This AIM chat made me clench my fists

Ramit Sethi · March 23rd, 2006


Friend: i just got into a long long discussion with these two guys, one is one of the smartest i know, they advocated not investing in retirement accnts

Ramit: yeah?
Ramit: whatd they say

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Friend: yeah
Friend: they said they don’t beleive the growth rate will continue into the fture
Friend: they see the system as unstable
Friend: and likely to fail
Friend: they don’t think that your money will make returns over time, and they say investing is great…if you leave an out

Ramit: what does leave an out mean?

Friend: so investment accts = wait until 69.5
Friend: whereas they say don’t use retirement, instead just invest in reg marke

Friend: and be able to sell

Ramit: wow
Ramit: your friends are breathtakingly misinformed

Friend: i definitely disagree
Friend: why?

Ramit: there are so many reasons. let me attempt to itemize them:
Ramit: 1. they completely miss the tax advantages of retirement accounts. these are quite simply huge
Ramit: 2. there is an out. you can withdraw all your money anytime. in fact, you can withdraw your principal completely penalty-free.
Ramit: 3. “the market wont sustain itself” is based on…what? certainly not 70+ years of evidence
Ramit: 4. the market may not return the same. this is potentially accurate, although debatable

Friend: ok so
Friend: here is what they said
Friend: 1. Tax advantages are worthless if the market defualts, which they think is very possible, maybe probable
Friend: 2. they didn’t say anything, but you have to pay a large 10% penalty right?

Ramit: yes, thats correct, for your INTEREST only if withdrawn early

Friend: 3. they are basing it on all empires previously, so he says we have been only having growth b/c america is a superpower, what if you invest in Great Britain in 1750? after 70 years, your money would have been worthless. All empires fail, america will decline too

Ramit: wow
Ramit: so my argument is simple
Ramit: besides your Friends being stupid
Ramit: they base their whole thing on pie-in-the-sky arguments: “it’s probably that the market will completely default.” Really? why? what evidence? what are the risk factors of that happening? its extremtyly hard for a government this big to defaul
Ramit: worst of all, they basically put aside huge earning potential for this pie-int-he-sky potential that “might” happen

Friend: yeah
Friend: social secruity

Ramit: they are literally betting with their money that something so stupid would happen
Ramit: you said “tax advantages are worthless IF defaults. blahblah”
Ramit: thats like me saying:
Ramit: i cant evn think of an equivalent
Ramit: “its useless to get a college degree because jobs might just stop caring about them”

Friend: they expect, with the rise of other countries + change in social secrutiy, our country will begin a decline
Friend: maybe in our lifetimes, maybe not

Ramit: that is such stupid handwaving nonsense
Ramit: they have no data, just “hunches”

Friend: i guess

Ramit: i could just as well say that “ireland might become superpower #1 because its been so long”
Ramit: i hate that kind of vacuous nonsense
Ramit: the easy way to penetrate their BS is ask one simple question: “what is that based on?”

I am now thinking of adding a category simply called “Dumb” to this blog. Thoughts?

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  1. Why do I get the impression there was a bong in the middle of this discussion? And a Che Guevara shirt on one of these geniuses.

  2. Ralph Brorsen

    I’m no macroeconomist, but did you stop to consider they might be right? Just consider a) HUGE US decifit. b) We’re running out of oil.

  3. Michael G. Richard

    Hey Ramit, what happened to all the “how to” and tutorial posts? Do you have less free time these days? Just wondering, because I enjoyed those in the past quite a bit..

  4. Ramit Sethi

    Yes, much less time!! But I’ll be getting some new ones like that posted soon…I have a list of 18 new personal-entrepreneurship articles I’m doing. Thanks for asking, Michael.

  5. mikshir

    I’ve heard a similar argument before. A couple things I reply with:

    1) If the entirety of the market defaults then there’s probably been some society changing or cataclysmic type event including revolutions, civil war, and, oh say, armageddon. In which case, you have a lot more to worry about than your retirement and any alternative to a retirement account probably just bit the dust too unless you can stiockpile and protect some precious materials.

    2) You got to play the odds that have the best expected value which means you put your money on the event that’s more likely. Dispite probable upcoming recessions and depressions, and dispite the knowledge that no empire lasts forever, I think it’s more likely the market will continue for the next handful of decades, which at least for me is all it needs to last for.

  6. I would add that their dire predicitons make diversification outside of the US even more important. As for the market defaulting, they can use put options to mitigate that, albeit it is an imperfect and expensive way to do it.

  7. “a) HUGE US decifit.”

    Although somewhat disconcerting, our deficit to GDP ratio is on average for other industrialized nations (about 2:3). Although yes, something has to be done to curb it and at least stop its rate of growth, we’re no worse off than the rest of the world.

    We have a huge deficit because we have a huge economy. Putting it in perspective sheds a whole knew light on it. Or, at the very least, makes the picture a little bit less bleak.

  8. Jason Ellis

    I would add another point to mikshir’s list:

    3) Even if they are right, and you invest US Dollars in foreign investments, if the US goes belly up, what will thos US Dollars be worth anyway? Zero. So, assume that the dollars will be worth something in the future, and invest normally.

    People like this kill me cause the amount of legitimacy given them is not proportionate to the evidence they can provide that what they are saying is true. “What if the sky falls tomorrow?” is not a good reason to drastically change your time-tested investment strategy.

  9. Dude, you can use an IRA or 401(k) to invest in foreign securities. Even if our system crashes, your money is better off in an IRA than outside it.

  10. Ramit I think you should just relax 🙂
    Arguing is ALWAYS a waste of time.

    Person1: I believe something.
    Person2: I don’t believe something.
    Person1: Well I’m right.
    Person2: Sorry my friend I have a list of facts that says you’re wrong.
    Person1: I don’t care.
    Person2: I hate you.
    Person1: Good, cause you’re stupid.

    So you disagree with people, big deal, move on. If you were seriously clenching your fists that’s a good indication to let go because nothing constructive is happening.

    Concentrate on other things that lead to a better result (like watering plants, or watching insects).

  11. Grayden

    There are a few scenarios in which the US economy could be in for a hard time. If OPEC decided to switch to the Euro as its standard currency for valuation instead of the American dollar, then the worldwide market for American currency would be shifted rather dramatically. As has already been mentioned, what happens when we run out of cheaply-recoverable oil? What happens when China and India get fully geared up to be economic superpowers and they start buying up more of whatever oil IS available? What happens when the US loses its top spot as the economic powerhouse of the world? Consider another longshot: what happens if the state of US politics keeps getting more and more corrupt over the next few decades and there is a popular revolt that throws the entire basis for trust in the value of the dollar into question?

    My takeaway from your article is perhaps not one you intended… These guys have pretty strongly rooted ideas that the world is going straight to hell in a handbasket. You have pretty strongly rooted ideas that the world will be sunshine and flowers (obviously an exaggeration, but I’m trying to make a point). Both viewpoints have valid ideas that can justify them, and both camps see the other camp as being naive, stubborn, or perhaps just plain stupid. From the outside, flat-out denouncements of the competency of the other side come off as being a bit arrogant. Rather than running up the attack flag and accusing these folks of not knowing what they’re talking about, maybe a better approach would be to find out more about why they think what they think. Heck, maybe you could do a future column about diversifying assets into other markets to prevent the loss of major chunks of your wealth in a doomsday scenario. What assets are inherently valuable regardless of political games? Foreign stocks? Gold? Land? Energy? Political clout? Vintage comic books?

    In the long run I’m not too worried. There are always up and down periods in markets and politics. The key is to not get caught at retirement age with all your assets at the bottom of a dip. These guys seem to be convinced that we are in for a long decline that won’t recover before they retire. You may not agree with them, but you have to understand that from their point of view, their actions are perfectly rational and reasonable.

  12. Gualberto Diaz

    As much as OPEC wants to switch over to Euro’s right away, it won’t happen. There aren’t enough Euro’s in print at the moment. To dramatically switch over from US Dollars to Euros would send the WORLD markets into chaos, not just the US markets. Major Central banks hold our currency as reserves. It’s in nobody’s best interests except for Islamic fundamentalists who only want to see the decline of the Western Devil for the Dollar to decline.

    Iranian officials have even stated that the petro exchange which was set to open this past Monday would be doing transactions in both Dollars and Euros because there aren’t enough Euro’s.

    I personally feel we will see a decline in the power of the US. It WON’T happen overnight. At this point in time though, if the Greenback declines, there won’t be anything to take its place.

  13. Anonymous

    They have good points, bad points, and wrong points. The dollar will go down is a good point. Using the lifespan of nations is a terrible argument. And the 10% penalty was wrong.

  14. Jennifer


    Two points here:
    1. There are a million different things to do with an IRA given a million different senarios. It’s up to individuals to critically determine the likelihood of each of these senarios and diversify accordingly.
    2. If you have your IRA with a company like Vanguard, I believe you can always convert it to another fund penalty free if you are afraid that the immediate future won’t favor your current fund.

    Then, because these two guys that your friend listens to are obviously working on fear appeals and peripheal logic, you need to destroy any and all source credibility they have. Guys like that are dangerous.

  15. If the economy collapses, aren’t you sort of screwed anyway? I mean, if the economy collapses, the dollar is going to be worthless or everything will be worthless, so all those dollars you didn’t do anything smart with aren’t doing anything for you.

    This is my problem with people thinking the world is going to end not doing anything reasonable with their money. Your money is useless if the world ends anyway.

  16. Anonymous(e)

    Ramit, you’re wrong about something: You can only withdraw your principal without the 10% penalty if you put your money in a Roth IRA — and that too five years after you put it in.

    If your “retirement account” is a Traditional IRA or a 401(k), then you will have to pay the 10% penalty (with a few exceptions, such as buying a first home) if you withdraw your money.

    These Friends might have pie-in-the-sky arguments, but you might want to read up on some stuff that is going on in the world and actively threatening the US Dollar.

    Regularly posted articles on Yahoo! Finance might be a good place to start.

  17. Okay, can we get a good detailed article explaining IRAs and 401(k)s?

    Especially from the perspective if you’re say, 20.

    I’ve been hearing a lot about them lately, and I’m really confused.

    They sound like a great deal, but I don’t want to put away money for 40 years.

  18. Chris Yeh

    For God’s sake, if the argument is that the US government will collapse (as another commenter has pointed out, you CAN invest in foreign securities in US retirement accounts–I’m heavily into overseas mutual funds in my IRAs and 401ks), I don’t think they’ll be in any position to levy 10% penalties!

    Sometimes the stupid just need to be bitch-slapped with the flaccid mass of their own brainlessness.

  19. Markets have defaulted in the past, and people manage their wealth throughout, you just need to be sufficiently diversified, by not having all your money in a single basket of things like tulips.
    If the market defaults, it shouldn’t matter if you money is inside or outside a retirement account, it would still be worth nothing. Just ensure you see it coming, and invest in something appropriate, like gold or commodities if stocks look bad.

    At any rate, if the world had a complete market default, investing in general would be a waste, and the only good position to have would be to be one of the people heavily in debt, and get it all written off!!!

  20. hi ramit, i totally see your point and i agree.

    i have friends who feel the way the person you were conversing with does, and part of me even feels the same way at times. BUT to not prepare for the future is really stupid. most of us WILL get old and need to survive on something. unless they have a better plan, there are proven methods working for people and it would be dumb to not take advantage of any, no matter what the beliefs are.
    reminds me a little of Madame X’s (of My Open Wallet blog) father. kind of sad (believed in impending economic doom & didn’t invest like he could have before he grew old — um, but he invested!).

  21. entropy

    It’s not totally inconveivable that the market will crash during our lifetime. IMHO l we are due to a 1930s style depression due to unsustainable debt and a looming energy crisis. However, I am not afraid of forces beyond my control, I am young and still feel investing 10% of my income into a retirement account. If we get to that point, I will have to face the challenges that arise.

  22. cmadler

    As several people have pointed out, this should not be a question of whether to invest in a tax-advantaged vehicle (IRA, Roth, 401k, etc) or in taxable assets. The question is WHAT you invest in.

    There are several very plausible reasons that we could see a major market collapse in the next 5-10 years:
    1. Devaluation. The dollar has been gradually devaluing for several years. As this continues, capital begin flowing out of dollars and likely into Euros.
    2. Debt. A very large portion of US debt is owned by foriegn governments (China, for example, holds quite a bit). If the dollar continues to decline relative to their currencies, OR if we have diplomatic trouble (Congress is currently considering a HUGE tarriff against Chinese imports) they could begin selling. This could trigger a scenario similar to what Argentina recently went through.
    3. Baby boomers. Most baby boomers are counting on the US stock market for their retirement. They are beginning to retire now, and are taking that money out of US stocks. $5 trillion is expected to leave the market in the next 3 years, and $15 trillion over the next ten. This creates an enourmous selling pressure.
    4. ERISA. Even those baby boomers who do not want to sell will be forced to starting around 2017. ERISA mandates Required Minimum Withdrawals from pre-tax accounts (IRA, 401k, 403b) at age 70.5, at that point the selling will increase even farther.
    5. Panic. When things start to go bad, people panic and overreact. So a little bit of downward pressure from any one of the above could result in a huge sell-off. Millions of Americans in or nearing retirement will be especially jumpy.
    6. Housing bubble pops. Take a look at; they discuss some possible scenarios for the correction in the housing market, which I think we all know is coming. As people find themselves underwater on houses they intended to sell (in many cases to finance part or all of retirement), downward pressure on stocks will increase.

    All of these seem to me to be reasonably possible (and synergistic – if one happens it makes all the others more likely and more severe) scenarios, the question is what to do? I am thinking diversification out of dollar-denominated assets, or possibly exchange rate futures (although the latter is not a great long term solution).

  23. as Kieran and Chris and others have pointed out above, you can invest in a portfolio which includes a decent allocation of foreign securities – there are plenty of good funds offered by people like Vanguard

    Sure, share investing won’t save you from “The End of The World As We Know It”, but if you’re planning for that, why bother with college, etc etc.

    International diversification is about as good as you can rationally get in that sort of disater planning

  24. I don’t believe in all the doom and gloom that people keep talking about because quite honestly a person who is smart enough can find a way to make money in any economy… even in anarchy. I personally have an investment thesis in case of doomsday which is to invest in GAG – Guns Ammo and Gold. But I still have my shares in tech companies because I’m not that pessimistic.

    Something that should be a concern as far as investing in 401Ks is related to the National Debt and was pointed out by Suzie Ormon who has a great TV show on CNBC. She says that 401Ks were made back in the 80s when taxes were really high. The government created 401Ks so that people can shelter their money and have it grow tax free. So the plan was to put as much money in the 401K as possible and avoid paying the upfront taxes. Then some time later you withdraw the money when the tax rate is low and your advantage is all the money that you invested has grown and you withdraw it at a lower tax rate.

    However, today year 2006 we’re at the lowest level of taxes we’ve been at in decades. And with the National Debt looming out there, there is only one solution… RAISE TAXES. So Suzie goes on to point out that if you put too much in a 401K right now you will putting it in when your taxes are low and withdrawing them later when your taxes are likely to be high, which obviously makes no sense. I’m not saying don’t use the 401K at all, but understand that it’s a tool and not a perfect one. You must understand how to use it. Suzie Ormon suggest only adding to the 401K what your company will match.

    I hope this was informative.

  25. Grumpy Old Man...

    Your friend also needs to learn a little history before he argues from it.

    In 1750-1820 the UK had lost 13 of its less profitable colonies (the real money at the time was in sugar), but had gained Australia, de facto control of India and had knocked then previous superpower (France) off its perch, establishing what became known as Pax Brittanica. It was poised on the great age imperial expansion and had launched the Industrial revolution.

  26. cellardoor

    Fist clenching indeed…

    1.Unless your friend is going to invest in assets that are non-publicly traded securities, why the hell wouldn’t he put the money in his retirement fund and invest it however the doom’n’gloomers want? So what if the US collapses — stick your IRA money in emerging market funds if you like. (The takeaway for me, isn’t that the US will or won’t collapse — just that the guy probably doesn’t know what he’s talking about.)

    2.Unless maybe he thinks that a future administration will abolish the benefits on IRA’s and punitively tax them disproportionately — and even then, what does he think will happen to non-IRA assets?

    3.A tongue in cheek suggestion: The only way he’d be correct to avoid contributing is if he’s putting that money into guns and survival gear. If so, he should still invest in a traditional, but self-directed IRA (w/insane fees), and buy the guns through it (and at least get the AGI deduction — I suspect this guy’s income isn’t high enough to knock that out). Technically, if he starts using them for his own benefit, that’s self dealing (I think that’s the term), just as if you sell a valuable house from your taxable portfolio to your self-directed IRA for $1. The only thing is, in the scenario where he needs to use them — I doubt anyone’s going to care…

    4.What the hell were his alternatives? Let me guess — a fund run by the guys who told him not to invest in retirement accounts?

    5.I’m trying desperately to come up with a scenario where the guy wasn’t on crack — is it possible he meant that he didn’t want to pay social security taxes?

  27. It is not true that you would have lost money in the British stock market over the long run, neither when their late 18th Century declned nor their late 19th Century empire. In fact, many economic historians argue it was good for the British economy to set its money-sucking colonies loose — sort of like the way the US would gain financially from giving Puerto Rico its independence.

  28. I’ve been reading your blog since this past fall, but the points these gentlemen bring up are quite absurd. Like the first poster mentioned, there must’ve been a bong and a Che Guevara shirt somewhere when this conversation took place. Utilizing Britain as an example of an empire falling is the most fallacious of all the silly points these guys made. Look at the London Stock Exchange: it is now competing with New York in the financial world for supremacy as the biggest purveyor of global capital. Bloomberg, of all people, is frightened by the growth of the financial industry in London. Britain was on the up and up in 1750; it controlled the world by 1850. I would’ve killed to have invested in British industries in 1750–by 1850 I would’ve been the equivalent of a 19th century billionaire. And even during Britain’s precipitous decline as a first rate world power post-World War II, there was nothing remotely catastrophic about its decline, which more than allowed for London to remain a vibrant financial center. I predict the same will happen to the U.S. and its financial structure vis a vis the rising powers in Asia. Of course there will be bumps along the way, but I’d bet on the resiliency of the American financial system much more so than on the opinions of these knuckleheads.

  29. This intrigued me very much. I get each of your points.

  30. @Pablo –
    Couldn’t agree more, that one astonished me too. I think it’s a mindset here (America) that the american colonies *were* the british empire, and it all went bad for them when we became independent. I apologise on their behalf. I’ll invest my 1 pound into the iron industry at, oh, around the time of Henry VIII thanks.

  31. Just because something hasn’t happened in recent history is not enough evidence to say that it can’t happen or even that it’s unlikely. While the economy always has it’s ups and downs, it seems like we are actually in a downward spiral because the government is only concerned with short-term fixes that bite us in the ass in the long run. And it’s not really their fault. They are just doing what their constituents want them to do. We are a country of spoiled children that want their problems fixed immediately, and if it leads to bigger problems, down the line, that’s someone else’s problem. In the past, the common man didn’t know very much about what was happening in politics, but now through political competition, candidates have become very efficient at doing exactly what their constituents want them to do, even if it’s not the healthy choice. They must pander to our impulsive choices in order to win elections, but in the past, there was enough of a veil to allow them to make unpopular though intelligent decisions for us. Therefore, because our government must cater to the impulsive desires of spoiled children, it is very conceivable that our economic system will eventually implode, and we may go into a depression that will make this last month look like nothing. You can’t rely on evidence to predict the end of an era. The Roman empire only had to fall once.

  32. Hey .. I remembered reading this post so came back to it. Seems like your friends were on to something…. Do they have a personal finance blog I can subscribe to?

  33. @SK: I get the impression your comment was tongue in cheek, so my comments are completely unnecessary. I think cmadler above was most on point – the points were cogent and well thought out and implied a high level of knowledge and understanding of the situation. The chicken little’s arguments were vacuous and their predictions still have not come true by a long shot. The market has already started to recover. A recession or even a depression is still a far cry from a complete collapse.