Frontline--The Retirement Gamble

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Re: Frontline--The Retirement Gamble

Postby LadyGeek » Wed Jun 12, 2013 6:33 pm

(I'm anticipating the next comment will be about Slice and Dice.) Please stay on-topic.
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Re: Frontline--The Retirement Gamble

Postby Spades » Wed Jun 12, 2013 9:26 pm

Good article. I agree the Frontline piece was trying to scare it's viewers, but that was probably to keep them watching and interested. The author is right in that Frontline could have expanded how Americans can start saving, why we save so little, and how to involve that with retirement plans. I'm glad the author concluded with praising the piece. Now only if we could make being a boglehead exciting to the masses....

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Re: Frontline--The Retirement Gamble

Postby damjam » Wed Jun 12, 2013 11:30 pm

jwillis77373 wrote:I watched the show.

But thought it was not as good as the other Frontline show about the same subject matter [ Can You Afford to Retire? ] by Hedrick Smith in 2006.

The full show is available online.

http://www.pbs.org/wgbh/pages/frontline/retirement/

Thanks for the link.
I actually watched this program when it aired in 2006. I agree this program was better than the more recent Frontline piece.

One interesting tidbit from the 2006 program:
Interviewee Brooks Hamilton is a Corporate Benefits Consultant who ran 15 corporate 401(k) plans that were rather large (1000+ employees, 100+ million in assets each).
He said he dug deep into his 401(k) records, analyzing investment yields for every single worker in every single plan.

Brooks Hamilton:
"We saw the same thing over and over. Say the bottom 20 percent had an investment return for the year for the year of 4 percent. The top 20 percent would be anywhere between 5 and 7 times that number."
"In every case, the 20 percent at the top not only had the highest investment income like 30 percent or whatever they also had the highest average annual pay, whereas the bottom 20 percent not only had the lowest investment income, 4 percent, they had the lowest average annual pay."


If this is supported by the data I find this fascinating. I suppose the new policy of automatically investing participants in a target date fund is an effort to mitigate this effect.

LadyGeek wrote:Here's the transcript: Can You Afford To Retire? Airdate: May 16, 2006
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Re: Frontline--The Retirement Gamble

Postby umfundi » Wed Jun 12, 2013 11:51 pm

damjam wrote:
jwillis77373 wrote:I watched the show.

But thought it was not as good as the other Frontline show about the same subject matter [ Can You Afford to Retire? ] by Hedrick Smith in 2006.

The full show is available online.

http://www.pbs.org/wgbh/pages/frontline/retirement/

Thanks for the link.
I actually watched this program when it aired in 2006. I agree this program was better than the more recent Frontline piece.

One interesting tidbit from the 2006 program:
Interviewee Brooks Hamilton is a Corporate Benefits Consultant who ran 15 corporate 401(k) plans that were rather large (1000+ employees, 100+ million in assets each).
He said he dug deep into his 401(k) records, analyzing investment yields for every single worker in every single plan.

Brooks Hamilton:
"We saw the same thing over and over. Say the bottom 20 percent had an investment return for the year for the year of 4 percent. The top 20 percent would be anywhere between 5 and 7 times that number."
"In every case, the 20 percent at the top not only had the highest investment income like 30 percent or whatever they also had the highest average annual pay, whereas the bottom 20 percent not only had the lowest investment income, 4 percent, they had the lowest average annual pay."


If this is supported by the data I find this fascinating. I suppose the new policy of automatically investing participants in a target date fund is an effort to mitigate this effect.

LadyGeek wrote:Here's the transcript: Can You Afford To Retire? Airdate: May 16, 2006

Are you sure he was only calculating investment returns? Of course, higher paid employees would have higher contributions and thus bigger changes in their account values.

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Re: Frontline--The Retirement Gamble

Postby damjam » Wed Jun 12, 2013 11:58 pm

umfundi wrote:Are you sure he was only calculating investment returns? Of course, higher paid employees would have higher contributions and thus bigger changes in their account values.

He seemed pretty clear that he was talking about investment returns. He called it the "yield disparity."
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Re: Frontline--The Retirement Gamble

Postby umfundi » Thu Jun 13, 2013 12:06 am

damjam wrote:
umfundi wrote:Are you sure he was only calculating investment returns? Of course, higher paid employees would have higher contributions and thus bigger changes in their account values.

He seemed pretty clear that he was talking about investment returns. He called it the "yield disparity."

Interesting. Hard to believe that lower compensation correlates with poor 401k investment choices.

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Re: Frontline--The Retirement Gamble

Postby schuyler74 » Thu Jun 13, 2013 12:20 am

umfundi wrote:Interesting. Hard to believe that lower compensation correlates with poor 401k investment choices.

I think you're implying that lower-paid employees are less educated and therefore make poor choices because of that. But i think it's more likely that the correlation isn't due to education but rather risk aversion. Regarding my coworkers who I know a bit about their 401k investments, what you noted holds true but from our discussions my feeling is that the lesser-paid ones feel they can't risk losing what they have so they lean towards safer investments like bond funds and Stable Value, while the ones who make more definitely buy more smaller cap and foreign funds.

Yet another reason the rich get richer, and in my view probably the main reason: rich people can afford to take more risk because they still have plenty of money if the risk appears. And as I've seen posted on these forums many times, you should expect higher returns when taking higher risk. If that's true, then the rich get richer because their behavior is riskier, not because they are more educated/intelligent and have a higher salary.
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Re: Frontline--The Retirement Gamble

Postby Call_Me_Op » Thu Jun 13, 2013 6:29 am

schuyler74 wrote:
umfundi wrote:Interesting. Hard to believe that lower compensation correlates with poor 401k investment choices.

I think you're implying that lower-paid employees are less educated and therefore make poor choices because of that. But i think it's more likely that the correlation isn't due to education but rather risk aversion. Regarding my coworkers who I know a bit about their 401k investments, what you noted holds true but from our discussions my feeling is that the lesser-paid ones feel they can't risk losing what they have so they lean towards safer investments like bond funds and Stable Value, while the ones who make more definitely buy more smaller cap and foreign funds.

Yet another reason the rich get richer, and in my view probably the main reason: rich people can afford to take more risk because they still have plenty of money if the risk appears. And as I've seen posted on these forums many times, you should expect higher returns when taking higher risk. If that's true, then the rich get richer because their behavior is riskier, not because they are more educated/intelligent and have a higher salary.


I don't think it has anything to do with intelligence. However, the more affluent would have more of an inclination to learn about investing, and would have perhaps a greater comfort level with the risks of the stock market.
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Re: Frontline--The Retirement Gamble

Postby damjam » Thu Jun 13, 2013 10:59 am

umfundi wrote:Interesting. Hard to believe that lower compensation correlates with poor 401k investment choices.

Agreed. I wouldn't think there would be any correlation. That's why it stuck out for me. If true, it has potentially far reaching implications.

schuyler74 wrote:... Regarding my coworkers who I know a bit about their 401k investments, what you noted holds true but from our discussions my feeling is that the lesser-paid ones feel they can't risk losing what they have so they lean towards safer investments like bond funds and Stable Value...

I think you may be on to something there.
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Re: Frontline--The Retirement Gamble

Postby Spades » Thu Jun 13, 2013 11:32 am

Call_Me_Op wrote:
schuyler74 wrote:
umfundi wrote:Interesting. Hard to believe that lower compensation correlates with poor 401k investment choices.

I think you're implying that lower-paid employees are less educated and therefore make poor choices because of that. But i think it's more likely that the correlation isn't due to education but rather risk aversion. Regarding my coworkers who I know a bit about their 401k investments, what you noted holds true but from our discussions my feeling is that the lesser-paid ones feel they can't risk losing what they have so they lean towards safer investments like bond funds and Stable Value, while the ones who make more definitely buy more smaller cap and foreign funds.

Yet another reason the rich get richer, and in my view probably the main reason: rich people can afford to take more risk because they still have plenty of money if the risk appears. And as I've seen posted on these forums many times, you should expect higher returns when taking higher risk. If that's true, then the rich get richer because their behavior is riskier, not because they are more educated/intelligent and have a higher salary.


I don't think it has anything to do with intelligence. However, the more affluent would have more of an inclination to learn about investing, and would have perhaps a greater comfort level with the risks of the stock market.


Interesting. It makes sense for people who have lower incomes to be risk averse with their savings. What could be some correlating traits of individuals who make poor investment decisions? I can think of lack of wisdom/maturity by being convinced by sleezy stock brokers.

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Re: Frontline--The Retirement Gamble

Postby Terraplane » Thu Jun 13, 2013 5:14 pm

If teachers are having a difficult time with their own retirement plans and finances, would you really want those who don't have a clue doing the teaching?[/quote]

I agree that most teachers are pretty bad at this stuff, but not all of us! I try to tie in personal finance to my courses, and I hope to teach it one day as well. It's offered as an elective at most high schools, but I hope it will be mandatory one day. I plan on working to make that hope a reality.[/quote]

I work at a high school and a couple years ago I was passing through the business dept and made a joke to a teacher (marketing) about how was he doing in the market. He stated his mutual funds weren't down any. This as the S&P was dropping daily. He had no clue what he had. Financial literacy is now taught to all and I hear good things being discussed in the classes but does it stick?

I have talked to a few people there to start an investing discussion group to maybe introduce indexing......only interest is in an investing club to pool our money and look into "hot" stocks! Have given up for now.

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Re: Frontline--The Retirement Gamble

Postby Billym » Thu Jun 27, 2013 10:50 pm

I thought over all it was a good program; however, the narrator made a gross error when he got out his calculator to see if what he thought he heard Mr. Bogle say about fees was correct. He entered $100,000 as a portfolio figure and then subtracted a 2% expense fee annually for I think 30 years leaving him with around $33,000, thus proving that what he "heard" Jack Bogle say was correct.

I do believe that Mr. Bogle used the word “compounded” several times in the interview. The narrator, however, never put in any return on the original $100,000 in his calculations. If the $100,000 didn't make a dime over 30 years then, yes, he would have been left with a third of what he started out with. But in reality using Mr. Bogle's example, if on average the original investment made 7% annually, the narrator would have been making 5% compounded; sure, that 2% fee would have added up to a healthy sum - at least $60,000 - I'm not going to do a spreadsheet; but the narrator would not have been left out in the cold with only $30,000. Rather, he’d have $250,000 plus.
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Re: Frontline--The Retirement Gamble

Postby ogd » Thu Jun 27, 2013 11:05 pm

Billym wrote:sure, that 2% fee would have added up to a healthy sum - at least $60,000 - I'm not going to do a spreadsheet;


Oh, but you should do a spreadsheet. It eats half of your returns.

The narrator was just doing a ballpark calculation. Yes, 0% vs -2% is worse than 5% vs 7% which in turn is worse than 100% vs 102% (where the impact is almost nil). I don't think anybody took it at face value. Although that face value actually applies for a portfolio that only manages to track inflation.
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Re: Frontline--The Retirement Gamble

Postby Billym » Sun Jun 30, 2013 9:41 am

OGD,

I did a spreadsheet as you suggested (albeit an unrealistic one) with a $100,000 beginning portfolio where the return was an annual 7% every year for 30 years. My investor gave up a little over 30% of the return with a 2.00% Fund fee. However, throw in one 2008 and one or two other down market years in the -20% range - even with a couple of up years around 10-15% - and the investor could have made more money power washing driveways in his spare time if his ER was 2%.

Clearly, Expense Ratios are integral to successful fund investing. My ER is .24. However, as I was trying to say in my original post, the facts are sufficient. The narrator did a great disservice utilizing a ridiculous scenario where he received NO return while paying the Fund Company 2% annually for however many years.

I've been investing for over forty years. But if I were in my twenties and watching that program I could easily be dissuaded by the narrator's example from ever investing in mutual funds. And I believe that would be a great mistake.
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Re: Frontline--The Retirement Gamble

Postby jwillis77373 » Sun Jun 30, 2013 12:11 pm

damjam wrote:
umfundi wrote:Are you sure he was only calculating investment returns? Of course, higher paid employees would have higher contributions and thus bigger changes in their account values.

He seemed pretty clear that he was talking about investment returns. He called it the "yield disparity."


I thought he was talking about the benefit of re-investing gains that are taxed at the capital gains rate.

At some point rich investors [drop] in real taxes because they make more from their investments than their salary and enter a low tax zone, say 15% and can quit their job or accept other types of compensation not taxed at normal tax rates. Example: Steve Jobs $1 salary a year with options.

But say they have all that income from capital gains to re-invest, they do so at a greatly reduced tax rate.

Through some other manipulations, say tax free investments they could boost it even higher.

Its like there are aggregate sum advantages for the affluent, reach a certain level and tax and investing options that normally aren't available become attainable.

I guess that is an edge from investor education, but even knowing about it doesn't help you if you don't have the sum to begin that strategy.
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Re: Frontline--The Retirement Gamble

Postby ogd » Sun Jun 30, 2013 1:51 pm

Billym wrote:OGD,

I did a spreadsheet as you suggested (albeit an unrealistic one) with a $100,000 beginning portfolio where the return was an annual 7% every year for 30 years. My investor gave up a little over 30% of the return with a 2.00% Fund fee.


I meant the investment return, not the total ending sum. The rationale being, I take 100% of the risk and the financial industry takes away 50% of my profits.

Billym wrote:Clearly, Expense Ratios are integral to successful fund investing. My ER is .24. However, as I was trying to say in my original post, the facts are sufficient. The narrator did a great disservice utilizing a ridiculous scenario where he received NO return while paying the Fund Company 2% annually for however many years.

I've been investing for over forty years. But if I were in my twenties and watching that program I could easily be dissuaded by the narrator's example from ever investing in mutual funds. And I believe that would be a great mistake.


The other side of that coin is that a young investor seeing a "typical returns" calculation could have thought to himself, "who cares about fees when I can quadruple my money!!!" I think that the calculation does a good job of driving home the impact of fees without getting overshadowed by the massive returns in either case. For example, with the fees you are paying, the end result would have been $93K instead of $33K.

And, like I was saying, in the prolonged periods of high inflation when a portfolio barely kept up, $93K real instead of $33K is exactly what you'd be getting.
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Re: Frontline--The Retirement Gamble

Postby damjam » Sun Jun 30, 2013 2:01 pm

jwillis77373 wrote:
damjam wrote:
umfundi wrote:Are you sure he was only calculating investment returns? Of course, higher paid employees would have higher contributions and thus bigger changes in their account values.


He seemed pretty clear that he was talking about investment returns. He called it the "yield disparity."



I thought he was talking about the benefit of re-investing gains that are taxed at the capital gains rate.


You have to watch the program or read the transcript to see the context. He was talking specifically about investments inside 401ks only, not taxable investments.
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Re: Frontline--The Retirement Gamble

Postby Abe » Mon Jul 01, 2013 4:41 pm

22twain wrote:From the program blurb:

Assume you are invested in a mutual fund, [Bogle] says, with a gross return of 7 percent, but that the mutual fund charges you an annual fee of 2 percent.

Over a 50-year investing lifetime, that little 2 percent fee will erode 63 percent of what you would have had. As Bogle puts it, “the tyranny of compounding costs” is overwhelming.


I had to try that calculation for myself. Sure enough, that's what you get if you assume continuous compounding on an initial sum left alone for 50 years with no additional contributions: e^(50*0.07) versus e^(50*0.05). If you assume annual compounding instead, the erosion is "only" 61%: 1.07^50 versus 1.05^50.


This is what I got using my financial calculator:
Investor A invest $100,000. @ 7% for 50 years = $2,945,702.00
Investor B invest $100,000. @ 5% for 50 years = $1,146,739.00
So, investor B received $1,798,963.00 less than investor A because he paid a 2% fee or 61% less. I think that's right.
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Re: Frontline--The Retirement Gamble

Postby Billym » Mon Jul 01, 2013 5:18 pm

ABE,

I think we're agreed here that what Mr. Bogle said - has always been saying - is absolutely true. My point was that what the narrator should have done was what you just did, what I did and what others here have done before I ever posted. Instead, he tried to dramatize the cost of high ERs in what I considered a foolish and really invalid way. ERs were just one area discussed in the program.

I've done a number of Spreadsheets over the years but never did one for ERs until the other day since all but two of my funds are Index Funds with very low Ers. I've had them for nearly 25 years. The one I have with the highest ER is a managed fund and did very well for me over ten years; after I did a make believe Spreadsheet for this discussion I did one for the fund I own. I discovered I could have done about $40,000 better.
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