Boston Gal's Open Wallet

You forgot a retirement - the Medicare and Social Security payments we make every two weeks to help pay for someone else's retirement, with no guarantee that future workers will continue to do so for us when we retire.

And you know all those co-workers that aren't in the 401(k)? Who do you think will keep them alive when health forces them to retire although they saved little or nothing when they were working? I'm worried my savings will somehow have to pay for theirs too.

And some people wonder why I save so much.

 

A TERRIFIC argument for socialism...which everyone *cough* "republicans" are so afraid of. I wonder how they are rephrasing the bailout?

 

I agree with you. It seems that when there is money to be made, get rid of regulation and let capitalism do its job. Case in point: Glass-Steagall Act was repealed in 1999. When the house of cards collapses and it's time to pay the piper for financial mistakes, ask for government help. In short: Privatize profits and greed. Socialize loss.

I am a proponent of capitalism too and I say let's let the market sort things out. Investment firms that made risky bets and then lose should go out of business. The ones that did not make mistakes survive and thrive. Along the same lines, real estate speculators and people who used NINJA (no income, no job) loan to buy houses that were way above what they could afford should also live with the consequences. Bailing out the greedy investment bankers, house flippers, and real estate speculators will create a moral hazard which will come back and bite all of us again.

 

Boston Gal,

I agree with you. The 401(k) tax rules have mainly benefited Wall Street by channeling our retirement savings into the stock market. It has helped to prop up stock prices, from which Wall Street firms make all their fees.

Of course, Wall Street can now legitimately say that our interests are tied to theirs. But you can't prop up the markets forever. At some point, the real world must come crashing in.

Stock prices are ultimately tied to the real economy. Financial experts like to point out that, in the long run, stocks outperform every other asset. But they are only looking at the time period of the last 100 years. Over the last century we saw exceptional economic expansion due to cheap and plentiful natural resources, especially oil, and this is now coming to an end.

My biggest concern is that our current economic paradigm, shared by Republicans and Democrats alike, requires constant growth and constant expansion. I worry that we are now reaching the limits of economic growth without yet having the financial tools and concepts for dealing with it.

So like you and others, I am still tied to the markets through my 401(k). I recently reduced my contributions from the federally allowed maximum to a mere 3 percent, by which I continue to collect the employer match. The extra cash in my paycheck will go towards emergency savings and mortgage debt reduction; because I think that the best return on my investment will come from being debt-free.

Also, I am trying to learn new skills that will make me less reliant on a money economy. My partner and I have started a garden from which we hope to grow much of our own food. We are also considering raising chickens, if we can ever agree on what to do with them after they stop laying. (As an aside, I am not vegetarian, but it seems very ungrateful to slaughter the hen that faithfully produces eggs for you for so many years, after she is past her prime. My partner, who grew up on a farm, does not agree.)

I also realize that self-reliance is only part of the story. No person or family can be completely self-reliant, which is why it is important to join (or create) a community that offers mutual support. Sharing and bartering goods and services on a goodwill basis is a necessary step for disengaging (to any degree) from the money economy.

In short, I'm trying to build up a portfolio of skills, both technical and social, to supplement my portfolio of financial assets. In my opinion, that's the best type of "diversification" that is available to us today.

Without further comment, I would like to share three websites from which I gain considerable insight and inspiration on topics like these. Maybe your readers will enjoy exploring them:

http://blog.holyscraphotsprings.com/

http://www.homegrownevolution.com/

http://globalpublicmedia.com/

Sincerely,

Michael

 

No, it's not really about 401k accounts or any other investments. The problem is that investors are stopping lending to banks and other businesses and banks in reaction reducing lending to other businesses and individuals. And banks are collapsing. This reduction in credit and money supply is what lead to the Great Depression. That's what the government is worried about. If noone can borrow or lend business grinds to a halt and soon after workers are fired.

If it was a worry about the stock market there wouldn't be this urgency but the problem is mainly in the money and credit markets. It's not being at all well explained to the American people of course...

 

This is the best succinct explanation I've heard of the financial crisis:

http://www.correntewire.com/the_crisis_explained

 

I'm with you Michael in Seattle. That's what my husband and I are doing as well Iexcept we're getting ducks instead of chickens). I don't think it's bad to eat a chicken after it quits laying, I always buy the "soup" chickens fron our local farm. We're also focusing on getting our mortgage paid off (looks like 3 years from now) and we're trying to lower our expenses as much as possible. We also started a business (6 year ago, it's full-time for DH) and we've built multiple income streams so we can survive if one drie up. We have also saved up 6 months living expenses in an emergency fund.

Thanks for the website, I love homegrown revolution - are you a member of FreedomGarden.org?

 

there is enough blame to go around, it is only b/c of the election that this is viewed as a republican vs. democrat, free-market vs. regulation thing. Fannie and Freddie were pushed into making riskier loans - greed from management, sure, but also a lot of democrats wanted to "expand homeownership opportunities". Well, I think we can all agree banks made loans to people who shouldn't have taken them out.

As for retirement, defined benefit pensions suck if you don't work at the same company for the bulk of your career. I've been at 3 firms since college, none longer than 5 years - I "vested" my defined benefit pension at one firm - the present value of the pension was $900, which I cashed out and rolled over to my IRA. It was worth about $500/year when I turned 65. I like 401ks because they are portable, and I get to make the investment decisions, whether it is very bullish on stocks, or like michael says, very bearish. Let individuals make up their minds and have control ...

 

This is what the government plan should be:

Give instructions on how to construct a rickshaw to all those borrowers and bankers who over-leveraged themselves. These debtors would then pay their debt back by transporting the rest of us around by human power helping to solve our our energy, financial, obesity and global warming crises all at the same time! If they do not want to run a rickshaw we can give them an oar and have them in the galley of trade ships like the British did with their debtor prisoners a few hundred years ago. And if they do not like those two options we can have them hold their breath until they expire so they reduce our health care costs and reduce carbon dioxide emissions!

 

To Susy: No, I had not seen http://freedomgardens.org/. However, I am familiar with the work of the Dervaes family. Thanks, I'll check the website out.

To Anonymous: I agree that there are certain advantages to a 401(k) over a defined benefit plan. The problem is the limited investment options each employer provides.

The law should be changed so that I can roll my money over into one or several IRAs without changing employers. I should have more control over my money without losing the tax-advantaged status.

Since I am bearish on stocks, I might put a large part of my money in gold or FDIC-insured deposit accounts, options not available to me in my employer's plan.

To All: Here's an idea for a new tax-advantaged program. Why not give a dollar-for-dollar tax deduction to people who pay down their mortgages early?

Frankly, this would be a great benefit to our overleveraged society. Unfortunately, it wouldn't do much for mortgage bankers or anyone else in the finance industry, so it will probably never occur.

 

I thought you were going to mention what didn't get mentioned until anonymous commented a couple of hours ago: the role of government in pushing banks to make irresponsible housing loans. That's a pretty important causal factor here.

I like the horse betting scheme at the site linked above. I was writing something about that, but it got long...if you're interested, I'll post it over on my own site rather than make a mile long comment.

It's easy to dump on the 401s now, when people are scared. But keep in mind that pensions used to keep people in jobs. It's a double-edged sword... the idea of a long term job is nice, but so is being able to move from employer to employer without losing time toward pension.

 

The main point--that this money isn't really ours--is still being overlooked:

http://willworkforjustice.blogspot.com/2008/09/ocm-other-countries-money.html

 

Better to have your money in stocks in a 401k than mortgage backed securities and other financial instrument junk in pension. At least with a 401k, you know where you stand. With a pension you'll have no idea until it's too late. Cry and moan all you want about your 401k being down 20% BostonGal, but pension losses are much greater at this point (the sheeple just don't know it yet...).

 

It reminds me of the scene at the ticket counter in "Planes, Trains and Automobiles" where Steve Martin goes on a tirade, to which the clerk at the counter replies, "You're f***ed."

 

While I agree that this is all a mess with the market going down, and we all don't like loosing money, at the end of the day, what can you do? If you insist at being invested, someone has to manage it. Do you want the government? Look at social security and tell me you want them to manage my retirement I made (welcome to socialism). Do you want your company? Look at what happened to companies with pensions, and your retirement grows at 3% per year, barely beating out inflation as you cannot take risks for risk of being sued by people.


That just leaves you. You can make better decisions than most government people or business people who are trying to be risk adverse. It is all a matter of where the market takes you.


Yes, I hate the 401k system. I think it is a crock that we have to put money away, and cannot touch it until an arbitrary age of 59.5. Who says that is my retirement age? I do it because I have to. Who says that single people have to pay more than married folks in taxes when they make the same amount of income? Who says you have to get a mortgage? These are just ways the government is trying to get people to comply so they can get people to do what they want them to do. Get married, by a home, have 2.5 kids and save for retirement. These are the things that are "blessed" by our tax scheme (pun intended), thus you end up with people complying to save the most money they can. I have considered getting married to a lady friend of mine from college (she lives 4 states away now) and has 3 kids from her first marriage. I have one son. We would end up never seeing one another - but that tax bill would be one heck of a lot nicer, 4 kids, married filing jointly, etc.


It is just where you want your realm of control being. Do you want the government controlling everything, your state, your city, your bank, your company or you controlling your own destiny in terms of financial freedom. That is all any of the banking, financial, taxes, etc. is, control over your assets.

 

Middle Class Chick,

You are aware that you DO NOT have to particpate in a 401K. You can invest you after tax money now, if you are so inclined and disciplined to do so.

I'd rather pay my payroll taxes now, and invest my after tax money into my own choices of investments that are far lower costs long term than to pay into a 401K.

Many funds rip you off with 1% or higher fees. That adds up over time.

There is no guarantee payroll taxes will be lower when you retire. I;d rather gamble on investing after tax money and paying the lower capital gain rate than pay payroll taxes and lose more of my money over time to the high fees imposed.

The problem is many people are simply not diciplined enough to save/invest their after tax dollars.

 

@Michael in Seattle. I agree w/ your decision to "decouple" from the economy. I'm in mad saving phase trying to set up my family to do the same.

I agree that 401(k)s have actually very little to do w/ this economic crisis, except in two ways: (1) because of the very real pain people with 401(k)s are feeling by the gyrations in the market, they are pushing politicians to DO SOMETHING, DO ANYTHING, to stop the bleed. I personally think that doing anything under that kind of pressure is only likely to lead to catastrophe. (2) 401(k)s and pensions flooded the market with money looking for high returns. We all got sucked into the idea that we deserve to have consistent 5-10% returns. That's just not the way the world works. When you reward high returns the way we did, you also encourage extreme risk-taking. Which gets us where we are today.

As for gov't pushing bankers to engage in risky lending, that is only marginally true. What happened is that the gov't heavily backed Frannie and Freddie, which hoovered up most of the PRIME mortgages in America, and had a specific mission from the gov't to extend a certain amount of subprime mortgages (very little, less than 10%, maybe even less than 5% of their total loan portfolio, I'll have to check) so as to support affordable housing.

The problem is that b/c no one else could compete with Fannie and Freddie w/ their ability to borrow from the govt at very low rates, all the other banks were forced down into the subprime arena. BUT THE POINT HERE IS THAT NOONE HAD TO LEND TO SUBPRIME AT ALL. Banks took the risk for the rewards. And they thought that through the MBS/CDO/CDS system, they actually minimized individual risk (when what they actually did was increased systemic risk).

 

This was a great post! There is so much turbulence in the market today, and people need peace of mind more than ever. I wanted to offer your readers a link to another blogger who is doing great work. He writes about our 'childhood money messages' and how the best approach to stability in today's market is to resist letting these emotions control our buying/selling habits. It is really fascinating work, and something you should all check out. His name is Spencer Sherman, and you can view his blog at http://www.curemoneymadness.com/blog.