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Well to follow up on this I'm now 29, and turning 30 next month. My combined 401k and IRA balance is now closer to $110K. The market going up has helped a bit. But I also took a new job in 2010 that paid better and had better retirement benefits. Anyway the last two years have been good for me financially speaking.
One thing that is common among many people posting here is that their retirement accounts have not returned much.
If you started contributing in the 1980s you are probably above your contributions. This is especially true if your company matched. However, if you started contributing in the mid 90s,your company does not provide a match, or you have limited plan offerings you could find yourself with no return or even below your principal contribution levels.
I believe the greatest danger to retirees is as more people are moved into 403b/401k plans the greater the supply of money and the lower the rate of return.
A lot of financial theories are currently not working in the real world. For instance, interest rates are supposed to be based on the real rate of inflation plus a risk return. How then does that justify a 0.1% return on savings? Has inflation been running at 0% a year over the past 10 years? I think not.
Supply and demand does affect return rates. Nowhere in my finance courses that I took in college did they factor an oversupply of money into the interest rate return of savings. Bond prices were based on inflation rates, underlying asset risk and term risk. Bonds do not seem to be factoring inflation into their pricing and appear to be more based on supply/demand issues related to other factors.
If the traditional models are not reliable then basing the majority of Americans' retirement income on a defined contribution plan is very risky.
one thing i learned about the longer term bond markets is its rare they are wrong.
as the best performing asset class in the last 30,20,15 ,5 yr,1 yr periods , and only missing the last 10 years by a hair , that says they were very very correct in their trend predictions.
think back to the inverted yield curve when the fed was raising short term rates and the longer term bond market dis-agreed and went lower, actually predicting the great reccession that was to come.
that was in spite of the fed already raising rates to fight the inflation they saw looming on the horizon.
the bond market is seeing deflation on the horizon not inflation.
with most of us earning way less or out of work the bond market may be spot on again.
for every dollar food,energy and medical costs rise some thing else is taking that hit from the missing dollars .
we are in a world of buying this or that and not this and that and thats deflationary.
we are a nation that counts on 70% consumer spending for its gdp. much of that consumer spending is associated with the home ownership market .many companies involved in consumer spending are in the toliet as food and energy costs suck away any dollars most of us have to spend since our pile of spendable dollars has shrunk .
with big demands for capital in europe that means many types of assets will have to be sold,not bought to raise that capital,thats deflationary.
no one knows whats next but i wouldnt say the bond market is mis-priced just yet.
Last edited by mathjak107; 01-21-2012 at 05:53 AM..
one thing i learned about the longer term bond markets is its rare they are wrong.
as the best performing asset class in the last 30,20,15 ,5 yr,1 yr periods , and only missing the last 10 years by a hair ,says they were very very correct in their trend predictions.
think back to the inverted yield curve when the fed was raising short term rates and the longer term bond market dis-agreed and went lower, actually predicting the great reccession that was to come.
the bond market is seeing deflation on the horizon not inflation.
with most of us earning way less or out of work the bond market may be spot on again.
for every dollar food,energy and medical costs rise some thing else is taking that hit from the missing dollars .
we are in a world of buying this or that and not this and that and thats deflationary.
no one knows whats next but i wouldnt say the bond market is mis-priced just yet.
What's your thoughts on the apparent manipulation of bond yield in Europe?
It is an interesting theory that large hedge funds are buying huge blocks of high-yield sovereign bonds and then forcing policy decisions that would protect the high rate thus protecting themselves from losing their investment in the event of a default.
If a hedge fund can get 11% out of Greek bonds and structure it so they will not lose their principle it defies the risk pricing model and in essence is just finding a way to take the money from someone else (taxpayers) to guarantee their yield.
This type of behavior, if true, could lead to civil unrest, class warfare or in the case of Europe a possible war between countries.
to be honest i dont know enough about it to really have a valid comment.
but ill tell you this,look at japan,china,great britain. know what they are buying? not stocks. they are buying billions in treasury bonds....
even the big brokerages here ,you know the ones telling you to buy stocks... they too are buying tons of treasury bonds for their own accounts.. but wall st cant survive selling bonds so stocks are pushed.
I'm 25. Last time I checked there was about 15K in there. I stopped contributing at age 20 due to job changes. Looking to start new 401K in a few months and begin contributing again.
A lot of financial theories are currently not working in the real world. For instance, interest rates are supposed to be based on the real rate of inflation plus a risk return. How then does that justify a 0.1% return on savings? Has inflation been running at 0% a year over the past 10 years? I think not.
I'm not sure what you have in mind when you say "financial theories", but any serious economic model can explain the current situation rather easily.
Quote:
Originally Posted by Lincolnian
If the traditional models are not reliable then basing the majority of Americans' retirement income on a defined contribution plan is very risky.
If by "traditional model" you mean classical economic theory from over 100 years ago...but if you use a model developed after the depression then everything has been pretty predictable.
Anyhow, people are getting burned in their 401(k)'s, etc because they believed that the future would mimic the past few decades. But what reason was there to believe that in the first place? Indeed, long-term returns in the 9~10% range don't even make sense on a basic level.
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