Is a retirement plan worth it?

March 2, 2009 6:33 PM

In light of what's happened recently, is starting a retirement plan really worth it?

I'm at an age (mid-20s) where by pre-2007 conventional wisdom, I should be looking to start a retirement plan to get the most of my money over time. If you start earlier you make more, yadda yadda yadda.

Considering how many people have lost tons of money in their retirement accounts in the past year, is it really worth it?

Of course this is just speculation, and nobody can predict the future, but if I choose to believe in economic cycles, a major recession/depression has occurred every 35-40 years or so, so if it happens to be the case where another major recession/depression happens 35-40 years down the line, it's gonna happen right around the time I retire. Sweet!

Is there something that I should know about retirement plans that would make my mind more at ease at getting one? Is there any solid viable alternatives? Has anyone whose gotten a retirement plan strongly regretted it?

posted by NeoLeo to work & money (22 comments total)

Is there something that I should know about retirement plans that would make my mind more at ease at getting one? Is there any solid viable alternatives?

You understand that "retirement plan" does not require you to invest in the stock market or anything like that, don't you?

If you're uncomfortable doing that, just start up an IRA and let the money sit there in it, tax deductible.
posted by Flunkie at 6:42 PM on March 2 [1 favorite has favorites]

Now would be a great time to start - the whole "buy low, sell high" idea - the market is low as hell right now, obviously.

As you get older, the wise thing to do is to divest yourself of high-risk, high-yield options, going for much safer (and lower-yield) instruments. A *lot* seemed to think that this wisdom didn't apply to them, so they still had all their money in stocks as they retired. I really don't feel too sorry for them, since most of them (a certain friend of mine's dad) gloated before the crash.
posted by notsnot at 6:44 PM on March 2 [2 favorites has favorites]

What's your alternative plan? Wait for your fellow taxpayers to provide for your retirement? Work your whole life?

You can set aside money in equities today and gradually transition to bonds and/or treasuries as you get older and/or feel the market is at a peak. You'll never be able to time markets perfectly, but you don't have to feel the full force of the downside (or upside for that matter).

You can save on taxes by investing in a 401k or IRA and your company may match your contributions. Lots more upside over 35-40 years than downside.
posted by Frank Grimes at 6:45 PM on March 2

My perspective, it's a savings account. When you hit a recession or job loss or health issues, the money is there, although you take a tax hit withdrawing it. However, if none of those problems happen that would force a withdrawal, then it builds.

I see where you're coming from though. You could get hit by a bus, die from a heart attack, or any number of other things. We can't all expect to live until we're 90, or even retirement age. I think economic cycles are less important than what I just wrote. But you don't also want to go through the rest of your life expecting to be dead or homeless by 60.

I doubt the comment helps, but it's something I've thought about myself. My parents are in their 50's, and have no retirement funds. That concerns me, I don't want to support them.

I'm interested in the other comments though.
posted by hungrysquirrels at 6:45 PM on March 2

Now is the best time to start putting new money into a mutual fund IMO! But if you don't have a lot of new money and you don't want risk then staying out of equities until things start going up again would be a better strategy.

This chart diagrams the current slaughter to the Great Depression, the 70s bear, and the tech crunch.

Clearly, if today's events are a replay of the 1930s then staying in cash (money markets) would be wise.

But if this is a replay of the 1970s, then you will be seeing an instant 20-30% boost on your contributions when recovery comes.

This chart comparing the Nikkei-225 to the S&P 500 over the past 25 years is also educational.

I wouldn't worry about what's happening later this century but rather what's coming up in the next 5-10 years, and how you can best shelter your income from taxes, and see some tax-deferred gains to get compounding interest working in your favor.

Either we are in a systemic collapse now (1930s) or just a SELL! SELL! SELL! panic. I lean toward the latter because I think monetary policy will result in us coming out of the tailspin this year, but I could be wrong.
posted by troy at 6:46 PM on March 2 [2 favorites has favorites]

Saving your money at any stage in your life is worth it. As already mentioned, it does not have to involve high risk investments. Heck, my grandfathers idea of a "retirement fund" was hiding his money in the wall. Important thing is to have money tucked away for the future, since solid pension plans are fast becoming a thing of the past.
posted by scarello at 6:46 PM on March 2

diversify! don't put all your nest eggs in one account.

401(k), IRA, savings, a mutual fund.

To do anything now involving stocks would probably be good. When the market's this crappy, it's only going to go up...eventually of course.

There have a been some economic unhappy times every 30-40 years - but that corresponds to some economic HAPPY times every 30-40 as well. If you are diversified in your saving strategy, you will be able to weather the bad times a little better. No one can predict the financial future, so you'll probably never know what's *completely* safe. Even my nana putting cash in with the kleenex, the mugs on the top shelf, under the shelf liners of the linen closest...if there was hyper inflation even that wasn't safe.

So....just start somewhere....you'll be glad you did *something* when you're 80.
posted by sio42 at 6:55 PM on March 2

Look up "dollar cost averaging" and you'll see why it's a good idea. If you were about to retire tomorrow, you wouldn't want your money in the stock market. But right now, with stock prices down, your investment buys more shares than when the stock prices were high. Then, as prices rise the value of the shares rises.

So it's actually in your favor to get in now because, when stock prices rise, your investment will buy fewer shares/$$.

That's what I tell myself when I look at my plummeting portfolio anyways. It helps me to remember that I still have another 35 years before I retire.
posted by missjenny at 6:56 PM on March 2

Saving for "retirement"*? Always a good idea.

Retirement savings plans based on corporate securities? Popular, but totally optional.

You can do tons of things which don't involve the kinds of investments that are currently in the news as down double-digit percentages from last year's highs. As long as you're comfortable with modest, predictable gains, there a lots of things you can do. Bonds come to mind, though interest rates are so low right now that your savings will currently grow more slowly than inflation, which is a bad thing. But you won't lose much, and money saved is better than no money saved. If you buy state or municipal bonds you don't have to pay taxes on their interest either, which is always a plus.

Basically, look for things where your growth comes in terms of income, not appreciation. Real estate is supposed to work this way: you don't buy property hoping to sell it for a profit at some nebulous point in the future, you buy property because it produces current income or, in the case of housing, reduces current expenses. A rental property you pay someone to manage can produce a reliable, if modest, source of income in perpetuity with a minimum of fuss.

If you have a bigger taste for risk, consider operating with others as an angel investor. This will require either serious networking, or serious cash, or both, as it involves direct investment in small business startups. Finding people starting businesses is hard enough; finding people starting businesses that have a snowball's chance in hell of turning a profit is even harder. But there will be organizations in your area which cater to this sorts of thing. Small business development corporations are a good place to start, and most municipalities have one. They'll also be able to connect you with local movers and shakers who would be more than willing to take your money.

But even if all you do is put your money in the bank and leave it alone, saving is better than not saving. You'll need it eventually, even if the "need" takes the form of helping your children and grandchildren get started in life.

*I put "retirement" in quotes because it isn't at all clear to me that people will actually be retiring 30-40 years from now. I think working until one is incapable of working will probably be the norm. Simply quitting around 65 to spend the next two decades cooling one's heels is a luxury we've never really been able to afford, and I think a lot of the recent bubble-bursting activity that's in the news lately is at least partly related to that fact.
posted by valkyryn at 6:56 PM on March 2

As I was recently reminded: This is what it feels like to buy at half price.
posted by devbrain at 7:05 PM on March 2

You should absolutely have a retirement plan. What form it takes has a lot to do with your personality, what your career is and a variety of other factors.

Now really is a great time to be in your position. The market is still going down which will mean there will be fantastic bargains when it finally bottoms. By starting to invest while the market is down you are following the classic "Buy low, sell high" advice. The more money you invest early, the more opportunity you have for compound interest to work.

You might start by reading some blogs on the subject. Michael Shedlock is my favorite. I use his column to help me invest personally and am doing quite well this year.
posted by thekiltedwonder at 7:10 PM on March 2

I have never before used bold caps on metafilter, but I will now: This is a FANTASTIC time to start your retirement savings. Even if stocks stay perfectly flat for the next 15 years, there are a ton of solid companies with huge cash reserves that are paying out dividends at a higher yield than your local bank's CDs. The market is at an 11-year low. It's amazing opportunity, and one you should be immensely thankful for.

Companies like Microsoft (disclosure: I work there and own stock, but am only citing it out of familiarity, not as a recommendation) have a P/E of 8.5 and have a 3.3% dividend yield, plus about $20 Billion in the bank with which to continue paying it out (investors hate dividend cuts so this would be a very unlikely thing to see). I can get a CD from Emigrant for 3.0%, and that's certainly not going to increase in value. One great thing to think about is that if you buy low (buy low! sell high!) on a dividend-paying stock, you're essentially "locking in" that dividend rate - even if MSFT triples, the effective yield I get from it is the same as when I bought it.

if I choose to believe in economic cycles, a major recession/depression has occurred every 35-40 years or so, so if it happens to be the case where another major recession/depression happens 35-40 years down the line

If that happens, it would be FANTASTIC for you. As you approach retirement age, you'll begin moving from securities and mutual funds to safer things like bonds and cash. So just when the economy comes to another screeching halt, bringing down prices for just about everything, you'll be living the good life because you were slowly moving to non-volatile instruments over the previous 10-20 years.

FANTASTIC.
posted by 0xFCAF at 7:25 PM on March 2 [5 favorites has favorites]

Seconding 0xFCAF. Get in, get diverse, and keep contributing.
posted by yclipse at 7:39 PM on March 2

If you have an idea, invest in that. If you can find a good deal on property, invest in that. Be VERY VERY wary of investing in someone else's company or idea. They don't care about your money.

Personal disclosure...I just withdrew every penny I had in my retirement to put into my own business. It's the only thing I can invest in with a chance for a 100% or 1000% return, determined primarily by my own skill and hard work. If it goes south, I don't have to read the NY Times business section or read Fucked Company or the police blotter to see why.

NOBODY ON WALL STREET WITH WHOM YOU WOULD BE INVESTING YOUR RETIREMENT KNOWS WHAT THE FUCK THEY ARE DOING.
posted by vito90 at 7:50 PM on March 2 [1 favorite has favorites]

Yes, a thousand times yes.

You should definitely be making and starting a retirement plan now — in fact the current market situation puts you in an enviable position. Pretty much any plan is going to have you buying equities at this stage, and right now they are very cheap. Irrationally cheap, some people would argue.

Most retirement schemes, whether they're put together individually for you by a hired planner, or are managed as part of some "Retire in 2050" fund by Vanguard or one of the other big companies, will start off very heavy in stocks (which are high-risk/high-potential-reward) when you are young, and then they will transition to bonds, Treasuries, and other safer income-producing investments as you get older.

If you had a competent investment planner (or had constructed for yourself a sound retirement plan based on good long-term, non-faith-based economics) and were planning on retiring this year, you would have had all or nearly all of your money for the initial years of your retirement in cash or near-cash. You would not have been wiped out. In fact, you'd probably be feeling pretty smug.

Considering how many people have lost tons of money in their retirement accounts in the past year, is it really worth it?

Most people who are saying that are in one of two camps: (1) they're basically talking about "paper losses" that they're not going to realize, because they're not at a point where they're going to sell and cash out; (2) they invested very, very poorly (or trusted someone to do it for them who did a shit job), and/or got greedy, and/or were seeking a rate of return that they shouldn't have been trying for given how close they were to retirement, and are legitimately wiped out.

Situation (1) is just part of how investing works. The reason you have your money in stocks instead of in a savings account is because it offers the potential for more return; the reason that potential exists is because the risk is higher. Period. If someone offers you a high return without increased risk, they are lying to and probably scamming you. (Even if they have a Harvard MBA. In fact, especially if they have a Harvard MBA.) Most of the time, historically, you make money; some of the time, you don't. The key is never to have money tied up in stocks that you can't afford to keep there long enough to ride out the next recession.

The key to avoiding fate (2) is to invest early and often, but more importantly, to invest aware. Don't trust other people with your money blindly. I have family members and very good friends who just thought of themselves as not money people and therefore never made any attempt to understand what was going on with their retirement accounts. In some cases they ended up with some very poor investments made on their behalf. Don't let that be you. Do your own due diligence: don't invest in anything, or allow your money to be invested in anything, that you don't understand and agree with. If an "advisor" gets annoyed or snows you when you start asking questions, fire them and find someone who's willing to work with you.

All of this is premised on the markets actually recovering, which I think is likely but admittedly isn't guaranteed. Before anyone jumps on that, though, I say that in the same sense that I'd have to admit that the sun isn't guaranteed to come up tomorrow. It might not, sure, but the available evidence suggests that it will. Plus, you might as well plan for success, because the alternative — total economic collapse, cannibalism, etc. — is impossible to really plan for.
posted by Kadin2048 at 8:11 PM on March 2 [1 favorite has favorites]

My advice to you would consist of two different, and I think not mutually exclusive takes on the current situation. One way you could look at the stock market right now is that there are a lot of perfectly good stocks that are selling for artificially low prices because people are scared. In one sense, many stocks are on sale right now and investing in the right ones would see you large returns if you hold on to those stocks over the long term. Of course, you're relying on your ability to pick those stocks if you invest in individual companies. That's probably not a good idea unless you put serious research into your investments. But placing a bet that the market overall is depressed right now by investing in a diverse mutual fund? Well, it might be less lucrative than if you could pick a really depressed individual stock, but I think it's a better bet.

Alternatively you could just look at the stock market and determine that you don't want to get involved in that craziness. Nothing wrong with investing in nice safe T-bills as a conservative base for your portfolio, maybe some safe municipal bonds and some low-risk mutual funds. If you get less risk-adverse later on you can always add some riskier but potentially higher yield securities to the mix. If you're young, you have plenty of years to diversify. Starting out conservative in a turbulent market when you're a less experienced investor isn't a bad move.
posted by Oso Mocoso at 8:54 PM on March 2

I'll just say that for a long time one of the canonical examples of the stock market's ... reliability (stay with me) ... as an investment vehicle was poor Tom. Tom, you see, was an enterprising young executive such as yourself, who had everything in the market on Black Thursday. Alas, the '29 crash spooked him of stocks for life, and he took everything he had out of the market and put it in a savings account.

The story always ends with what Tom would have today, versus what he actually has, because he kept his money out of stocks for the last X years. As savings accounts earn 2% if you're lucky and the stock market averaged over time earns closer to 8%, you can see this would be a considerable sum.

Anyway, don't be Tom. This is a bear market, but bear markets don't last a lifetime.
posted by dhartung at 9:13 PM on March 2

To put it simply, Yes, you are in your 20's. If you were in your 50's, then you might want something more fixed and stable like shotgun and gold bars stable, but as a 20 something you can afford to be less risk averse.
posted by Pollomacho at 5:02 AM on March 3

The only difference between having money in a retirement plan & not having money in a retirement plan is that outside of one you'll be taxed on any money your money earns.
posted by MesoFilter at 8:35 AM on March 3

It is absolutely a great time to start. Stocks are roughly half the price they were last year.

Assuming you'll have your money in the market for 20-30 years at least, you'll probably make a tidy profit once things pick back up (and they will).
posted by reenum at 9:31 AM on March 3

you are in a perfect time and age to start investing in the stock market, hopefully a few mutual funds. This is the buy low opportunity of a life time. Sucks to be wanting to retire in the next few years though.
posted by jrishel at 9:42 AM on March 3

Investing is like exercise. Get in the habit early and do it regularly no matter what. If you're squeamish, put half in CDs and half in index funds. Just do it. A friend said something back in the 1970s about something called "Keogh Plans." I started then, invested regular sums conservatively every year, and have a nice little pile almost forty years later despite a not-highly renumerated career and no other pension. It's also like flossing--just do it so you don't wind up getting gum surgery or losing your teeth.
posted by Elsie at 4:17 AM on March 4