The Trouble with 401ks and Bond ETFs

A couple of items for Friday morning.

First is this blog post from BusinessWeek about average 401k balances that was a followup from earlier in the week. Depending on how one looks at the numbers, like whom they exclude (workers in their twenties maybe), the average balance ranges anywhere from $86,000 to as low as $12,000. A median calculation came in around $43,000.

Anyway you look at it these numbers are depressingly low. Taking the high number, $86,000. How long does it take you to make that much money and how long does it take to spend $86,000 on common living expenses? Forgetting the taxes owed upon a normal withdrawal I doubt the typical person could get four years of expenses out of $86,000 unless they have baloney for lunch every day and macaroni and cheese for dinner.

So the first four years are covered (not really), what about the other 25 or 30? Everyone learns at a very early age that they need to save money. I'm not sure whether people start out on the right path as adults and then fall off or if they never make it on to the path when they start out but this is a real problem and based on the way the mortgage bailouts are being handled any attempt to fix the savings shortage may come at the expense of people who do the right the thing with regard to their saving habits. I'm thinking something like means testing for social security benefits. If you have a pile of money then no payout for you, for example.

On a different note, IndexUniverse reported that iShares filed for a couple of new bond ETFs including the iShares 10+ Year Credit Bond Fund (CLY) which will tack an index that combines US Corporates and Yankee bonds. Yankee bonds are issued in other countries in US dollars. Depending on the issuer it is a way of offering stability to bond holders or effectively going short US dollars. FT Alphaville has had several posts recently about Germany issuing Yankee bonds.

If this fund ever makes it to the market you may read some commentary that says it is a way to buy foreign bonds without taking currency risk. That may deserve a not so fast my friend. If a bond issued in dollars will generally be serviced by a US dollar income stream then currency risk is very unlikely. Is a bond issued in dollars and paid for with a USD income stream really a foreign bond? If however it really is an attempt by the issuer to take advantage of what looks like an obvious trade in the dollar and the dollar has another massive rally like it did a year ago (counter trend or not) then the bond, more correctly the issuer, could be negatively impacted.

I'm not saying these are crazy risky just pointing out that if an issuer is betting on a lower dollar the bet will at times be wrong. The fund could actually be quite interesting, I just don't think it would be immune from currency risk.

Comments

[Alan Young:]

Roger, you lost me with the Yankee bond thing. I thought this was a way to enjoy the interest rate of a foreign country without any exposure to currency fluctuation.

If I want exposure to the currency trend (which I generally do), I look for bonds denominated in the foreign currency.

But you say there's a currency risk in the Yankee bonds. Can you explain (or point to an explanation) of how that happens?

Oct 09 10:40 AM

[Roger Nusbaum:]

taken to the extreme, look at argentina from years past. issue debt in USD and then default.


On Oct 09 10:40 AM Alan Young wrote:

> Roger, you lost me with the Yankee bond thing. I thought this was
> a way to enjoy the interest rate of a foreign country without any
> exposure to currency fluctuation.
>
> If I want exposure to the currency trend (which I generally do),
> I look for bonds denominated in the foreign currency.
>
> But you say there's a currency risk in the Yankee bonds. Can you
> explain (or point to an explanation) of how that happens?

Oct 09 11:32 AM

[debtacid:]

In 1990 , my 401k advisor assured me that my 401k would accumulate a million dollars by 2010. Well here we are and I’m short by way more than half. I wish I would have put it all in gold or silver. The trouble with 401s is that they float in sea of fraud and they are at the mercy of corrupt fund managers.

Oct 09 12:53 PM

[DonFurio:]

Most 401K's have an option for a S&P 500 index fund. Also, unless you have stayed in the same job for 20 years (which I'd have to question unless you got promoted to a really high position), you should have rolled over your old 401Ks into a good ira. Hopefully you did at least a little rebalancing when the market went crazy in the late 90s.


On Oct 09 12:53 PM debtacid wrote:

> In 1990 , my 401k advisor assured me that my 401k would accumulate
> a million dollars by 2010. Well here we are and I’m short by way
> more than half. I wish I would have put it all in gold or silver.
> The trouble with 401s is that they float in sea of fraud and they
> are at the mercy of corrupt fund managers.

Oct 09 01:37 PM

[DonFurio:]

The biggest viarable is prob medical expenses. People should have their house paid for by retirement. 86K is def not enough, but since most people don't work in factories anymore, you can work when you are in your 60s and it's not that big of a deal.

Retirement was never supposed to be for as long as or longer than the amount of years you actually work. Unless you really earn well during the first 30 years you work, expect to work another 5-15 years.

I hear all this talk lately about how great the pension was, but people forget that unless you have other investments, your pension stays the same as you age, and yes SS goes up each year for inflation, but if there is big inflation in the goods you actually buy, you're pension is worth a lot less, and you can't pass it down if you happend to die at a young age.

Oct 09 01:57 PM

[Plant the s...:]

The distance to retirement and overconfidence does lead younger people to underinvest. I spent a car ride explaining to my 32 year old brother why he needs to save ( I don't know if I got across).

Oct 09 02:44 PM

[Plant the s...:]

Roger if the currency risk drives the issuer to default then Puts on this can be a dollar long trade. Kinda convoluted, I know.

Oct 09 02:48 PM

[Bob Mayo:]

Hmm, withdrawing 4% of $86k each year allows me $286 in monthly spending for 30 years. This is about enough to pay for blue tarps to cover the wet cardboard box I will live in down by the train tracks, near the soup kitchen that sometimes feeds me.

People say that they can't afford to contribute to their 401k right now, because they have car payments, gymnastics classes for the kids, and the flat-screen TV is on the fritz.

My question is this: knowing that you will be living in a wet cardboard box for 30 years of your life, would you rather do it now, or when you are 70 years old and your arthritis is flaring up? Or perhaps it would be better to even things out a bit, maybe trade the Lexus for a Kia in exchange for enough of a 401k to pay for dry living quarters your entire life?

Oct 09 04:28 PM

[conceptwizard:]

The revenue that banks and credit unions generate by letting customers overspend their accounts, then charging them a fee, increased 35 percent in two years, the Center for Responsible Lending reports in a study released Tuesday.

Culling figures gathered by the Federal Deposit Insurance Corp., the consumer advocacy group found that customers paid $23.7 billion in overdraft fees in 2008, up $6.2 billion from two years before.

In the past 12 months, an estimated 51 million Americans spent more than they had in their checking accounts, triggering either an overdraft or non-sufficient funds fee, the study found.

People have no money for retirement because the banks bleed us dry. We work in a debt system.

Oct 09 11:39 PM

[Old Trader:]

While there's no question that banks have taken to some outrageous practices, when it comes to fees in an effort to juice their profits and repair their balance sheets, the statement that "People have no money for retirement because the banks bleed us dry" is one of the dumber comments I've run across lately. Hopefully, you're kidding, but I suspect that you actually believe that.


On Oct 09 11:39 PM conceptwizard wrote:

> The revenue that banks and credit unions generate by letting customers
> overspend their accounts, then charging them a fee, increased 35
> percent in two years, the Center for Responsible Lending reports
> in a study released Tuesday.
>
> Culling figures gathered by the Federal Deposit Insurance Corp.,
> the consumer advocacy group found that customers paid $23.7 billion
> in overdraft fees in 2008, up $6.2 billion from two years before.
>
>
> In the past 12 months, an estimated 51 million Americans spent more
> than they had in their checking accounts, triggering either an overdraft
> or non-sufficient funds fee, the study found.
>
> People have no money for retirement because the banks bleed us dry.
> We work in a debt system.

Oct 10 09:36 AM

[Vaun:]

"People have no money for retirement because the banks bleed us dry. We work in a debt system. "

The bank doesn't force people to spend more money than they have. With online banking there's no excuse for not knowing how much you have in your account at any given time.

Oct 10 09:54 AM

[swygert@law...:]

"The banks bleed us dry . . ." What? We the people bleed ourselves dry -- we make choices to save or spend, to borrow or to invest, we sometimes win and sometimes lose, but in either case it is our doing -- let's stop playing the victim game, exclaiming that it is "their" -- banks', unions', Wall street's, Washington's, Obama's doing. We as a people collectively make bad choices and then won't acknowledge that we are the problem. If we have a bad government let's remember we elected them. If we are in bankruptcy, through greed or otherwise we became overextended. Period. If we are spendthrifts, look inward, don't blame Madison Avenue. I'm tired of all the comments on Alpha that reveal a victimization mindset. The rise and fall of the American (U.S.) Empire will be reflected in the normative shift in attitude from personal responsibility to victimization -- it is happening to ALL classes of Americans, not just those on welfare. OK, enough sermonizing.

Oct 10 10:00 AM

[Gib:]

I wonder how much higher the average would be if instead of just 401k, all retirement accounts were included, (401k + IRA + Annuities, etc.). Probably still disturbingly low...

That said, if I read this right, $86k isn't the this isn't the average balance for someone ready to retire today. Presumably, the number is being brought down by workers who are decades away from retirement. Assuming people contribute throughout their career, the average balance of those near retirement should be 2 or 3 times the overall average, maybe about $200k. Throw in a $200k house and a regular social security check and things are starting to look a little bit brighter.

Oct 13 01:14 AM

[Roger Nusbaum:]

if you believe in limiting withdrawals to 4% (I do) then $200k generates $8000 per year plus another $36k maybe for a married couple? might be enough to get by on month to month but leaves almost no margin for error if something big, financially, comes up.


On Oct 13 01:14 AM Gib wrote:

> I wonder how much higher the average would be if instead of just
> 401k, all retirement accounts were included, (401k + IRA + Annuities,
> etc.). Probably still disturbingly low...
>
> That said, if I read this right, $86k isn't the this isn't the average
> balance for someone ready to retire today. Presumably, the number
> is being brought down by workers who are decades away from retirement.
> Assuming people contribute throughout their career, the average balance
> of those near retirement should be 2 or 3 times the overall average,
> maybe about $200k. Throw in a $200k house and a regular social security
> check and things are starting to look a little bit brighter.

Oct 13 09:15 AM

[Roger Nusbaum:]

sorry the $36k is the from social security


On Oct 13 09:15 AM Roger Nusbaum wrote:

> if you believe in limiting withdrawals to 4% (I do) then $200k generates
> $8000 per year plus another $36k maybe for a married couple? might
> be enough to get by on month to month but leaves almost no margin
> for error if something big, financially, comes up.

Oct 13 09:16 AM