Defined Contribution Plans

[jiimbergin]

Re: Defined Contribution Plans

rosgal, excellent summary of where we are. I agree about how much some people can save living modestly. I am the executor of my sister-in-law's estate and managed her money after her husband died 11 years ago. He always had a modest job and she worked in day care. Several times during his life he was without a job although he always found some small paying job, such as working in a conveince store. When he went Home to the Lord, I was absolutely stunned by the estate he left. I had been a senior VP at several insurance companies and although I managed to retire early at 54, his estate was about 50% of my net worth. I really had expected my sister in law to have to have my help financially. Well she did, just not the way I expected.

[DSpencer]

Re: Defined Contribution Plans

The issues with Medicare and Medicaid are that they take the uninsurable and offer them care. This way insurance companies only have to deal with the profitable. The riskiest, the old and the poor, do not factor into the pool. It would cost almost nothing more to throw everyone into a unified plan. Indeed, for nothing more than these programs cost, all other first world countries, and some third world, provide universal care.

It would cost almost nothing? I strongly disagree. You think that since we already spend so much on Medicare that it would "cost almost nothing" to add everyone else. I think that Medicare is proof of how terribly expensive it would be in the US.

I think our two schticks here are different. I would characterize them this way:

Mine is: "The middle class is being picked apart. It is dying. Here is the proof. Here is why this is bad for the economy. Here are the reasons it is dying. Here are systems proven to have helped in other places. Here are ideas to stop it. Saving it is important by any means necessary. If doing so is ideologically impure, so be it."

Yours is: "Libertarian ideals are pure and correct. Freedom is important above all things. The elimination of any and all government is always good for the economy. The middle class is incidental. It will do better under my ideas anyways, at least if we go far enough and try new things. It's not as important to stop the shrinking of the middle class as it is to introduce pure markets."

How surprising that you would characterize your own position as a pragmatic solution based on proven systems and facts while a differing position is a risky ideological fantasy.

While I don't deny believing in freedom for its own sake, I don't recall making any sort of argument in this thread saying that freedom is important above all things and the middle class is incidental.

I would characterize our positions in this way:

You look at our system and see it's broken. You see other systems and believe they work better and can be implemented here with the same results.

I look at our system and see it's broken. I advocate finding the causes and fixing the major problems before trying to copy another system. I see important differences in our country that may not allow the same system to work as well here. I also believe that our country used to have a better system and one that resulted in it being the global leader in Medicine.

I also question the sustainability of other systems. Sure Greece has universal healthcare but will it always? I'm not convinced that the US can even afford it's partial government coverage system. I'm not sure about the wisdom of handing over healthcare to an entity that finds itself deeper and deeper in debt all the time.

[DSpencer]

Re: Defined Contribution Plans

I am in a position to see folks' financial statements. You would be AMAZED at what some people can save on VERY modest means.

I would love to hear more about this. How do they do it? It could be very practical, interesting and even uplifting. I tend to see the opposite: people living outside their means on above avg salaries.

[jiimbergin]

Re: Defined Contribution Plans

I would love to hear more about this. How do they do it? It could be very practical, interesting and even uplifting. I tend to see the opposite: people living outside their means on above avg salaries.

I would suggest a book http://www.amazon.com/Millionaire-Ne.../dp/0671015206

I know many who live below their means. My son lives far below his means as does my daughter and I know of others. I do not live as much below my means as I once did. I am getting older and decided that we love to travel so we do since one day we may not be able to.

[dcarrigg]

Re: Defined Contribution Plans

It would cost almost nothing? I strongly disagree. You think that since we already spend so much on Medicare that it would "cost almost nothing" to add everyone else. I think that Medicare is proof of how terribly expensive it would be in the US.

The cost of insuring the young, wealthy and healthy is far less than the cost of insuring the old and sick. The per capita taxpayer burden from Medicare and Medicaid equals the per capita taxpayer burden in every other comparable first world country. That's why I threw those charts up.

How surprising that you would characterize your own position as a pragmatic solution based on proven systems and facts while a differing position is a risky ideological fantasy.

I use the word pragmatism in the ol' Boston Brahmin C. S. Pierce sense here, and not in the modern colloquial sense. So by this I mean that I think about how to operationalize a new healthcare system before ideological preferences.

The differing position is only a risky ideological fantasy insofar as it has never been tried, and therefore, its implementation is not so clearly envisioned.

While I don't deny believing in freedom for its own sake, I don't recall making any sort of argument in this thread saying that freedom is important above all things and the middle class is incidental.

But I thought that was your position, is it not? I was not trying to be rude. Do you place value on equity?

I would characterize our positions in this way:

You look at our system and see it's broken. You see other systems and believe they work better and can be implemented here with the same results.

I look at our system and see it's broken. I advocate finding the causes and fixing the major problems before trying to copy another system. I see important differences in our country that may not allow the same system to work as well here. I also believe that our country used to have a better system and one that resulted in it being the global leader in Medicine.

But we're not the global leader in medicine. Americans invented neither penicillin, nor the MRI, nor X-rays, nor morphine, nor asprin. We do not have the best health outcomes. The biggest inventions we did come up with were vaccines, and even they were developed with government research money after the inception of the NIH. Pre NIH gilded age medicine was backwards indeed. I don't think anyone would go back to that. Maybe you're looking at the 50's then?

We do, however, spend the most money, even when the NIH is not taken into account.

I also question the sustainability of other systems. Sure Greece has universal healthcare but will it always? I'm not convinced that the US can even afford it's partial government coverage system.

We shall see what happens in Greece. The GS boys wrecked that place good. Healthcare in Iceland, where the people voted down the huge payments to bankers, is still functioning well, however.

I'm not sure about the wisdom of handing over healthcare to an entity that finds itself deeper and deeper in debt all the time.

I'm not sure about leaving healthcare in a system where it is exponentially taking up a greater share of GDP without showing improved health outcomes.

But you're right to not be sure. Particularly in our new age of dark money; government can certainly foul things up.

Nothing's sure, except that cost increases cannot keep going like this.

Sooner or later the quadratic graph will flatline even if nothing is done. And when that day comes do you think it be the insurance execs taking the hit, or doctors and patients and taxpayers?

[c1ue]

Re: Defined Contribution Plans

I would suggest a book http://www.amazon.com/Millionaire-Ne.../dp/0671015206

I certainly believe frugality has its place, but the "Millionaire Next Door" is as thoroughly debunked as is possible.

I'd suggest reading 'Fooled By Randomness' to get a sense of the many ways by which that author went astray.

[Milton Kuo]

Re: Defined Contribution Plans

I certainly believe frugality has its place, but the "Millionaire Next Door" is as thoroughly debunked as is possible.

I'd suggest reading 'Fooled By Randomness' to get a sense of the many ways by which that author went astray.

The Millionaire Next Door is, in my opinion, very worthwhile reading despite its flaws and I believe almost all Americans would benefit from reading it. I'd be interested in hearing what you believe to be the book's shortcomings.

The book does say that many of the millionaires interviewed accumulated their wealth in part by investing their savings in the stock market, which has been disastrous over the past decade. But to be fair, the book was released in 1996 before the U.S. entered a bubble-cycle economy and I do not recall the book recommending any specific investing style. In fact, even in the face of the bubble economy, one still could have made a good return provided one bought the right things and avoided buying the wrong things; e.g., Internet bubble stocks in the run-up to the 2000 crash, FIRE economy stocks leading up to the 2008 crash. On the "right" things to buy if one had to be invested in stocks, I distinctly remember an interview the Financial Times did with Jeremy Grantham where he said that if you had invested in an index of emerging market stocks, you would have tripled your money even after the 2008 crash.

If most Americans had applied the information in The Millionaire Next Door as a guide to planning their finances, I suspect the U.S. would not be in such dire straits today. That's not something I would say about a book that "is as thoroughly debunked as possible."

[flintlock]

Re: Defined Contribution Plans

We can argue the details all day long but what this really boils down to is that we have a class of parasites(FIRE) that must seek ever more complex ways to confuse and make more complex all aspects of our financial lives. Why? Because it makes it easier to insert themselves into the employer/employee relationship. What we should be asking is why does our employer still have anything to do with our health care or what we do with our money after we've earned it. Sure, blame the ridiculous tax laws that encourage this. But its no mystery who is really behind those laws and until the discussion shifts to fixing how influence is bought in Washington, the money will continue to flow away from the average investor and towards those with influence over our lawmakers. Thats the only real trend here.

I always try to see the big picture,the common denominators, and not get bogged down in discussions on how to slice the pie when what we really should be seeking is how to make more pies instead. In my opinion, getting bogged down in the details of who controls this or that simply plays into the hands of FIRE by validating their assumption that they should play a role in the first place. To kill the snake you cut off the head. Fix how Congress is bought and sold and the rest will fall in place.

[shiny!]

Re: Defined Contribution Plans

YES! and +1.

[c1ue]

Re: Defined Contribution Plans

The Millionaire Next Door is, in my opinion, very worthwhile reading despite its flaws and I believe almost all Americans would benefit from reading it. I'd be interested in hearing what you believe to be the book's shortcomings.

A short examination just on survivor bias:

By choosing those who are millionaires already as opposed to looking at a fixed group of people to see who became a millionaire, the premise that the frugality characteristics of these millionaires is the driving factor behind their becoming millionaires is extremely suspect.

In Fooled By Randomness, one specific flaw in measuring asset manager performance averages is precisely the same as the above: asset managers fail and disappear constantly. If all you do is examine the ones who succeed/survive, you are inherently biasing the average performance of the group upward.

For that matter, we could do a survey today and the most likely conclusion is that becoming a bankster is the best way to become a millionaire.

In reality, the best way to become a millionaire is to be born one.

Secondly the generation of the typical millionaire in that book was Boomer. Do I really need to highlight the FIRE driven asset, as well as stock market inflation underlying much of the Boomer generation's wealth?

Would the strategies of frugality work as well when you as a college student today must accrue $50K or more in debt to just get educated, only to then enter in a job market with 25% to 40% un- and under- employment for your age demographic?

Ultimately the premise of the book: be frugal, work hard and you'll become rich is nothing but a variant of the American Dream's meme of working hard and you'll become rich.

Sounds nice, is attractive to those who have or are near success, but of little value beyond flattering preconceptions.

[shiny!]

Re: Defined Contribution Plans

The book's central theme of living below your means and saving may not make people millionaires, but it's never bad advice.

[charliebrown]

Re: Defined Contribution Plans

Here are some tips that I use.

1) I don't know if it is possible any more with inflated house prices, but only buy a house approx. 2x your income.
2) Cars are really expensive. buy a good used car treat it well, and drive it into the ground. Watch fuel economy, and if possible live close to where you work.
3) cable + internet + cell phones + land phones add up to a lot of money every single month. ditch cable, find low speed internet, get a track phone.
4) get clothes especially childrens from childrens resales. the money goes to support good causes, and like new clothes can be bought for pennies on the dollar.
goodwill can provide some of the clothes for adults. I can't find good shoes there. pants and shirts are good.
5) buy one generation old electronics from ebay. I just bought a canon power shot s2 for $30. Retail price 5 yrs ago ... $499. A used laptop $100.
6) same with other toys like musical intruments, sporting goods, colletables etc.
7) eat out less, don't drink out, eat low on the food chain.
8) for gas, groceries, and other sundries find a loyalty program. We buy a lot of stuff at target. a target red card gives you 5% back. Some gas cards will get you 5% back on a fillup.
9) Be careful when accessing the medical system. Try to call around and get prices and determine coverage before the procedure. Model your expenses, so you can
decide the best insurance plan for yourself. I know these are very hard to do and that is one of the reasons why the health system is so messed up. opacity.
10) For investors, unless you really know what you are doing, just buy low cost index funds and adjust asset allocations to your risk tolerance.
11) cut out the firemen. If you have cheap cars and a cheap house, insurance costs will be lower. If you save some money you can raise deductables for home, auto and health insurance. a cheap house means you can ditch pmi earlier too.


Anyone else can add to the list.

[Milton Kuo]

Re: Defined Contribution Plans

A short examination just on survivor bias:

By choosing those who are millionaires already as opposed to looking at a fixed group of people to see who became a millionaire, the premise that the frugality characteristics of these millionaires is the driving factor behind their becoming millionaires is extremely suspect.

Thank you for your reply, c1ue. I guess on the subject of The Millionaire Next Door, we're just going to have to agree to disagree. In my experience, for people who are not already exceptionally knowledgeable on accumulating wealth, the book actually has something to offer and isn't based on faulty premises. That said, however, I suspect that most iTulip members, who are unusually knowledgeable about matters of wealth, would not learn anything new although the data and case studies presented are interesting.

I'll just offer my opinions on some of the points you make and let this issue rest. I don't want to be seen as a salesperson for this book.

The book does examine people who are not millionaires as evidenced by some of the PAWs (Prodigious Accumulators of Wealth) profiled who are not millionaires but likely will be when they retire. While not explicitly stated, the book makes it clear that one needs to be a business owner or skilled labor to generate enough income to have a shot at becoming independently wealthy; they do not suggest that an unskilled laborer earning minimum wage is ever going to become wealthy. However, the premise of frugality as a substantial factor in amassing net worth is valid and, if one looks and is willing to ask uncomfortable questions, one will find that frugality (or at least temperance for the truly high-grossing individuals) is a common trait among PAWs.

In Fooled By Randomness, one specific flaw in measuring asset manager performance averages is precisely the same as the above: asset managers fail and disappear constantly. If all you do is examine the ones who succeed/survive, you are inherently biasing the average performance of the group upward.

While the book focuses on those who have managed to accumulate substantial wealth, the book also contains relatively detailed profiles of people who fail to accumulate wealth. Something that really stuck in my mind from the book was the study in contrasts of Dr. North and Dr. South: both 50-something year-old physicians who grossed over $700,000 per year (in mid-1990s dollars!) but had vastly differing net worths of $7,000,000 (Dr. North) versus $400,000 (Dr. South.)

For that matter, we could do a survey today and the most likely conclusion is that becoming a bankster is the best way to become a millionaire.

In reality, the best way to become a millionaire is to be born one.

The book is not so much focused on studying millionaires so much as it is focused on studying people who have accumulated enough wealth such that they can not have jobs and live off their wealth. In fact, the only mention of a Wall Street worker I can remember from the book is that of a broker who wasn't a PAW partly because he couldn't stop trading.

Secondly the generation of the typical millionaire in that book was Boomer. Do I really need to highlight the FIRE driven asset, as well as stock market inflation underlying much of the Boomer generation's wealth?

In my earlier post, I did mention that the book states that the PAWs grew their wealth through investments in the stock market. However, I also stated that even in a bubble economy, it is still possible to make capital gains provided that one avoided the truly horrible assets. But your point is taken and it is a major problem with the book: the Baby Boomers had it pretty easy. It would be nice to get an update on the book using newer data and younger people while following up on how the PAWs and UAWs in the first edition of the book are doing today.

With that said, however, one can become wealthy without FIRE economy gains. A frugal friend has over his working career put the vast majority of his money in CDs. Despite having a relatively modest income (he is college-educated and a skilled white collar worker), his net worth is easily in the top ten percent--maybe even top six or seven percent--and he has more than twenty years to go before he retires.

Would the strategies of frugality work as well when you as a college student today must accrue $50K or more in debt to just get educated, only to then enter in a job market with 25% to 40% un- and under- employment for your age demographic?

For graduates from reasonably good colleges with degrees in more immediately useful fields such as engineering, computer science, accounting, and medicine, I would argue that the answer is an unequivocal, "Yes!" These fields can earn $50,000 or more as a starting salary and they do not have the high unemployment rates of liberal arts or humanities majors.

As for student debt, frugality in accumulating student debt and not being careless by borrowing from loan shark operations makes a tremendous difference. A friend who got his M.D. from a top medical school in the 1990s did not borrow unnecessarily and only owed $60,000 upon graduating. [The typical debt incurred was more than $120,000.] In the two or three years he was a resident, he paid off $30,000 of the loan and this was on a salary of $30,000 or $40,000 per year.

Ultimately the premise of the book: be frugal, work hard and you'll become rich is nothing but a variant of the American Dream's meme of working hard and you'll become rich.

Sounds nice, is attractive to those who have or are near success, but of little value beyond flattering preconceptions.

If the American Dream is, "work hard and you'll become rich," of course it's likely to fail because it omits critical details. However, even in these difficult times, I still believe a person can become relatively wealthy if he follows a more practical guide to accumulating wealth. Here are a few things off the top of my head:

1. Acquire a useful skill or trade.
2. Work hard and do good work.
3. Make sure you are fairly compensated for your work; in other words, make sure you aren't underpaid.
4. Learn how to manage one's finances: balancing a checkbook, using and eschewing debt, investing and capital preservation.
5. Try to save at least 25% of your gross income.
6. Don't buy stupid things you don't need ($100/month cable TV subscriptions, $100/month cell phone plans, $50/month gym memberships, cigarettes, unnecessarily fancy and expensive things, etc.)
7. Buy quality goods with the goal that they will last your lifetime.
8. Learn how to cook for yourself. Not only is this less expensive than eating out, it's healthier.
9. Take good care of your body so you don't waste all your money on expensive doctor visits and expensive medicines that typically have nasty side effects.
10. Don't get divorced, especially if you're a man.

And of course, hope that you are a little bit lucky and manage to avoid personal catastrophes.

[lektrode]

Re: Defined Contribution Plans

....However, even in these difficult times, I still believe a person can become relatively wealthy if he follows a more practical guide to accumulating wealth. Here are a few things off the top of my head:

1. Acquire a useful skill or trade.
2. Work hard and do good work.
3. Make sure you are fairly compensated for your work; in other words, make sure you aren't underpaid.
4. Learn how to manage one's finances: balancing a checkbook, using and eschewing debt, investing and capital preservation.
5. Try to save at least 25% of your gross income.
6. Don't buy stupid things you don't need ($100/month cable TV subscriptions, $100/month cell phone plans, $50/month gym memberships, cigarettes, unnecessarily fancy and expensive things, etc.)
7. Buy quality goods with the goal that they will last your lifetime.
8. Learn how to cook for yourself. Not only is this less expensive than eating out, it's healthier.
9. Take good care of your body so you don't waste all your money on expensive doctor visits and expensive medicines that typically have nasty side effects.
10. Don't get divorced, especially if you're a man.

And of course, hope that you are a little bit lucky and manage to avoid personal catastrophes.

EXCELLENT list mr K (and comeback to mr c1ue's otherwise fair commentary on the book)

sounds like maybe #10 was the diff tween dr's N & S, eh?

the importance of #1 tho, cant possibly be overstated
which seems to be the biggest problem with the younger gens, who seem to believe that all they have to do is put in their time on some campus, aquiring the easiest degree possible, while financing both the degree along with the 'animal house' lifestyle - and then expect some employer to be impressed with their 'experience' in retail or otherwise not-too-strenuous occupational pursuits while partying thru college

but i do agree with mr c1ue on the relative success of the boomers, esp the early wave of boomers, who basically just had to show up, dont piss off the boss and hang around long enuf for demographics to propel them up the foodchain = not likely to ever happen again

would also add that if one is a skilled tradesperson, one needs to be able to make enough, fast enough - to be able to outrun/get in front of the aging process, as it at some point WILL take its toll on ones ability to perform (ask me how i know this, esp in something like the boatbiz) - its getting more difficult by the month: eyeballs, knees, back, and elbows all seem to conspire against ya - and THEN there's the market krash and ZIRP taking out the customer base's retirement plans (since most boaters _arent_ rich guys, they just spend it all on their favorite 'woman' ;)

[Milton Kuo]

Re: Defined Contribution Plans

EXCELLENT list mr K (and comeback to mr c1ue's otherwise fair commentary on the book)

sounds like maybe #10 was the diff tween dr's N & S, eh?

Actually, Dr. North and Dr. South were both married with children and I seem to recall the data indicating that neither had ever divorced. The key difference was that the South family were hyper consumers. Among the expenditures the South household had that the North household did not:

1. Dr. South bought a brand-new Porsche every one or two years. It wasn't stated if Mrs. South or any of the children bought new cars regularly.
2. $30,000/year on new clothes.
3. $50,000/year on country club fees.
4. A very expensive home with all the associated expenses of an expensive home: mortgage, property taxes, landscaping, and decorating.
5. Frequent dining out at restaurants.
6. Private tutors.

Regarding divorce: the book does state that divorce is detrimental to net worth and being married is conducive to accumulating wealth.

the importance of #1 tho, cant possibly be overstated
which seems to be the biggest problem with the younger gens, who seem to believe that all they have to do is put in their time on some campus, aquiring the easiest degree possible, while financing both the degree along with the 'animal house' lifestyle - and then expect some employer to be impressed with their 'experience' in retail or otherwise not-too-strenuous occupational pursuits while partying thru college

It has always puzzled me how anyone could think that getting a degree in English literature would result in one being able to secure a relatively well-paying job outside of academia. Outside of getting such a degree from one of the elite programs, I wonder if that has ever been the case.