1. Next Up: 401(k) Insurance

    And no, it’s not the kind you think.

    Time: 401k Loan Defaults Soar; Insurance Needed?

    Obviously, where government and financial services are concerned, you can never have too much graft in the system. Thus our nation’s Smartest Finger Waggers have determined that the time has come to protect our 401(k) plans not from Wall Street, nor from shady CEOs … but from ourselves.

    This, of course, will cost money.

    As Time tells us, because so many folks take loans against their 401(k)s and then later default on those loans, we SIMPLY MUST DO SOMETHING to stem the tide — nay, the FLOOD — of money “leaking” from professionally-managed, employer-sponsored retirement saving plans.

    …Fidelity found in 2010 that a record 22% of 401(k) plans had a loan outstanding. That’s not as bad as it may sound because most loans get paid back. But the default rate on these loans has skyrocketed since the recession; today defaults result in annual 401(k) plan leakage of up to $37 billion . . ..

    Well, heavens-to-Betsy! Thirty-seven billion dollars? Why, this sounds like a great opportunity to introduce more “loan insurance” into the system!

    Now comes a proposal that workers be asked to purchase insurance against involuntary default before they are allowed to borrow from their 401(k). The insurance would work a lot like private mortgage insurance, which some banks require of some borrowers before extending a home loan. This policy would guarantee that any outstanding loan against 401(k) savings would be repaid if the loan goes into default due to job loss through death, disability or termination.

    We’re told that presumably, such “insurance” would be paid for by only those who borrow against their 401(k) plans, and not the rest of us. Color me skeptical. When a new opportunity to skim fees from the masses pops up, you can bet the “safety” it provides will cost a bundle, cumulatively … and they’ll be sure to spread that cost over as many hapless marks investors as possible.



  2. S&P500 Dollar-Cost Averaging, Pt. 3

    It recently occurred to me that I’d stopped tracking the performance of a hypothetical $1,000/month investment into the S&P 500 (via the SPY exchange-traded fund), going back to a start date of October, 1998. In fact, the last time I’d talked about this topic was my S&P 500 post of April, 2009. The market’s been on a great run since then, all things considered. (Thanks, Federal Reserve, for making sure asset prices don’t go down long-term!)

    So here’s where our fictional dollar-cost-averaging investor would stand now (all dividends reinvested; returns exclude fees, taxes, etc.):

    SPY Tracking

    As of the end of June, 2012, our investor had a cost basis of $188,586. His investment would have been worth $217,672, for an on-paper gain of $29,085 over the course of those 13+ years. For those keeping score, he’s up a smidge over 15 percent, which equates to an internal rate of return of 2.16% per year.

    Our investor’s high-profit mark, to date, was back in March of this year. Cashing out then would’ve brought a profit of $36,468. That mark looks to be eclipsed shortly, I’d think.

    (From the “Wait, you mean there’s risk?” department, it’s worth noting that our investor was staring at a $5,833 loss as recently as September of 2011, too.)

    Now all we need is for a Dave Ramsey acolyte to chime in with a “Look how your money grows when invested at 12 percent per year in good growth-stock mutual funds!” rant, and we’ll be on our way.

    What Does This Tell Us?

    I dunno. Go long antacid, maybe?



  3. Boomers: Retirement Trouble Ahead

    Ah, the perils of basing one’s retirement on double-digit asset-price appreciation … and carrying large debts in the meantime:

    WSJ: Retiring Boomers Find 401k Plans Fall Short

    Who knew retirement could be so perilous? And who knew it was all the stock market’s fault?

    Bad stock market. Bad.



  4. Dave Ramsey and 12 Percent

    This, friends, is easily the one thing about Dave Ramsey that pisses me off the most. This particular table comes from Dave’s Total Money Makeover Workbook, page 229:

    Twelve Percent ... HOW?

    The point of that data is pretty simple: If you’re not making payments to anyone other than yourself, AND if you’re willing to work hard, you can accumulate a lot of money in a pretty short amount of time.

    Now, I agree with that premise wholeheartedly. Heck — I’m seeing it play out in my own life. Our only debt payments go to the mortgage company, and further, those same mortgage payments (15-year, fixed-rate loan) take up less than 15 percent of our monthly take-home income. (For those who care, Dave’s recommended upper boundary for mortgage payments is 25 percent of take-home pay.)

    So, because there aren’t any car payments or student loans or credit-card debts sucking cash out of our accounts, we have a lot of leeway in directing our money where we want it to go.

    No, my problem is with the “12 percent returns” Dave loves to talk about SO VERY OFTEN. And, as noted by the chart above, use as a reference point in his books.

    Here’s the text that accompanies the chart:

    Exercise #69

    Consult the chart below.

    • Determine how many years you have to retirement … or to the place you’d like to set as your Pinnacle Point.
    • Determine how much you have to invest each month to get there.

    At your current rate of investing, how long will it be before you reach the Pinnacle Point? Are you willing to invest more each month?


    “Invest your money in good growth-stock mutual funds,” Dave always tells radio listeners, “and in twenty years, earning twelve percent a year, you’ll be a fobzillionaire!” Or something along those lines.

    Well, yeah. At annual earnings of 12 percent, the math works.

    But it’s getting that “average 12 percent per year” return that might cause some consternation.

    Like It’s a Given

    Dave throws this figure out there constantly. Like it’s inevitable. Like it’s a given.

    That, at least, is how I hear it.

    And it never fails to make me cringe. (As I’ve mentioned before.)

    It seems to me that when you’ve had a few decades of economic “growth” built upon declining and/or stagant wages for the lower and middle classes, coupled with repeated injections of massive debt at every level of society — how else to make up the difference and still keep asset prices high? — then it’s at least worth considering that maybe investment returns going forward will come with a level of risk that’s not conducive to double-digit expectations.

    Am I alone in this thinking?

    Because some days — like when I come across the chart above — it sure feels like it.