Since the 1990s workers seeking a safe haven for their retirement assets have been steered toward the stock market by the popular financial culture with the promise of consistently high returns. But are the long term returns true? The author examines the long term performance of the stock market and tackles the provocative question: Is the stock market a place where the average worker can safely craft a secure retirement.
First the Disclaimer: This is a thought-provoking article that draws upon real world examples, articles, books and websites that are readily available to the public. This article is not intended to offer investment advice. Any actions that you take in the market place should be the result of your own financial education and consultation with a licensed professional. Financial calculations were accomplished using the savings goal calculator found at Bankrate.com unless otherwise indicated.
When I entered the work force, I was offered a retirement plan, actually I was offered two. My employer was transitioning out of defined benefit plans, i.e. pensions and opting into defined contribution plans, i.e. 401ks. Because I was hired during the transition I was given a choice. I could not see working for any employer for 20 years and since the pension as I understood it was all or none, I opted for the 401K. Little did I know, I became part of a phenomenon initiated by the Federal Government in 1974 when it enacted the Employee Retirement Income Security Act (ERISA).
ERISA was created in the wake of the failure of the Studebaker Corporation in 1963. When Studebaker failed it left a pension that was so badly funded it could not provide benefits for all of its employees. ERISA did two things:
1) It provided regulation of any existing and future pension plans;
2) It provided government insurance of those pension plans in the form of the Pension Benefit Guaranty Corporation. ERISA also did something else, it virtually guaranteed a shift away from corporate-sponsored pensions and toward employee-sponsored savings plans. The 401K, intended to be a tax-advantaged benefit to corporate executives, has become the major savings vehicle for retirement for the average worker in America.
Let’s look at that statement. The 401K, intended to be a portable, tax-advantaged benefit to corporate executives, people whose income is generally north of six figures, has become the major savings vehicle for the average American worker, people whose median income is $46,326. ( This figure for median income comes from the US Census and the General Accounting Office.)
Assume the average retiree will need cash assets of one million dollars. One million dollars invested at 5% will earn an income of $50,000 per year without having to draw down the principle. This goal of one million dollars assumes the $300,000 to $500,000 dollars retirees will have to have set aside to cover health care costs. (CNNMonday February 19, 2008 “Most Americans Unprepared for Retirement”) Even if a worker earning the median income only desires to live on sixty percent of his or her working income, he would still have to save $555,912 invested at 5% to earn an income of $27,796. Add in the amount needed for health care and the goal is still one million dollars. The Savings goal calculator at bankrate.com shows that even if a worker earning the median income managed to save $10,000 per year or 21.6% of his gross income, it would take 100 years to reach the estimated million-dollar target needed for a comfortable retirement. In other words this retiree will die of old age while trying to save for retirement. Using bonds or a “high-yield” savings account with an annual percentage yield of 3.6% will put the average American worker within reach in 77 years 11 months almost beyond the average American’s lifespan. He would still die of old age while trying to save for retirement. Add a 50% employer match and the goal is reached in 34 years and 3 months. Well within the estimated forty year working life of the American worker. But an employer match of 50% is virtually unheard of. A true 50% match of 50 cents per employee dollar invested does not exist. The 401Khelpcenter reviews the common matching plans available to people who save through their 401Ks.
Because amassing the funds necessary for a comfortable retirement is virtually impossible through savings alone, employees must seek vehicles capable of higher returns in order to reach their retirement goals.
In steps the Stock Market.
Please see part 2 for the complete article.
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