I believe in Saving but…
If you are like me you probably have a 401k. You may or may not still be contributing to it. You most likely have no idea about how to invest in it, you just put a little in some of the options offered by your employer.
In wondering why I seem to be the only one who thinks 401k’s are a bad idea I found this article from 2009 but I think it is still very relevant today.
Why It’s Time To Retire the 401k
The article I am reverencing is “Why It is Time to Retire 401k“. It explains a bit about how the 401k started.
“Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation’s retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that’s exactly what happened.”
it goes on to say…
“Congress was trying to close a loophole on executive bonuses when it created the 401(k). Most companies intended 401(k)s — which were originally called salary-reduction plans but then renamed for the portion of the tax code that makes them possible — to be a perk for highly paid executives, not a pension replacement. That’s because lower-paid employees probably could not afford to defer a portion of their paychecks. So companies held on to their pension systems even as they added 401(k)s, which by law they had to make available to all employees. When the market took off in the 1980s, the rank and file clamored to get in.”
Performance 2007 to 2009
The article says that “from the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%.” Yep, for me that is pretty close. Sure, the market had an up sweep in 2010, but what has happened in the last few weeks has made me look again if the 401k is really a good idea or not.
Back to the article, remember this was written in 2009, but things haven’t changed much today as the average balance now is around $40k…
“The average 401(k) has a balance of $45,519. That’s not retirement. That’s two years of college. Even worse, 46% of all 401(k) accounts have less than $10,000. Today, just 21% of all U.S. workers are covered by traditional pensions, and the number shrinks every year.”
Alternatives to 401k
The article continues by mentioning some alternatives to 401k…
- “The most popular solution is the so-called automatic 401(k). Under that plan, all workers would be enrolled in 401(k)s when they’re eligible. Companies would establish default settings to boost returns and make the portfolios safer as workers near retirement.”
- “Teresa Ghilarducci, an economics professor at the New School, has proposed a plan in which the government would divert 5% of everyone’s wages. In return, you would be guaranteed in retirement a check for 26% of your final salary every year until you died.”
- “The ERISA Industry Committee (ERIC), a group that represents the nation’s largest employers, has proposed a system of exchanges that would allow individuals the ability to buy a guaranteed retirement account on their own. Some government regulation would be needed, but it would be a private plan. What the ERIC plan and others like it are essentially proposing is a form of retirement insurance. So instead of putting 6% of your salary into a 401(k) or some other investment account, each pay period you would send 6% of your check to a retirement-insurance provider. The policy would work similarly to a traditional pension in that it would provide a guaranteed monthly check equal to about a quarter of your final pay, from when you quit working until you die. Some employers might even be willing to pay the annual premium as a perk. If not, employees would pay for it much as they currently fund their own 401(k)s. But the policy would be portable. Contribute for 30 years and you would be guaranteed income in retirement, no matter how many employers you worked for. Combine your retirement-insurance check with the money you get from Social Security, which can equal as much as 50% of final pay, and presto: you have something approaching retirement security.”
IMHO
Personally I don’t see pensions coming back. Actually I never really thought a company should take care of you in retirement, just as I don’t think the government should either.
Take care of self and start NOW. Living a lifestyle full of debt will not help you to live well in retirement. First those in debt seldom contribute to 401k anyway. Second, chances are Social Security won’t be there when you retire, or if it is it won’t be near enough to solely live on.
If you are not in debt you can put all that money you spend on paying credit card bills into savings and pay yourself! You can still invest in the stock market if you educate yourself on what you are investing in. I totally recommend a ROTH IRA, it is where you put in post tax dollars, and the increase is tax free. With 401k, who knows what the tax rate will be when you pull money out of that in 30 or so years.
So personally, I am no longer drinking the 401k Kool-aid. I am debt free, I am not greedy. I believe it is important to have money work for you but think counting on 401k to bring in 12% is not realistic. After fees and inflation you may gain what 4%? If you live debt free, live a modest lifestyle, have your home paid off, how much money does one really need when you retire?
Do you think a 401k is a bad idea? Let me know.
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