Understanding The Whole Retirement Industry

Last time we cogitated a bit about the concept of retirement. Today let's consider a better way to understand the whole retirement industry. 

Industry? Absolutely. Last time we showed how "retirement" was never a part of life until the 20th century - and we explained how it came about. But since then, a whole industry has grown up around this newfangled retirement thing. And naturally, leading the way, we find Wall Street, partnering with the government.

Yes, it's that dynamic duo again - the very same folks who lurk behind our current dysfunctional economy and markets...which is why we've been ignoring both and spending some time with items that might provide some benefit to us, instead of wasting our time with the media-fueled drama of the latest shake and wiggle of the markets or the questionable (at best) assessment of the current state of our economy.

Back to retirement.

The "industry" includes government programs and Wall Street products. Now, to be clear, we're not trashing Social Security here. An argument can be made that this government program benefits many who otherwise would have little to support them in their dotage. But what of something like IRAs and 401ks?

It's with these sacred cows of retirement planning that we find the dynamic duo joining arms and marching together. And we could spend the rest of this post and more parsing through these government created programs, intended to benefit those looking to save up for retirement. But we won't this go-round. Instead, we'll simply point out that the creation of these programs opened up the door to a plethora of retirement-oriented "products" that have lined the pockets of Wall Street. 

You get that, right? Basically, just about everyone has some version of a 401k to suck money from their paychecks, along with, when possible traditional IRAs and their more recent cousin, the Roth IRA. The trillions in these are all infested in Wall Street products - usually mutual funds and/or ETFs. 

Do we derive a benefit from this? Sure. But what pushes us to invest in these vs. just saving our money for a rainy day, as folks did for centuries - without having to encumber the funds in programs and products that carry all sorts of rules as to how much you can save, when you can access the funds without penalty, and...well, we're getting side-tracked again. The simple point: We are convinced to put funds into "pre-tax" retirement plans in order to get a tax deduction because we're taxed so much. Maybe you think this a stretch, but it's not. Even those who don't make a lot and have a low "marginal" income tax rate get hit with FICA taxes with each paycheck. And so typically, there's about 25% that comes off the top when we get paid. And, of course, the more you make, the higher that percent.

So the case for the pre-tax retirement plans that government concocted is quite compelling.

Of course, these were created and presented as a benefit for us all, given the current tax savings they generate. As usual, the government presents its latest plan or legislation as a boon for us. They particularly like to focus on the regular folks, or the middle class, or the common man, or retirees, or even the poor. The emphasis given is frankly driven by the voting power of each contingent. 

But what they fail to include in their presentation is what caused the conditions that led to the need for said legislation. And that, more often than not, is some legislation, rule, regulation et al that government imposed on us in the past. In this case, it's the income tax that was initiated in 1913, along with FICA tax, initiated in the 1930s. Both of these began with little impact on regular folks, and were sold as more of a burden on the rich than us little guys. But over time, their impact grew until...well, you get this whole progressive build up in tiny unnoticeable increments, right?

Now, naturally, folks are a lot more aware of stuff like this. They're not surprised when they hear that some government legislation might not be so sweet as presented. (Although a surprising number of folks still buy the sweet and ignore the bitter stuff.) But still the wheel keeps turning as they suck up what we keep earning. 

So there's one way to understand the whole retirement industry. Should we stop socking away money into our 401ks, IRAs, etc. Typically, no. Saving remains the bedrock of whatever security we might hope to build up for ourselves. We just want to be aware of how and why these programs came to be. More so, we should understand that they present us with a needlessly complex way to be prudent and provide for ourselves over time.

One response to this: It is what it is. But there are ways to anticipate and control the complicated system and its consequences that we all have to deal with.

Perhaps a subject for another time.  

For now, we note for our Catholic readers that today was the Feast of the Assumption of the Blessed Virgin Mary. Let's hope we all got to Mass to honor our dear Mother. That's not so complicated.