401(k) Losses Linger for Young People

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There are a couple questions about the tradition stock market investing methods. In reality, the overwhelming majority of people (and, unfortunately mutual fund salespeople) have a weak understanding of how the markets really work. John Bogle, founder of the Vanguard group, has been particularly critical of the mutual fund industry. He wrote a scathing indictment a while back. You can request that report here: http://www.retiredsafely.com/index.php?p=1_23_Requesting-Babbel-Report

Randy McKee of SD 10:09AM April 10, 2010

I know I'm a bit young (26) but why hasn't my generation and younger been alarmed by this trend? No one my age seems to be interested in even discussing the challenges we have ahead of us. The wake up call for was reading Smart Women finish rich several years ago, but I'm worried about many of my peers and the growing intitlement mentality. Every generation needs a wake up call about the economy, we just aren't living in the times of my parents and grandparents.

Green of WA 12:23PM April 06, 2010

Those of us that are "early baby boomers" remember some mighty hefty inflation in the late 70s and early 80s.
The assumed returns have to be balanced somewhat against inflation ..... And nobody can say with any certainty what that will be going forward.
I would assume that if inflation is high, returns will be also.
And, even if we "early boomers" have acumulated some wealth, high inflation could make it somewhat worthless rather quickly.
So ..... Government overspending may kill us all soon.

boomer of FL 11:57AM April 05, 2010

Sure baby boomers had good returns in their early years, but it's the last years that matter the most for TWO very important reasons - first, because that's when they are making their largest salaries and hence socking the most away (at least that's true for baby boomer professionals who steady advance in their careers and their salaries), and secondly, the rate of return you get after you have accumulated a large block of savings is far more important than the rate of return you get on the small amount of money you have put away in the earlier years.
Here's a simple illustration. Let's ignore taxes or IRA/401K contribution rules.
A person begins working and puts $2000 away in year 1. Her salary rises 5% a year - well above inflation - every year for 40 years, so she increases her savings by 5% every year.
In case A, she earns 15% every year for the first 20 years, and 5% every year for the last 20 years. After 40 years she has $1,118,462. The first 20 years were her best years for rate of return, but she she earned less, so she put less away, and her early balances in general were very low compared to her later balances.
In case B, she earns 5% every year for the first 20 years, and 15% every year for the last 20 years. After 40 years she has more than twice a much - $2,573,874, even though her average rate of return was the same - about 10% (depending if you look at geometric or average rate of return).
In the last 10 years baby boomers have been earning the lowest rate of returns in their savings careers on their largest annual chunks of savings, if they steadily increased their earnings due to professional advancement. But what about the non-professional boomer who perhaps has seen little if any real growth in income over most of their working life, as unlikely as that may be?
What if her salary never ever increases (or she just chooses to keep her savings at a flat $2000 a year)?
In case A, $2000 a year invested at a 15% rate of return during the first 20 years and a 5% rate of return during the last 20 years grows to about $694,609. In case B, earning 5% the first 20 years, and 15% the last 20 years, the sum grows to almost double - $1,372,088. It is still far better to make the high rate of return over the second half of her career than the first.
There is a possibility that the average rate of return over the life of boomers will be greater than the rate of return over the life of GenX'ers. But if somehow it all averages out, and GenXer's end up with the same average rate of return as the boomers, they will be far better off than the boomers, as their higher rates will come on larger balances and bigger late in career contributions to their savings.

gary of MN 1:34AM April 05, 2010

Silly me. I thought the object to making money was to buy low and sell high. If I was in my 20s and 30s, I would get down on my knees and pray for a long bear market so I could buy stocks very cheaply. A roaring bull market in my 40s and 50s would send me very happily into retirement. At least that is what happened with my parents who were "lucky" enough to start investing in the late 1970s during the last great bear market. The 1980s and 1990s stock market gave them a very comfy retirement nest egg. (Which they are happily spending judging from the postcards from Europe I get from them while they are traveling!)

Dave of CA 10:39PM April 03, 2010