How Wall Street Consumes All Retirement Earnings

(1 Minute Article)

By Daniel R. Amerman, CFA

(The video below takes just under two minutes to view, the transcript can be read in about a minute.)

Let's talk about your retirement. You responsibly save for decades, your investments help the real economy of this country grow, and as a reward, you eventually reap the benefits of that economic growth in the form of a prosperous retirement.  

Wonderful theory.

When we look not at paper wealth, and not at stock or real estate bubbles, but the real US economy, then over the last 50 years economic growth has averaged about 2% per year per person, after adjusting for inflation.

Now here's a fascinating coincidence.   The rule of thumb figure is that total financial industry revenues average about 2% of assets under management.  So for every $100 in an investment account, about two dollars will end up sticking to the fingers of the investment industry over the course of the year.

What a coincidence! We responsibly save to be rewarded with our share of economic growth, but the annual financial fees exactly cancel out the annual growth and we’re left with… what?

Meanwhile, in exchange for managing let's say $10 trillion in retirement account investments, Wall Street pulls out $200 billion every year.  That's $200 billion they get whether the economy is growing or shrinking.

Now logically, this would lead to a situation where tens of millions of retirement investors wait patiently for the wealth that has been promised to them but never quite arrives, while in the meantime every year a relatively small group of people enjoy extraordinarily good incomes on Wall Street.

It sure is a good thing this is just some silly coincidence, isn’t it?   

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Contact Information:

Daniel R. Amerman, CFA

Website: http://danielamerman.com/

E-mail:  mail@the-great-retirement-experiment.com

This article contains the ideas and opinions of the author.  It is a conceptual exploration of financial and general economic principles.  As with any financial discussion of the future, there cannot be any absolute certainty.  What this article does not contain is specific investment, legal, tax or any other form of professional advice.  If specific advice is needed, it should be sought from an appropriate professional.  Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.

Copyright 2010 by Daniel Amerman