A 60 Minutes segment on Sunday presented sad stories about people in their 50′s and early 60′s who had counted on their 401K plans to provide a comfortable retirement income by age 65 or even earlier, but who have had their dreams destroyed by the stock market bust.
Anyone born in the 1940′s or 1950′s who planned on retiring by age 65 has either ignored the rise in life expectancy (to age 82 for a man at 65, age 85 for a woman at 65); has saved like mad while working; or has delusions about the risks and returns to investments. I’d bet that many people extrapolated the huge returns on stocks between 2001 and 2008 as if they would persist forever. They didn’t, and they never will.
It’s true that in almost every year a random set of stocks will do better than other investments if held for 20 years (DeLong and Magin, Journal of Economic Perspectives, Winter 2009); but short-term fluctuations are greater on stocks, and one can’t count on huge sums being there every year.
So it may be heartless of me, but I am quite unsympathetic — even though my own 401K was down 12 percent at the bottom (only 12 percent because for once I was sensible and, as one should by age 65, had a large majority in bond funds).
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I agree. If you are about to retire, why do you have all your money in stocks?
I share your sentiments, although I’d go even further. These people who are complaining that their 401ks have tanked are not taking into account the fact that they are still coming out far ahead of where they would be had they invested in a nice, completely safe savings account for the past 30 years.
The people on that show acted as if returns from equities were a guarantee. I can only assume these people would be just as furious if they lost all their money betting on the “guaranteed win” Patriots in the Super Bowl last year.
The problem is that a huge portion of the current problem (both the “huge returns … between 2001 and 2008″ and the recent free-fall) was largely caused by a small handful of excessively greedy *$&#@*s on Wall Street.
I’m glad I can come to the Freakonomics blog site and read posts that ask people to be realistic about and accountable for their decisions rather than crying foul and whining. I am with you, Daniel! I don’t know that much about investing, but I know that the closer you get to retirement, the “safer” your investment choices for your 401(k) should be. So many people are whining that they can’t retire in a year as they hoped because they’ve lost in stocks – well, why were those funds invested in risky assets if there was only one year to go until retirement?
It’s also hard for me to be sympathetic when the current group of retirees will get social security, something that might not be around in 20 or 30 years time when us Gen Xers get to retire (if we ever do have such a luxury).
It is heartless of you.
The problem is your presumption that people would *understand* the terms of the problem you’ve laid out. You’re right that the people who lost their money made a mistake, but the question is whether they should have known better.
What percentage of the population do you think is actually capable of sitting down and doing the calculations required to determine the consequences of even the simplest investments? These calculations are trivial for an economist or someone with a decent background in math, but most people lack such a background. So to be unsympathetic is to think that the appropriate punishment for a weak background in math is to lose one’s lifesavings.
If we just privatize social security so those people can get market returns…oh, wait…nevermind.
I think it’s fair to make a distinction between *planning* to retire and *hoping* to retire. If I’ve been planning to retire in fifteen years, I might still have over 60% invested in equities; yet if that portfolio has been doing really well, I might be hoping to retire in just a year or two (with a rapid, rather than gradual, shift to safer investments).
I know with the run-up in stocks over the last decade, I’ve been “doing the math” every few months to see if I can afford an early retirement. However, I’ve kept my portfolio balanced for a normal retirement age. If I’d been within three years of the hoped-for early retirement, I’d be sorely upset. As it is, though, I can pretty much say, “Oh, well,” and revise my expectations.
With all respect, I would go further than heartless and say that your argument is non-economic in the sense that an economist would say that people are of varying abilities and financial sense and that, without incentives or regulation about the composition of a portfolio, they will be taken advantage of and will make errors. To blame people for being people is not what an economist, IMHO, should do.
An economist, again IMHO, should look at the problem, look at whether it’s real or merely an artifact of the short-term and then think about policy changes that would encourage different results. For example, society has a concern that the elderly have sufficient resources, so why not regulations that adjust a portfolio by age for safety?