This past week I listened to a presentation for young professional (20s and 30s) from one of the largest asset management firms in the world. The objective, which is of course to educate the audience, is also meant to help the firm snatch up talent and future wealth management clientele while those prospects are still spring chickens. Although I found the information presented to be generally useful and relevant to the respective audience, I couldn’t help but take a devils-advocate view on —well— just about everything. I bit my tongue until they presented this one particular example regarding a 401k:
Suppose you spend $5 per day on coffee (example: Starbucks, as many of us do) but if you opted instead to spend $1.50 a day to make your own gourmet coffee at home Monday through Friday (5 days a week), you’d save $3.50 a day. Now suppose you took that $3.50 per day and invested it into a 401k plan. At a 100% match by your employer and an assumed 10% return annually, guess how much you’d have in 40 years? A whopping $1 million!
“What?!!” I exclaimed. I could not contain my contrarian views any longer.
I politely raised my hand and asked a few simple questions:
- You’re asking me to give up the convenience of gourmet coffee today, and every day (5 days a week) for the next 40 years of my life… what if I never reach retirement age because I don’t live another 40 years? Forgo such a luxury (and convenience) for what? Why don’t we make the $1M figure more realistic by adjusting it down for the statistical likelihood that I will live that long (i.e. adjust those 40 years based on the average human lifespan).
- Or leave lifespan alone, suppose I do indeed have an extra $1M in my 401k in 40 years. What exactly will $1M dollars buy me 40 years from now? Suppose we went back 40 years and adjusted for inflation. All assumptions equal, had I forgone a $0.05 coffee 5 days a week for 40 years, how much money would I have in today’s dollars? Hm. To be frank, I’m not even thrilled with what a $1 million can buy me today, let alone what that purchasing power would yield in 40 years from now.
- And lastly, how much do I love coffee?
Of course, the presenters didn’t like my seemingly radical views. They got defensive. Everyone laughed. I writhed. Why? Because my thoughts continued to run… so much so, I was compelled to write this blog post! I thought to myself further:
- ‘Hmm, put money away today for tomorrow. Yes, this is a sensible idea.’ But invest it into which vehicle? A 401k invested into our stock market? Financial advisors love to say, “based on historical returns.” I always laugh at this. The history these returns are predicated on is less than ~100 years. Are we not evolving? If I’m forgoing the pleasure of gourmet coffee each day, shouldn’t we considered the statistical likelihood that my 401k will be viable in 40 years? Half a century is about half the time the market has been around! What is the statistical likelihood it will be around in another 50 years from now?
- And on the subject of lifespan, will we live as long as our parents? Why is modern society so sick and obese? Is it our environment? Our food supply? The endless and steady stream of processed foods produced by the same food industry that is traded on our stock market? Someone (society at large perhaps?) is bound to soon recognize how these very industries that our 401k plans are invested into (processed food, big pharma, textiles) are contributing to our own death. In its short history, we’ve seen a few bubbles hiccup the market in a pretty gnarly way (real estate, technology, etc). Could the next bubble be processed foods? Could we (will we) as a society rid ourselves of the food supply causing us ills if we know it will come at the expense of our economy, our 401k plans and our financial livelihood? Is it really a matter of if, or is it a question of when?
- In a documentary I recently watched called ‘Fed Up,’ it was highlighted that of the 600,000 food items on the market, 80% of them have sugar added. Sugar has been proven to be as addictive as cocaine. In fact, lab mice offered either sugar water or cocaine water unilaterally chose the sugar water (40 of 43 mice!). Most shockingly, when the sugar water was taken away, the mice exhibited the same withdrawal symptoms as the drug addicted mice. Furthermore, if you run a quick Google search of diets in the 1950s, you’ll notice they’re quite high in vegetables, fruits, protein and animal fats. On the lesser side you’ll find sugar, grains and processed foods. A similar search of people in the 1950s will return images of largely healthy looking (non-obese) individuals. Obesity in children? Unseen. What is our food pyramid today and how has it changed since the 1950s? Of the foods available in the 1950s, how many percent had sugar as an ingredient? Similarly, what were the statistics on obesity then and how do those compare to the statistics on obesity today? How do these figures change lifespans for us and for our children? Will our children live a shorter lifespan than we do? What will be the financial burden of the diabetes and sickly kids we’re rearing as our children age? How will all of this impact our financial system, and my 401k plan?
Thank you for your advice “based on historical returns.” Answer me the above questions and then I’ll place my full confidence (and my money) into the market. Until then, I rather have my coffee.
Editors note: I do have a 401k plan (because yes, they have merits), however, my 401k is part of a diversified approach to investing that is predicated on asking a lot of questions and taking nothing unsubstantiated as fact.