How Many Contribute To A Retirement Fund But Never Invest

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runnerguy
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How Many Contribute To A Retirement Fund But Never Invest

Post by runnerguy » Mon Mar 13, 2017 8:52 pm

I recently found out my sister had an IRA with several thousand just sitting in cash. No clue that it needed to be invested. Then found another friend like that.

How many people are out there like them? Any statistics. We all fret about finding an extra .5% of return and there are people who might spend their whole career contributing to a retirement fund only to lose out to 40 years inflation.

jasc15
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by jasc15 » Mon Mar 13, 2017 8:58 pm

My father did that for a while with an IRA at a credit union.

LawyersGunsAndMoney
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by LawyersGunsAndMoney » Mon Mar 13, 2017 9:17 pm

I did this from 2003-2007, my first job out of college. My employer didn't offer a 401k option that I could contribute to, and so my parents advised me to make deductible contributions to a Trad IRA. So I did, and contributed like $4k per year over this time to a Fidelity Traditional IRA.

I didn't know I had to then choose investments, so all the money just stayed in the money market sweep account (or whatever option Fidelity has set up as the default back then).

In 2007, I moved to NYC, got a new job and then distinctly remember wondering why everyone was talking about the stock market crashing in 2008 while my investments weren't losing anywhere near as much. When I became 401k-eligible in November of 2008 I finally figured it all out, and both invested my Trad IRA in an S&P 500 Index Fund as well as started my 401k contributions. Accidentally was an idiot and timed the market.

gizmo
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by gizmo » Mon Mar 13, 2017 9:20 pm

Complicit in this for about six months during my first relatively well paying job. Dropped funds into a Chase IRA for a series of account sign up bonuses - several months later at tax time I was going through paperwork, and found the funds were still safe and sound, and at the exact same value, in a money market account.

That was frustrating enough, but even more so was despite never actually having the IRA opened, I was still hit with an early withdrawal after I closed it in a spat of rage.

macheta
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by macheta » Mon Mar 13, 2017 9:30 pm

LawyersGunsAndMoney wrote:I did this from 2003-2007, my first job out of college. My employer didn't offer a 401k option that I could contribute to, and so my parents advised me to make deductible contributions to a Trad IRA. So I did, and contributed like $4k per year over this time to a Fidelity Traditional IRA.

I didn't know I had to then choose investments, so all the money just stayed in the money market sweep account (or whatever option Fidelity has set up as the default back then).

In 2007, I moved to NYC, got a new job and then distinctly remember wondering why everyone was talking about the stock market crashing in 2008 while my investments weren't losing anywhere near as much. When I became 401k-eligible in November of 2008 I finally figured it all out, and both invested my Trad IRA in an S&P 500 Index Fund as well as started my 401k contributions. Accidentally was an idiot and timed the market.
Seems like a really good time to buy once you figured out the issue in 2008

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abuss368
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by abuss368 » Mon Mar 13, 2017 9:33 pm

I have seen many times over the years folks who open and IRA at a bank for example and then buy a bank CD only in the IRA. In today's environment, that is a tough rate of return to try an build your future around.
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obafgkm
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by obafgkm » Mon Mar 13, 2017 11:12 pm

abuss368 wrote:I have seen many times over the years folks who open and IRA at a bank for example and then buy a bank CD only in the IRA. In today's environment, that is a tough rate of return to try an build your future around.
I opened my first IRA in graduate school in the late 1980s at at savings and loan. It was a certificate of deposit (CD) and was earning about 9% interest, if I recall correctly. I let it continue to roll over into a succession of CDs for years. It was not until about the late 1990s that I transferred it to a mutual fund at Fidelity, only because by that time I had been educated in mutual funds and investing through my 403(b) at work. Before that, I understood banks and the like, and CDs. I did not understand mutual funds, and what I did not understand, I was frankly fearful of.

I wonder how many people described in this thread just don't understand mutual funds and investing.

bjames310
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by bjames310 » Tue Mar 14, 2017 1:29 am

My brother (34 y.o.) did a backdoor Roth, to only keep it in a money market account. I tried explaining to him whAt I learned from this Blog and the books that have been recommended to me to read, but he doesn't trust the market and thinks I'm dumb for not hiring a financial advisor. He thinks he's fine just having it in cash and that I will go broke doing it on my own.

Artisan
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by Artisan » Tue Mar 14, 2017 1:30 am

I am constantly amazed that coworkers have no idea the difference between an investment vehicle like an IRA and the mutual funds that may be contained therein.

I try to educate them, one at a time.

cherijoh
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by cherijoh » Tue Mar 14, 2017 7:40 am

gizmo wrote:Complicit in this for about six months during my first relatively well paying job. Dropped funds into a Chase IRA for a series of account sign up bonuses - several months later at tax time I was going through paperwork, and found the funds were still safe and sound, and at the exact same value, in a money market account.

That was frustrating enough, but even more so was despite never actually having the IRA opened, I was still hit with an early withdrawal after I closed it in a spat of rage.
Great way to cut off your nose to spite your face.

BTW, you just amply demonstrated the OPs main point about clueless investors. An IRA is a wrapper not a specific investment, so by depositing funds into the Chase IRA it WAS actually opened. :oops:

cherijoh
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by cherijoh » Tue Mar 14, 2017 7:55 am

obafgkm wrote:
abuss368 wrote:I have seen many times over the years folks who open and IRA at a bank for example and then buy a bank CD only in the IRA. In today's environment, that is a tough rate of return to try an build your future around.
I opened my first IRA in graduate school in the late 1980s at at savings and loan. It was a certificate of deposit (CD) and was earning about 9% interest, if I recall correctly. I let it continue to roll over into a succession of CDs for years. It was not until about the late 1990s that I transferred it to a mutual fund at Fidelity, only because by that time I had been educated in mutual funds and investing through my 403(b) at work. Before that, I understood banks and the like, and CDs. I did not understand mutual funds, and what I did not understand, I was frankly fearful of.

I wonder how many people described in this thread just don't understand mutual funds and investing.
+1
It used to be SOP that workplace retirement plans defaulted to a stable value fund if the employee didn't specify an investment. I think now it's more common to default to an age-appropriate target retirement fund if it is available. But with an IRA there are just too many choices, so that paternalistic approach won't work.

A former colleague once asked for my advice on our 401k after hearing me discuss the topic with another colleague. (She was a bright woman, but wasn't especially financially savvy). I was a little hesitant to provide advice, but agreed to share how I was invested (S&P 500 index, core bond fund, international fund) and my reasons why. She then mentioned that she had invested 50/50 in the stable value fund and company stock.

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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by dbr » Tue Mar 14, 2017 9:03 am

I made that mistake way back when, at the beginning. I think the nuance was that saving was important and that investing is risky.

Two things. The first is that at the beginning saving is important. The assets grow more from contributions than from return. Second is that risk doesn't matter very much early on but time at expected return matters a lot.

I think the default to a fairly aggressive TR fund is a good idea.

A side observation is that at Megacorp in those days people saved as much or more in the employee stock purchase program. Thirty to forty years on those people have made out like bandits. But it didn't have to happen that way.

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TomatoTomahto
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by TomatoTomahto » Tue Mar 14, 2017 9:11 am

30+ years ago, I opened an IRA with a $2000 CD (the limit then). The CD kept being reissued, at lower and lower rates, and I forgot about it. 20+ years ago, I remembered it, and put the money to work. I don't remember the details, but it wasn't much more that $2000 after a decade.

Ostentatious
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by Ostentatious » Tue Mar 14, 2017 9:29 am

Spouse did the same thing for over a year but that was more out of ignorance than on purpose. I didn't know much either. We've wised up a little bit now.

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nisiprius
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by nisiprius » Tue Mar 14, 2017 9:33 am

Two details.

1) "Savings" doesn't mean "a bank account," and "investment" doesn't mean "securities." "Savings" mean the part of your income that is not spent, and "investment" is whatever you do with it. If your savings are not spent, they are invested. A money market mutual fund is an investment--a low-yielding, low-risk investment. If people are contributing to a retirement fund, they are investing, even if you think their investment choice is excessively risk-averse, to the point of not being in their own best interests.

2) Although I think it's a bad idea to invest 100% in short-term reserves and 0% in stocks and intermediate-term bonds, the "investment" industry is prone to a bit of propaganda involving two different meanings for the word "cash." It is certainly true that "cash" in the form of a fixed number of dollars, either as physical currency or in a non-interest-bearing account, has a seriously negative real return and will over time get savaged by inflation. However, this not at all true of either Treasury bills, money market mutual funds, or good competitive bank accounts.

Runnerup's sister may be entirely invested in "cash," but unless it is physical paper bills, it probably is not "just sitting there."

Money market funds and well-chosen bank accounts are usually pretty close to Treasury bills, and thus usually have slightly positive real return. The Bogleheads' wiki shows a chart of Treasury bills versus inflation:

Image

One of the curiosities of investment-advice rhetoric is that Treasury bills are fairly often cited as one "hedge against inflation," yet money market funds and bank accounts rarely are.

From 1926 through 2014, inclusive, the CAGR of inflation was 2.9%, and the CAGR of Treasury bills was 3.5%, thus a real return of 0.6%. That's nothing to write home about, but it's still positive.

Since inception, the Vanguard Prime Money Market Fund, VMMXX, (and doubtless others) has closely tracked and beaten 3-month Treasury bills:
Source
Image

Vanguard is showing Prime Money Market as having had a 5.11% average (CAGR) annual return since inception; since inception, it would have grown $10,000 to $79,872.50, while the BLS inflation calculator tells us that $10,000 in 1975 had the buying power of $45,137.46 today; thus, Prime Money Market cumulatively added 77% in real value since inception.

Again, that doesn't mean putting all your retirement money in a money market fund is a good idea, but it's not quite so bad as all that.
Last edited by nisiprius on Tue Mar 14, 2017 9:38 am, edited 1 time in total.
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climber2020
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by climber2020 » Tue Mar 14, 2017 9:36 am

I did this when I was in school/training for a few years because I knew nothing about investing at that point. By random luck it turned out very well, as the money in my Roth sat in a money market account in 2006, 2007, and 2008 before finally being directed toward a balanced fund in 2009 after everything collapsed.

Lyrrad
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by Lyrrad » Tue Mar 14, 2017 10:36 am

Looked up the form 5500 for my company for 2015. At the end of the year, 2.2% of assets were in the Money Market fund. My company has auto-enrollment and increasing contributions each year with contributions going into the target retirement account. Just over half of all assets were invested in the current default retirement funds.

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5th_Dimension
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by 5th_Dimension » Tue Mar 14, 2017 10:46 am

This happened to us for more years than I care to admit. Wife's employer was contributing to an IRA and the money was just sitting there. It was doing research on what to do with it that led me here :happy
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by stemikger » Tue Mar 14, 2017 11:04 am

I'm shocked by how many people I work with who are very smart people but know absolutely nothing about investing. For some ignorance was bliss and just put everything into stocks even though they were a year or so from retirement.

For others, they put it all into a money market for many years. One woman I work with who is a computer genius is also a bit of a conspiracy theorist said to me that she does not trust the stock market. She has everything in a money market and is about to retire next year.

I have only seen a few people who are really doing the right thing for their future.
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Pajamas
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by Pajamas » Tue Mar 14, 2017 11:38 am

Some people do the opposite of leaving their money in the default money market or equivalent and instead split their contributions among all the available choices in equal percentages.
Artisan wrote:I am constantly amazed that coworkers have no idea the difference between an investment vehicle like an IRA and the mutual funds that may be contained therein.
Even a few "professionals" who should know the difference do not. Twenty-five years ago, when the public internet was young and information was not so readily available, I convinced a friend to open an IRA for retirement but didn't give further advice. He went to a major bank and walked out with a tax-deferred annuity inside an IRA.

Hanksmoney
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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by Hanksmoney » Tue Mar 14, 2017 12:07 pm

LawyersGunsAndMoney wrote:I did this from 2003-2007, my first job out of college. My employer didn't offer a 401k option that I could contribute to, and so my parents advised me to make deductible contributions to a Trad IRA. So I did, and contributed like $4k per year over this time to a Fidelity Traditional IRA.

I didn't know I had to then choose investments, so all the money just stayed in the money market sweep account (or whatever option Fidelity has set up as the default back then).

In 2007, I moved to NYC, got a new job and then distinctly remember wondering why everyone was talking about the stock market crashing in 2008 while my investments weren't losing anywhere near as much. When I became 401k-eligible in November of 2008 I finally figured it all out, and both invested my Trad IRA in an S&P 500 Index Fund as well as started my 401k contributions. Accidentally was an idiot and timed the market.
I some similar luck. I had a company match during an extended college internship. I did used to play around with the investments (b/c I thought it was fun and I was 19) Anyway, when that ended, it rolled over into a cash rollover IRA to sit. Got a real job a few years later at the end of 2008 and put the $4K right at the bottom of the market sometime there after.

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Re: How Many Contribute To A Retirement Fund But Never Invest

Post by Spirit Rider » Tue Mar 14, 2017 1:06 pm

Lyrrad wrote:Looked up the form 5500 for my company for 2015. At the end of the year, 2.2% of assets were in the Money Market fund. My company has auto-enrollment and increasing contributions each year with contributions going into the target retirement account. Just over half of all assets were invested in the current default retirement funds.
For the vast majority of people that is not a bad thing, and they probably have better returns that the majority of people who create their own portfolios.

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