said:
igor67 said:
The amount of money that wouldn't have to go to retirement under the 401K model if people didn't have to self insure against living too long is pretty staggering. It's one of the big reasons pensions are so much more efficient/ cheaper as an investment they can just assume the actuarial average.


I hadn't thought of that. That's money that could be tossed back into the economy quite easily I would imagine.


What would be even better? Let people control at least half of the 12.4% paid in under SS. Then there would be no need for pensions or 401k.


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Offline  Re: The Investment Thread
Posted: April 17, 2020, 2:48 PM Post
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I hate SS and I am not really a fan of pensions either. The things I would do to be able to use that SS money for retirement myself.


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Posted: April 17, 2020, 2:56 PM Post
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Isn't SS essentially insurance against living too long?


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Offline  Re: The Investment Thread
Posted: April 17, 2020, 8:58 PM Post
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If you're concerned about outliving your wealth, you can always buy some kind of annuity. I'm not an expert, but that's pretty much the point of them. That basically allows you to pay in the actuarial average and get income for life, similar to what a pension would offer.


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Posted: April 17, 2020, 9:39 PM Post
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bani1717 said:
If you're concerned about outliving your wealth, you can always buy some kind of annuity. I'm not an expert, but that's pretty much the point of them. That basically allows you to pay in the actuarial average and get income for life, similar to what a pension would offer.


An annuity would be a better option than SS.


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Offline  Re: The Investment Thread
Posted: April 17, 2020, 11:46 PM Post
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FVBrewerFan said:
homer said:
igor67 said:
The amount of money that wouldn't have to go to retirement under the 401K model if people didn't have to self insure against living too long is pretty staggering. It's one of the big reasons pensions are so much more efficient/ cheaper as an investment they can just assume the actuarial average.


I hadn't thought of that. That's money that could be tossed back into the economy quite easily I would imagine.


What would be even better? Let people control at least half of the 12.4% paid in under SS. Then there would be no need for pensions or 401k.


I always remember when Paul Ryan tried to make the case for greater use of private retirement options for ALL workers in a VP debate in 2012. Biden ranted about how Ryan and others like him always talk about the market, but "tell that to someone who lost half their money in the recession" (that's paraphrasing). I'm politically moderate and neutral on a lot, but that set me off as an Economist. Within a year or so of that debate, the market had surpassed pre-recession levels. People who kept their money in the market were ahead. But it sure made a great soundbite in the election


Last edited by DHonks on April 17, 2020, 11:58 PM, edited 2 times in total.

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Offline  Re: The Investment Thread
Posted: April 17, 2020, 11:50 PM Post
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homer said:
igor67 said:
The amount of money that wouldn't have to go to retirement under the 401K model if people didn't have to self insure against living too long is pretty staggering. It's one of the big reasons pensions are so much more efficient/ cheaper as an investment they can just assume the actuarial average.


I hadn't thought of that. That's money that could be tossed back into the economy quite easily I would imagine.


One flaw with praising pensions is that they are subsidized by younger workers and the government. A 401k vastly outperforms a pension over time. The difference is that in a 401k/403b/457b/IRA it is MY money earning a return, but in a pension it's often an unfunded promise that falls on later generations backs. I'm very grateful that my state has one of the better funded pension programs for educators.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 6:50 AM Post
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401Ks do substantially worse. I'm not aware of any pension that isn't invested so it is earning a return. So I mentioned 1 huge advantage above, but there are 2 others that do it yourself will never top in a systematic way (so yes lucky individuals will occasionally out perform but not most). Reason number 2 is lower fees, than an individual can get. Reason 3 is that a pension never has to adopt the more conservative approach needed when you get older to manage risk. They can always participate in the market in a similar way. There are some cautions.
1) Rapidly changing the number of workers especially downward in a pension plan is problematic, this was a big one a few decades ago for the autoworkers.
2) Apparently in some states rules made it easy for lawmakers to raid the public pension fund. To my understanding this is not possible in MN or WI
3) I don't know how often private pensions are required to do the actuarial studies to adjust as people live longer or the inevitable variations in market returns.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 7:58 AM Post
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homer said:
thebruce44 said:

FWIW, I'm 37, own investment property, have been maxing 401ks and IRAs for 7 or 8 years, have taxable investments, and still do not feel financially secure.


I'm a decade older than you, have been doing the same with IRA, 401K, and feel the same way. I'm terrified of outliving my retirement funds...I probably won't but it's why I live very frugally. I can't really make up lost ground when I'm 80 but I can while I am still able to work.


This is why I’ve been working the past several years toward being able to sustainably trade stocks. Zero desire to work for the man, I want to be financially independent, and I want to know that I can work when I want to work, anywhere I want to work. Taking a paycheck from somebody else for the rest of my life is going to leave me right in the position you feel insecure in in 15 years (I’m 31).

If you have interest in the markets in general look into it as a second hobby, maybe you find you love it and maybe you won’t. There’s no better feeling I’ve ever experienced though than a hard day “at the office” and going home with high 3 figures-4 figures to show for my work. I then cut lawns for exercise and extra income in between watching our little one ($450-500/week for child care with 6-18 month waitlists is asinine to us). I have a couple friends working the 9-5 and doing the same, strategy just has to be adjusted a bit.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 10:11 AM Post
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Saying 401Ks are substantially worse is really inaccurate, especially without fine details of said person. When one gets into the pension (and leaves it) is a pretty important detail and how much they contribute is a pretty big deal (which tends to be a lot more than 20+ years ago).

If we are being technical one would probably want a 401K for the first half of their career and then a pension for the later half. That probably is the most beneficial.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 10:56 AM Post
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Trying to extract maximum individual benefit is a short term gain though at best. If there is some sneaky hidden inefficiency, eventually it will show up in the actuarial studies and then you have to make adjustments to payouts and/ or contributions. I'm getting close enough that the various calculators give close enough results without having to completely sweat about how sensitive they are to assumptions. Between SSI and our pensions we are on pace for our retirement income to at worst match our working income. We effectively contribute 13% of our income to pensions. Once you account for not having to make SSI or Pension contributions in retirement we come out ahead. People work hard enough by and large they all deserve that.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 3:49 PM Post
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Pensions are bad as they require a younger workforce to continue pouring money into it. What happens when that industry is no more? For example what if there is an invention tomorrow and it makes cars obsolete. The people that are relying on the pension are now out of new workers contributing to that pension and no new money is being put into the pension. Without the infusion of new money the pension will fail or the amount of money that is handed out from the pension is diminished greatly. You could go from $4,000 a month from your pension to $2,000 a month or whatever the amount would be to keep a positive or neutral value in the pension.

A 401k or any other type of investment is not reliant on a younger workforce to contribute. If you can have both a pension and a 401k that is probably the best way to go or if you can't get a pension a 401k and an annuity is the way to go. If you can afford more get more like rental properties.

Having only one investment like a 401k or just a pension is just not a good idea. Also if you are relying on social security as an income source you are setting yourself up for failure.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 5:11 PM Post
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nate82 said:
A 401k or any other type of investment is not reliant on a younger workforce to contribute.


I hear teachers in AZ talk about how they used to contribute 5% of their pay to our pension in the 90s. Next year it will be 12.22%, despite pay increases the contribution rate goes up every year. Sadly much of the pension promises fall on younger workers, robbing these low wage newbies of money they need right away.

But it's better than the alternative, as most would never fork over 12% of their salary to a retirement plan at age 24. I try EVERY year to get people so sign up for one of our 403b offerings, and many don't see the point of even $10/pay, even though I show them the spreadsheets. The main benefit to a pension is that a person doesn't have to be accountable for their future...it's just there for them


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 6:26 PM Post
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Workforce age is not really relevant as pensions give you credit based on years worked, so swooping in at the end doesn't get you much. As I mentioned above a shrinking pool of workers does cause problems. Pension funds have an FDIC type insurance program, but solutions aren't hard to imagine since we have more workers than we did years ago, namely instead of tying pensions to jobs you could group pensions across worker classes and make sure things are staying stable. We know 401ks don't work as policy. They benefit some individuals, but after decades of telling people to save more it's clear that ain't working. If there wasn't so much money to be made in fees investment banks wouldn't try so hard to get a hold of the pensions. Aside from the rise of the 401k coinciding with rapid Wall Street growth my coworker who lived in NYC can vouch how eager they are to get their hands on the money. So I play the game a little bit to spread and hedge against what is really just a political risk.

MN most recent actuarial study had to increase funding just a bit because people are living longer, I would guess that is the biggest driver of increases in most states.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 6:26 PM Post
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Well there is a difference between a pension being good because it is actually good and a pension being good because the person is financially illiterate. The later is why social security even exists, because people cannot voluntarily make good decisions for themselves.


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Offline  Re: The Investment Thread
Posted: April 18, 2020, 7:48 PM Post
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igor67 said:
MN most recent actuarial study had to increase funding just a bit because people are living longer, I would guess that is the biggest driver of increases in most states.


And the investment returns of defined benefit plans fail short of funding promises.

Public Pensions in most states--including Minnesota (as mentioned)--are really a ponzi scheme. Like I said, they're good for us workers, but will come back to bite future workers and taxpayers down the road. Courts have also ruled that cities and states (Illinois in particular) cannot retroactively change the benefits in order to make the systems more viable long-term. This isn't just pensions, as many consider Medicare to be a gov't sponsored ponzi-scheme as well. The common denominator in these options is politicians that won't be around when the programs go bust


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Offline  Re: The Investment Thread
Posted: April 19, 2020, 6:03 AM Post
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I challenge anyone to add up their Social Security contributions from their 20s and 30s and consider what a difference that 6% would have made in terms of paying student loans, buying a first home, paying for child care, or enabling other investment opportunities. Personally, I think we’re making one generation more secure at the expense of another.


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Offline  Re: The Investment Thread
Posted: April 19, 2020, 6:04 AM Post
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We didn't have any problems lowering the benefit growth rate along with increasing contributions to improve the fund ratio. Calling it a ponzi scheme doesn't make any sense since it does not rely on ever increasing numbers of participants. It invests in the market just like individual.

The reason it became easy to sell people against the idea is the dark side of compound interest. When you build your various budget forecasts extending 5,10 or 20+ years into the future any small amount of mismatch be revenue and costs will get magnified like it is compound interest, which turns into huge numbers pretty quickly. But forecasts are not destiny in the public sector anymore than they are in the private sector. You just have to manage the projection/ budget every year. I've sat through board meetings for well over a decade, and most of those years some new board member becomes convinced healthcare expenses are going to sink everything. At the end of the day though, with competitive bids and some other things we kept the impact close enough to inflation so that we've only had to increase employee contributions $25/ per check in that span.


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Offline  Re: The Investment Thread
Posted: April 20, 2020, 6:48 AM Post
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A barrel of oil is now cheaper than a meal at McDonald's. WTI down over 30% today.


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