By David Melton
David E. Melton
To my Fellow Kentuckians in the public sector as well as the private sector. First off, I do not presume to be a financial advisor nor do I have any formal education as such. But what I have done is managed my own 401K plan for over 20 years through The Vanguard Group offered by Logan Aluminum in Russellville, Ky.
When I say I “managed” I don’t mean I put contributions with matching funds into some mutual or bond fund and hoped for the best. I mean I looked at my account every day in an attempt to learn the do’s and don’ts of investing in mutual funds. My wife is a retired teacher and participated in the Kentucky Deferred Compensation plan offered to Kentucky teachers, which I also manage. It has almost double that of her contributions into that account.
It baffles me that actuaries and others using “formulas” are surrendered to the fact that they cannot achieve average rates of return of more than 5-6 percent or 7.5 percent at best. That would also be before expenses. I went to the Kentucky Deferred Comp website and listed below all funds that had an average annual rate of return of 7 percent or better that had inception dates of more than 10 years. I found 13 mutual funds that met the 7 percent-for-10-years criteria. I am only going to use ticker symbols to identify them. You can use that ticker symbol on any financial page to get more information.
Ticker symbol Inception date Average annual rate of return Age in years
PAAIX 2002 7.20% 15
DFISX 1996 7.57% 21
DODFX 2001 8.12% 16
RERGX 1984 11.31% 33
VSCIX 1997 9.02% 20
PMEGX 1996 12.32% 21
VMCIX 1998 9.96% 19
FCNTX 1967 12.46% 50
FDGRX 1983 13.47% 34
VIIIX 1997 7.19% 20
VWENX 2001 7.68% 16
FHRRX 1969 8.13% 48
GWEIX 2009 15.92% 8
The GWEIX fund only had an eight-year history, but I included it due to the impressive average rate of return over those eight years. Also, it is where I currently have my wife’s money invested. Although retired, I still use Vanguard for my investment needs. I am about 90 percent invested in their health care fund, VGHCX. It has an inception date of 1984 and the average rate of return is 16.59 percent annually. The fund pays dividends in March and December along with short- and long-term capital gains in December.
I draw my monthly social security and supplement from my 401K account when needed, in the amount needed (the balance is the limit) which leaves the balance invested. I couldn’t ask for a better outcome related to my retirement.
“BUT WHAT IF THE MARKET CRASHES!”
Please acknowledge that all of the funds above went through the 2008 housing bubble crash and still managed to achieve the listed average rates of return. Also, all of the funds above that are over 17 years old went through the 2008 housing bubble crash, the 1999-2000 tech bubble crash, along with every other market correction since their inception date. Still they have had the impressive average rates of return on investments as is shown.
I am going to give an example of the possibilities using one of the examples above, DFISX, with its 7.57 percent average annual rate of return. The numbers used will be those from the recent proposal from the pension reform bill of 15 percent contribution rate and an average over career salary of $45,000 ($35,000 start, $55,000 ending.) I use a teacher as the example since I am more familiar with those numbers, but I would be happy to work with any salary for an example. Dave Ramsey’s compound interest calculator was used for the calculations, but any compound interest calculator will work.
Example of a Kentucky teacher new hire under the pension reform proposal.
–Start at age 25
–Retire at age 60
–Start with zero savings
–A contribution rate of $562.50 per month: 9 percent of which would be the employee responsibility compared to the current 12.855 percent, which is a 3.855 percent net back to the employee
The estimated balance at age 60 would be $1,137,442 ($1.13 million).
If I use the fund FDGRX with its 13.47 percent annual rate of return over its 34-year history the estimate account total could possibly be $4,681,783 ($4.68 million).
The first question I get from actuaries is, “Then why aren’t more people millionaires?” The answer to why more people are not millionaires through 401K plans is simple. Few individuals can afford or have the opportunity to start investing at age 25 with this amount of money, in an investment plan capable of yielding this kind of returns over a 35-year career.
(A side note, I oppose the 401A plan due to the limit on contributions.)
The folks working their foot-long math problems and assume that they can get you maybe 6 percent, or at best 7.5 percent return will tell me and you that I am wrong. I ask you to ask them to show or explain to you, how I am wrong?
Anyone can do this through training and workshops. I’ve done it on my own. To consider making Investing as part of the curriculum in high school would be a good place to start. Our youth need to know how to use the investment options available to them.
I urge Kentuckians to reconsider pension reform and come up with a plan that will merge new hires into a Social Security type plan coupled with a 401K plan – a plan that will get those already in the game across the finish line. And be done with this ridiculous and expensive public pension system. It will always cause problems, and we all should know that by now.
Thirty-seven states in America are listed as unhealthy and it isn’t due to the fact that public pension systems work, much less work efficiently.
We can’t continue to force taxpayers to bail out the public pension systems every time it reaches a crisis state. Let’s resolve this now and not have us have to deal with it again in the future. Don’t deny teacher new hires and other public service workers the rare opportunity to retire wealthy and leave a financial legacy that could help their heirs for years to come. The alternative option would be to put another Band-Aid on this public pension hemorrhage and call it a resolution. Let’s not let new hires enter a workforce facing a lifetime of worry as to whether their pension will survive the next crisis. You can’t honestly say it will not happen. Change it now and eliminate that worry.
Support pension reform.
David Melton of Central City is a retired mechanic from a Kentucky aluminum rolling mill.