Everything is in place. An average young worker can increase her retirement assets by at least $400,000. Perhaps $700,000.

That's my conclusion after comparing the investment tools of today and yesterday.

We have much better tools today. Only will and knowledge stand between young workers and a larger fortune.

Skeptics should consider history:

In 1970 there were no money market funds. A law called Regulation Q restricted the returns small investors could earn on their savings. The I Savings Bond, offering inflation protection of principal and a real return, didn't exist until 1998. Treasury Inflation Protected Securities didn't exist until 1997.

There were only a handful of bond and income funds in 1970---38 according to the Investment Company Institute. There were only 323 equity funds. Most were load funds with front-end commissions as high as 8.5 percent.

Brokerage commissions, including those paid by institutional investors, were fixed. They would not be deregulated until May 1975.

The first index fund wasn't created until July 1971. That's when the Samsonite Luggage Company put $6 million from its pension plan into an index fund established by Wells Fargo Bank. Five years later John Bogle created the first retail index fund at Vanguard.

The traditional Individual Retirement Account (IRA) didn't exist until 1974. The opportunity to invent the 401(k) plan didn't exist until 1978. It wouldn't be seen as a powerful retirement vehicle until nearly a decade after Ted Benna invented it. The Roth IRA didn't exist until 1996. It would take until 2002 to expand the plans enough so that 90 percent of all workers could easily enjoy tax-benefited growth.

State Street Global Advisors didn't launch the first Exchange Traded Fund, the SPDR (for Standard and Poors' Depositary Receipts) until 1993. The first fixed income ETF didn't exist until Barclay's Global launched several in 2002.

In technology, the Department of Defense commissioned Bolt, Berenek, and Newman to build the ARPAnet in 1969. It developed an arcane network for communication between research institutions known as the Internet. Intel didn't launch the first computer on a chip until 1971. Apple Computer didn't launch the first successful microcomputer, the Apple II, until 1977. IBM didn't launch their competitor until 1981. Tim Berners-Lee didn't start writing the code for HTML and the World Wide Web until 1990. Marc Andreessen didn't announce Mosaic, the first web browser, until 1993.

Together, these developments have created a true revolution in personal investing. You and I can now invest quickly, efficiently, and at minimal cost. We can get results that are superior to high cost traditional managers. Our results can add hundreds of thousands of dollars--- the $400,000 to $700,000 cited earlier--- to our retirement nest egg.

Using the tools of yesterday, a 25-year old worker who saved 10 percent of his $25,000 salary each year could accumulate $1,530,000.   This would happen if the money were invested in a 70/30-equity/fixed-income portfolio at a direct cost of 1.40 percentage points a year.

Using the tools of today--- major index mutual funds and exchange-traded-index-funds that cost 0.2 percentage points a year or less---the same worker would accumulate $2,060,000. The difference in lifetime accumulation is $530,000, an increase of 35 percent.

The table below shows the value of new, low cost investment technology compared to three levels of traditional investment tools. These costs reduce returns by 1 percent a year, a typical cost of 1.4 percent a year, and a high cost of 2.0 percent a year. The high cost is typically seen in small 401(k) plans, many retail IRA plans, and many of the 403(b) plans sold to teachers.

The Value of New Technology for Retirement Investing
These calculations assume a 25 year old with a starting salary of $30,000 and career earnings that exceed 3 percent inflation by 1 percentage point annually. The assumed return is that of a 70/30-equity/fixed-income portfolio. The worker saves 10 percent of income and retires at age 67.
Net Portfolio Return 42 Year Accumulation New Technology Advantage In $ New Technology Advantage in % Investment Cost





















Source:   author's calculations, based on Ibbotson Associates returns data

Bottom line: It's time to modernize our investing.

Tuesday: Another reason to index.