Retirement Savings: The Need to Strengthen Social Security
If Joe Nocera had started putting $1,000 inflation-adjusted dollars a month into the S&P 500 in January 1980--back then it would have been $340/month--he would now have $1.3 million in his 401(k): real contributions of $384,000, and $916,000 of accumulated reinvested dividends and capital gains. At a retirement spending rate of 5%/year that is $65,000/year of income: not princely, but the median American worker makes $26,500/year.
The problem is if you trade or hire others to trade for you: then you (or they) buy high and sell low because when you (or they) trade you do not ask yourself the question: "who is taking the other side of this transaction, and if they think it is a good time to sell why is it a good time for me to buy?" And if you hire people to trade for you, you also pay them their salaries, options, and bonuses.
And if management fees and price pressure reduce your returns by 3%/year, we are talking not $1.3 million but $498,000--with what would otherwise be Joe's extra $800,000 going to the Princes of Wall Street who took the other side of his transactions and whom he paid to manage his money for him.
Invest the Social Security Trust Fund in equities by all means. But do not rely on individual savings invested in actively-managed accounts to fund anybody's retirement in any half-serious way.
