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Are 401ks a failed experiment?
What say you, PCE?
http://theweek.com/article/index/227394/are-401ks-a-failed-experiment
Are 401(k)s a failed experiment?
As Baby Boomers approach retirement age, it's clear that most have not saved enough to live out their golden years in comfort
POSTED ON APRIL 30, 2012, AT 6:20 PM
Best Opinion: N.Y. Times, Wash. Monthly, InstaPundit
Baby Boomers latched onto 401(k)s in the late 1970s, when companies began switching from traditional pension plans to employee-funded retirement accounts tied to the ups and downs of the stock market. But now, many Boomers eager to quit working haven't saved nearly enough, and are heading toward a "faith-based retirement," says Joe Nocera at The New York Times, in which they have little to go on but faith that everything will be fine once they leave the workforce. Only 22 percent of workers over 55 have more than $250,000 socked away for their post-work life. And a shocking 60 percent have less than $100,000. Even with Social Security payments, that amount will dwindle quickly, and Boomers are increasingly putting off retirement and working into their late 60s and 70s. Are 401(k)s simply a bad retirement system?
Tying retirement to the stock market is a bad idea: Most people "lack the skill and emotional wherewithal to be good investors," says Nocera at The Times. That's why "linking investing and retirement has turned out to be a recipe for disaster." Average investors are prone to bubbles in the stock market, such as the tech bubble in 2000 or the housing bubble in 2008. Furthermore, most people are also vulnerable to personal financial shocks ? a divorce, a health problem, or a job loss ? that can force them to raid their 401(k) accounts. It's time to rethink the system.
Clearly, we ought to beef up Social Security: "The poverty rate among the elderly is rapidly increasing," says Kathleen Geier at Washington Monthly. And remember, the elderly are particularly vulnerable to financial difficulties arising from health problems, which will deplete their personal savings even more. The problem? Social Security benefits are way too low. The solution? The government ought to raise them.
Hold on. More government funding is not the answer: It's ridiculous for Nocera to trash the entire 401(k) system just because he messed up his retirement, says Glenn Reynolds at InstaPundit. And expanding Social Security would only make things worse: If "people aren't clever enough to plan their own retirement," then it's unlikely the government is "clever enough to plan for other people's retirement." There's "no evidence that the folks in Washington are any less dumb than the public at large."
Re: Are 401ks a failed experiment?
I think this is not a 401k problem, but a baby boomer problem.
MH and I are 30 and 31, and he is the only one working and we have more in our 401k than $100k, plus other savings/investments, and other work retirement accounts (his company has a pension-ish plan that is separate from our 401k but he has a percentage of forced contribution from his salary - it's odd).
We do this because we know SS is going to be gone and I wouldn't be surprised if the baby boomers try to raid the younger generation's 401ks. I hate old people, but most of all I hate the baby boomers. I swear to God, they'd let us support them to the country's demise if it benefited them. DEATH PANELS FOR BABY BOOMERS.
ETA: I also don't think 401ks are the be all end all answer and I don't think they will necessarily work for everyone. However, I think the situation described here with the baby boomers is unique to that particular group of asshats.
Is it really a matter of 401(k)s not working, or is a matter of people just not planning ahead and using the resources they had available to them to plan their retirement?
I mean, if it's going to be this awful for baby boomers, imagine how it will be for younger generations who will have little to no SS to depend on, virtually no pensions, and more debt than ever before.
I can hardly wait!!!
<a href="http://www.thenest.com/?utm_source=ticker&utm_medium=HTML&utm_campaign=tickers" title="Home Dbullshiit. this isn't a 401(k) problem, it's a lazy, instant-gratification person problem. i get that the boomers didn't have a model of how to do this right or wrong since most of their parents (fathers) were pensioned, but come ON.
over the long term (and 1970 to now is the long term), you make money on the stock market if you don't try to beat it. put money in gradually, change the investment mix to more stable assets as you approach retirement and walla, you have enough to live on.
the problem isn't the boom and bust stock market, it's nimrods who didn't put enough away, or who tried to cash in on booms so they could have flashy cars or some nonsense. i don't buy that "oh, we had to raid our 401(k) because of a divorce" explanation at all. that doesn't explain how 60% have less than $100k.
On my phone but anyone who blindly throws money into the stock market is an idiot. Just because your 401k offers a particular fund doesn't make it a safe investment.
I think people are shockingly lazy about managing their money. They throw it into the hot stock and think they will wind up owning a tropical island and a harem of young, hot slam puppies. Then they get creamed by a stock market that is stacked against the average individual investor and start crying into their Beast and demanding that SS give them more.
Managing your money takes time, effort, and skill. If you are lacking any of these, either opt for low-risk investments or find a financial advisor who has very low fees and who isn't constantly ginning up fees, and whose advice you trust.
And on the topic of financial advisors, I have an article about a new study that does not have good things to say about them. I'll post when I get to my laptop.
When I hear amounts tossed about in terms of how much will be needed to retire (I think I read somewhere that a million dollars was a conservative estimate), I do wonder if the 401(k) will be sufficient. I say this as someone who started contributing at least 10% right out of school and for the last 7 years or so has contributed the dollar maximum allowed and never made a withdrawal. I feel like technically I followed what was recommended and I STILL wonder how it will be enough if we don't own a home outright by the time we retire and have to consider living expenses in a HCOL area.
It makes me extra nervous to think about whatever gains we have made in our retirement account can be easily wiped away at anytime with a collapse of the market. How do you plan for that???
I don't think that 401ks are a failed experiment yet, but give it another 30 years. Everyone keeps talking about the squeeze on the middle class with inflation, increasing education and health care costs, etc., so I don't see how people will be able to put enough away now with their dwindling disposable income to help them retire 30 years from now when costs will be out of control.
MH and I are both 30 and have a decent amount between the two of us, but honestly, I would be very worried if all we had were 401ks and company sponsored pension plans (which don't exist in every industry). It may sound morbid, but the biggest reason I think we will be OK is due to him being an only child and his parents being pretty well off. Not everyone has that advantage.
This is not that easy though. Low-risk investments for the duration of the time you are contributing to your 401(k) aren't likely to yield the return you need to retire on without some additional sources like social security or a significant amount of outside investments / savings (yes I agree you should have that anyway but still).
And finding a financial advisor who isn't trying to get you to buy only their products or who actually is knowledgeable themselves is almost a pipe dream.
Can I hire you?
i would like to clarify that i don't think 401(k)s are the answer to everything and neither is social security. i have no idea what the right answer is. i just don't think that the evidence proferred by this article in support of the 401(k) "failure" is even remotely persuasive.
ANECDOTE: i remember being jealous of and admiring my mom's friend who had all of these quirky fun jobs and travelled a ton. i learned recently that she's 70 and literally can't retire. she has nothing saved. i love her dearly, i hope she figures something out, but there's a part of me that's all "oh, that's why she could "afford" to quit her job and live in europe for a summer for the hell of it." so i'm probably using this anecdote to fuel my response, subconsciously.
Cookie is right. I mean, yeah, I'm annoyed that so many old people haven't saved sufficiently for retirement. But those of us trying our best now might still not be able to save enough even while doing everything we're supposed to be doing.
Heck, even I'm guilty of "faith-based retirement planning." H and I are both entitled to state pensions after we retire. Now, you don't want to know me when I'm 60+ and learn that I'm not getting any of that money back that I've been contributing since I've started working here because I will go apeshiit on everyone, but there's a big part of me that's still counting on that money (though we do contribute to our 403(b)s too, but not as much as we would like to).
Some Baby Boomers were likely counting on real estate to add to their nest egg too. If they sold 5+ years ago, they're probably set or close to set, but otherwise...not such a good idea.
So yeah, with real estate the way it is, with student loan debt, credit card debt, etc., how on earth is shiit supposed to get better? Anyone want to move to some random uninhabited island with me?
<a href="http://www.thenest.com/?utm_source=ticker&utm_medium=HTML&utm_campaign=tickers" title="Home DJust signing in as a Bitter Betty who doesn't even have access to a 401(k).
Exactly. If you do low risk you're barely offsetting inflation. You can do an index fund or something and just hope for the best, but to some extent it is always going to be about timing. No matter how disciplined and responsible you are, your retirement money will depend on luck to a significant extent. That is why I see it as a problem.
And let's talk about the people who only make 60k/year. Try as they might, it will be hard for them to fully fund their 401(k)s every year. Is not about people being lazy or irresponsible or whatever in many cases, it's about the very normal human characteristic of worrying about what will hurt you immediately at the expense of what will hurt you in the distant future. If you have to make a choice, you choose survival now. (This ties us into Fat Tuesdays and how people are programmed to get as many calories as they can and not pass them up. YW!)
Especially if they have large student loan debts.
Also, whether one can even use a 401(k) is entirely at the discretion of one's employer. And yes, you can look for another job that offers one, but that doesn't mean one will be immediately available.
Is this really an Old Person's problem? I'm thinking younger generations are even more screwed. Don't forget The Nest audience is a select few high income earners. Half our country's households are taking in 50K or less per year. Where is retirement savings supposed to be coming from?
The boomers and older people I know are set and some are downright loaded. They had pensions, they have SS income, Medicare to cover their exorbitant health care costs plus group rates on supplemental insurances.
The rest of everyone I know has full time employment with company matches, access to group health insurance rates and are generally high income earners and/or own expensive real estate. I feel like I'll be begging to rent out one of their basements one day while I work until the day I keel over.
If our younger generations are already developing chronic health problems like type 2 diabetes as early as childhood, what's that going to look like when they are too old or too disabled to work? What about young people with huge student loan debt who will go through a decade of shiity work opportunities with crappy or no benefits, low pay, etc? People hit by long stretches of unemployment?
and realistically speaking, if you've gotten divorced or become unemployed and you have a choice between leaving your 401k intact or paying your rent/mortgage, what are you going to do?
What is worse is that 60% represents people who don't even have $100K saved which is still far less than what is needed to retire. I would imagine the percentage that don't have enough to retire is even higher.
And then as long as old people are still working into their 70s and older, younger generations won't be getting their foot in the door until much later, losing valuable years when they can be investing some money. And then shiit just gets worse and worse.
That uninhabited island is sounding better and better right now. Invitation is still open, people.
<a href="http://www.thenest.com/?utm_source=ticker&utm_medium=HTML&utm_campaign=tickers" title="Home DYup. Plus, even if you're allowed a 401(k) not all employers match. So not everyone gets the same benefits out of a 401(k) and some who save so much are doing so because their company is helping them, not because they are inherently smarter, more disciplined or anything else.
I don't know that they are a complete failure. But I also don't believe for an instant that a dual income household maxing out two 401ks will be ok in retirement in a world with reduced SS and means-tested Medicare.
My grandmother's Alzheimer's facility costs $8,000 a month and that is exclusive of prescription medication and medical care unrelated to the Alzheimer's diagnosis. Imagine if her husband were still alive and needed similar care?
Yeah, I think that if we are seeing these problems with people retiring today, who had the benefit of lower health care and education costs, more company pensions, and actually getting social security, it's only going to get worse. So however well 401(k)s are working now, this is probably the best they will ever work.
No matches here.
Sometimes I even wonder if it's still work contributing to the 403(b) then if I get no match, but it's money I don't ever see so it's easy enough for me to just continue having that money yanked out of my paycheck.
<a href="http://www.thenest.com/?utm_source=ticker&utm_medium=HTML&utm_campaign=tickers" title="Home Dthe reason pensions "worked" is because you just got paid less and the money was never in your hands. and, hypothetically, the business was ever expanding and would support the pensioners.
there is nothing (that allows for portability) on the market that's like this; where you never even get your hands on the money--where you can't. while that might be the best in practice, since apparently when left to their own devices people cannot or will not set aside the money in sufficient amounts, after years of 401(k)s and the like, i really don't see any possible moves in that direction (politically or practically).
so, barring some sort of mandatory pension-type system, what will work?
i don't see this as the boomers problem (i don't know why they didn't/couldn't/wouldn't invest), but for our generation i think student loans are going to be the killer. out of college making $20k/year, i contributed to my 401(k)--because i didn't have student loans. if i'd had student loans then (i do now), that would've been an utter impossibility.
I wonder if part of the problem is that 401(k)s are often touted as the solution. Like if you max them out every year you will be fine. Obviously this doesn't take into account lost years of earnings for education, child care, etc., but even allowing for that, many people I know tend to rely solely on 401(k)s. Granted, most of them are trying to pay down their student loans with insanely high rates, but it's normal in my circle. Some also put 5k into an IRA on top of it. But trying to save for a house (don't want to throw away money on rent), pay down debt, and max out your 401(k)....I think it's asking for a lot for people to do more than that.
So perhaps 401(k)s are fine... as part of 3 separate things you are doing to save for retirement. Which gets us back to the "yeah, but how many people have the ability to do that" issue.
I agree with all of this. I think the problem with 401ks isn't 401ks, or even the stock market, but it's the way people use them. Mandatory saving - where you never see your contribution and do not have access to it - in a mandatory targeted date fund is the only way IMO, to save a nation of bad savers and bad investors from ourselves.
Yes but...mandated by who? The government? I don't really see a whole lot of people going for that, even though it does seem like the best idea.
<a href="http://www.thenest.com/?utm_source=ticker&utm_medium=HTML&utm_campaign=tickers" title="Home DI know that there are a lot of circumstances that lead to undersaving and that not everyone is a moron, but 60 percent don't have more than $100k? I fear for the future and it really pisses me off that DH and I are fiscally responsible and will be left holding the bag for the Me Generation in yet another way.
DS1 born June 2008 | m/c at 9w March 2011 | DS2 born April 2012