How Wall Street Consumes All Retirement Earnings

By: Daniel Amerman | Thu, Jul 8, 2010
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(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.

Leftovers

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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Daniel Amerman

Author: Daniel Amerman

Daniel R. Amerman, CFA
The-Great-Retirement-Experiment.com

Dan Amerman

Daniel R. Amerman is a financial futurist, author, speaker, and consultant with over 20 years of financial industry experience. He is a Chartered Financial Analyst (CFA), and holds MBA and BSBA degrees in Finance from the University of Missouri. He has spent seven years developing a large, unique and intertwined body of work, that is devoted to using the foundation principles of economics and finance to try to understand the retirement of the Baby Boom from the perspective of the people who will be paying for it.

Since 1990, Mr. Amerman has provided specialized quantitative consulting services to financial institutions, with a particular emphasis on structured finance. Previously, Mr. Amerman was vice president of an institutional investment bank, with responsibilities including research, synthetic securities, and capital market originations.

Two of Mr. Amerman's previous books on finance were published by major business publishers. "COLLATERALIZED MORTGAGE OBLIGATIONS, Unlock The Secrets Of Mortgage Derivatives", was published by McGraw-Hill in 1995. Mr. Amerman is also the author of "MORTGAGE SECURITIES: The High-Yield Alternative To CDs, The Low-Risk Alternative To Stocks", which was published by Probus Publishing (now a McGraw-Hill subsidiary) in 1993. Advertised by the publisher as a professional "bestseller" for four quarters, an Asian edition was sold as well.

Mr. Amerman has spoken at numerous professional seminars and conferences nationwide, for a variety of sponsors including New York University, the Institute for International Research, and many others. After the publication of his prior books, he acted as keynote speaker at a number of banking related conferences over the next several years.

This article contains the ideas and opinions of the author. It is a conceptual exploration of general economic principles, and how people may - or may not - interact in the future. As with any discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal 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 website, pamphlets, videos, books and other products, either directly or indirectly, are expressly disclaimed by the author.

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