The 401(k)- a failure?

[Mulligan]

What opportunities? Mom got married in '39. She was sent home when she went back to work. Actually she knew it as, "a married women had a husband to take care of them". What?

Dad's mother was widowed in '29. Wasn't much for her to do either. She managed to open a small local store, they were poor not hungry, still pretty scary times. But what else could a respectable single/widowed woman do?

The good ole days??

Hope the future continues to be better in many ways.

That is what happened to my step mothers mom. Her job as a 7 year old was learning how to cut off the home grown chickens head off and plucking it so they could have something to eat for dinner.


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[Texas Proud]

One of the things people forget about the old pensions is that they were more like the military.... if you did not work the required amount of time you got nothing...

My dad worked for Nestle's back in the 60s... the sales manager would fire any employee who was approaching 10 years since that was the cliff... if you did not make the 10 years you got zip... so he got good bonus due to the amount he saved the company....

Now there is a 5 year cliff or a step that IIRC can go out 7 years, but you start to get benefits after 3...

 

[pb4uski]

But if you gross $25k, presumably you live on $22k or less after taxes and other deductions are taken out and SS will cover a lot of that and you don't need to max out a 401k to make up the gap.

Someone starting out in the work force today and making $25K/yr every year until age 67 would only get $1145/mo or $13,740/yr in SS. That's a pretty big cut in pay for someone who already could barely get by let alone save for retirement. A lot of people in that income range work physically demanding jobs and probably can't work until age 67 so their benefit would be even lower.

Where are you getting your data? I recently read a study that for the lowest quintile of Income that SS replaced 70 something percent of gross income for a single and 60 something percent for a couple.

This study indicates replacement rates of 72% of gross income for singles and 63% of gross income for couples for those whose income is in the lowest 20%. The replacement of take-home pay would be even higher.

 

[Sunset]

My sister worked in an office with some people like that. Not $600k, but 150k range. If the paychecks weren't delivered before noon they couldn't buy lunch. Amazing.

I worked at a place, and one day the owner called me into his office to explain due to a bank issue, paychecks would not be coming out on Friday (the next day), but would be out Tuesday.

I told him, no problem.
He was shocked as so many folks had already whined/complained about how they were going to be starving over the weekend without their pay.

I told him I always keep a couple of thousand in my bank account, and consider it my Zero level, so I'll always have cash for any little hiccup.

 

[growing_older]

Quote:
Originally Posted by growing_older
I think the majority of statistics purporting to show the 401k is a failure are poorly designed and deliberately distort the situation to fit the thesis.

Doubtful. I think rather that they are including in the statistics a large number of people who don't fit the model of those for whom 401(k)s serve well.

Typically the statistic they quote is average size of the current 401k balance. Relatively few workers have only a single 401k at a single employer for their entire career. By ignoring multiple 401k accounts from previous jobs and any amounts that were rolled into an IRA, these "statistics" strongly underestimate the actual 401k retirement savings. Also, most of these articles go on to decry the "failure" of the 401k in large part because the balances as they measured them are so low. Curious how their methodology so strongly supports their position, instead of better methodology letting the data drive the opinions.

 

[Sunset]

I recall when DW worked with the WIC program 20 years ago and would visit low income households on the program. Many of these people made very poor decisions on how to spend what little money they had. They frequently had better cable tv packages than we had, not that we couldn't afford it but more that we didn't see it as a wise way to spend money. They frequently also had caller id and other phone services that we could have afforded but didn't think was worth the cost. Sometimes, they even had newer cars than we had. I'd bet that today they have better/fancier/more expensive cellphones and plans than my 5 year old bring-your-own-phone and pay-as-you-go $10/month plan.

My point is that any claim that low/middle income people don't save in their 401k because they can't afford to is poppycock.... they could... but they don't because it would crimp their lifestyle and require sacrifice.

+1
I often ran into fellow workers at various jobs I had, where they would say they had no money. My first job, I made the same/less than everyone, but I bought a condo while they rented. One even told me she couldn't see how she could afford that, then she would tell me about all her shopping trips and restaurant dining during the week.

It is amazing what people will spend their money on, and then claim they cannot afford to save anything.

 

[MRG]

Typically the statistic they quote is average size of the current 401k balance. Relatively few workers have only a single 401k at a single employer for their entire career. By ignoring multiple 401k accounts from previous jobs and any amounts that were rolled into an IRA, these "statistics" strongly underestimate the actual 401k retirement savings. Also, most of these articles go on to decry the "failure" of the 401k in large part because the balances as they measured them are so low. Curious how their methodology so strongly supports their position, instead of better methodology letting the data drive the opinions.

+1

We have the exact same thoughts see post 24. The data are incorrect, it's known by some. The folks that write this drivel should be forced to back their statements. The data cannot be aggregated together to get a picture of what an individual investor has, only individual accounts value is known. If the average investor has two accounts it's 100% wrong all the time. That assumes equal value, what can you assume? I don't know but neither does the author or anyone else. The author does not point out a major flaw in the data and analysis, instead passes it off as a new reality.

Thanks growing_older.

 

[purplesky]

Typically the statistic they quote is average size of the current 401k balance. Relatively few workers have only a single 401k at a single employer for their entire career. By ignoring multiple 401k accounts from previous jobs and any amounts that were rolled into an IRA, these "statistics" strongly underestimate the actual 401k retirement savings. Also, most of these articles go on to decry the "failure" of the 401k in large part because the balances as they measured them are so low. Curious how their methodology so strongly supports their position, instead of better methodology letting the data drive the opinions.

I wonder why we don't see studies that show the 401k is a true widespread success for retirement saving.

If the baby boomers haven't acheived real success with their 401ks, imagine what the statistics for the millennial generations 401ks will look like.

Student loan debt and healthcare costs and even lower wages than their boomer parents will not look good.

 

[purplesky]

+1

We have the exact same thoughts see post 24. The data are incorrect, it's known by some. The folks that write this drivel should be forced to back their statements. The data cannot be aggregated together to get a picture of what an individual investor has, only individual accounts value is known. If the average investor has two accounts it's 100% wrong all the time. That assumes equal value, what can you assume? I don't know but neither does the author or anyone else. The author does not point out a major flaw in the data and analysis, instead passes it off as a new reality.

Thanks growing_older.

If all those scattered 401k accounts were underfunded during that investors career, then his or her final retirement 401k balance will still be underfunded.

Or should we assume the average 401k investor is fully and properly funding their 401k.

 

[MRG]

If all those scattered 401k accounts were underfunded during that investors career, then his or her final retirement 401k balance will still be underfunded.

Or should we assume the average 401k investor is fully and properly funding their 401k.

There's the problem, how can anyone tell from this data? Either could be argued right or wrong. Point is this data does not, and cannot support either as being more likely.

I'm sure many folks are underfunded, just as some still unknown percent are ok. I can't draw any other conclusion from the data. It's worthless IMHO. Just some unrelated facts the author is attempting to relate to make his point.

 

[bUU]

I'd really like to see that study. I tried to find anything like it and couldn't, so if you could provide more info I'll search for it myself.

http://gabriel-zucman.eu/files/SaezZucman2014.pdf

First, saving rates tend to rise with wealth. Bottom 90% wealth holders save around 3% of their income on average, the next 9% save about 15% of their income, while the top 1% save about 20-25% of their income. ... Second, saving rate inequality has increased in recent decades. The saving rate of bottom 90% families has sharply fallen since the 1970s, while it has remained roughly stable for the top 1%.

Also see attached, accompanying figure.​

While there's undoubtedly some correlation between income level and savings, it's not as simple as that IME.

Correct, but it would be a copyright violation to type in all 65 pages of detail. Furthermore, the differences are so vast - the gulf between the different economic classes so substantial - that that overwhelms the significance of other details.

Back when I used to go to a FA, he told me he knew doctors who couldnt save any money. While more income helps with the prospect of saving, ultimately your lifestyle and spending levels dictate whether you can save or not. People sometimes increase their lifestyle when more money comes their way.

But the data shows that those are anecdotal outliers and that the general case is that savings rate tracks very highly with wages.

I think there is some viewing of the past through rose-colored glasses going on here.

I agree, and the confusion stems from the fact that things were getting better - much better - and then stopped getting better and proceeded to regress backward.

My point is that any claim that low/middle income people don't save in their 401k because they can't afford to is poppycock.... they could... but they don't because it would crimp their lifestyle and require sacrifice.

There is no evidence that all or even most low/middle income people are in that circumstance because of definitively bad choices. Calling something poppycock doesn't make it so. If we're relying on anecdotes, then rely on those that show that it is far more likely that their situation is predicated by inadequate opportunities, as evidenced by the fact that those given such opportunities have managed to climb out of poverty. Let's stick with what we know rather than relying on prejudicial assumptions about a large swath of the American population.

 

[Fermion]

I think by law a pension should be the senior-most debt holder of the company. If the company gets in trouble the pension should be fully funded before bond holders get anything.

Management would get focused on keeping the pension fully funded real quick.

Toss in tax credits for funding a DB plan and you'd fix the retirement crisis fast...and also put real pressure on returning more of the economic growth to workers.

This is why pensions are better than 401K. People think pensions should have more rights than bond holders (which more than a few are held in a 401K that is also being depended on for retirement by someone).

 

[Midpack]

http://gabriel-zucman.eu/files/SaezZucman2014.pdf

Also see attached, accompanying figure.​

Correct, but it would be a copyright violation to type in all 65 pages of detail. Furthermore, the differences are so vast - the gulf between the different economic classes so substantial - that that overwhelms the significance of other details.

Thanks bUU. It will take me a while to read through it, but I wanted to promptly acknowledge your reply. I am hoping there is some discussion in the paper as to why the large savings rate disparity.

Like pb4uski, I have 20 years of first hand experience with too many people (employees in the $50-$70K/yr range, most with working spouses) who saved little or nothing, due more to willfully poor choices than their income. They had the means and tools to save, and planned to do otherwise...

 

[bUU]

We all have our own personal experiences, but again, they're just anecdotal. The reason why such conflicting perspectives flourish is because they support conflicting intentions, and because there is no effective means of proving nor refuting any of them, because they have to do with the content of people's minds and hearts. All we can say with assurance is that the savings rates are different and have trended in a specific direction, correlated with other changes in economic indicators that track to the same categories.

 

[Midpack]

We all have our own personal experiences, but again, they're just anecdotal. The reason why such conflicting perspectives flourish is because they support conflicting intentions, and because there is no effective means of proving nor refuting any of them, because they have to do with the content of people's minds and hearts. All we can say with assurance is that the savings rates are different and have trended in a specific direction, correlated with other changes in economic indicators that track to the same categories.

I am not at all surprised at the correlation between % savings and income. But I find it hard to believe poor choices haven't played a significant role in the macro trend as well. It's not solely one or the other?

 

[2B]

Not saying things were better then, ALL things considered, but I think the points I made were valid in terms of the direct deal you could expect from career-oriented employment. If you dispute them, please provide counterexamples or another perspective rather than just peeing in my Cheerios. Simply saying "you're wrong" (even if indirectly) doesn't help bolster your position.

Do you deny that the average career-oriented job in 1955 or 1960 was likely to be a job for life with a pension? With fully employer paid health insurance? With a much lower chance of being "downsized" out of a job? Would love to hear your take on this beyond just saying "NO!"

Educate me. I'm listening.

I think you are living in a dream world as far as the past is concerned.

My father was working for Bethlehem Steel before 1955. He had a pension plan and health insurance. Strikes and layoffs ended that job for him and most of his coworkers by 1960. He got a job with a US government weapons manufacturer but lost that job three years later when the contract went somewhere else. He got another job that ended after 5 years during the 1970s recession. In between "real jobs" he worked in gas stations where there was no health insurance or pension plan. None of his pensions ever vested until he worked 20 years for the post office.

During this time I also watched "Leave It to Beaver" and "Ozzie and Harriet" but unlike you I was aware what was happening around me.

 

[MichaelB]

We can all disagree without being disagreeable ..

 

[2B]

Thanks bUU. It will take me a while to read through it, but I wanted to promptly acknowledge your reply. I am hoping there is some discussion in the paper as to why the large savings rate disparity.

Like pb4uski, I have 20 years of first hand experience with too many people (employees in the $50-$70K/yr range, most with working spouses) who saved little or nothing, due more to willfully poor choices than their income. They had the means and tools to save, and planned to do otherwise...

Multimillionaires with low paying jobs show up on a regular basis. They are usually people that lived very frugally but ended up leaving their substantial wealth to a charity of some sort.

Like you and pb4uski, I've been surrounded by well paid individuals that are broke and in debt up to their eyeballs.

You would think it would be easier to save money if you are well paid but LBYM is all that's really needed. We can wring our hands about social inequity but there is no "living wage" that assures people will adequately save for their retirement.

 

[pb4uski]

....There is no evidence that all or even most low/middle income people are in that circumstance because of definitively bad choices. Calling something poppycock doesn't make it so. If we're relying on anecdotes, then rely on those that show that it is far more likely that their situation is predicated by inadequate opportunities, as evidenced by the fact that those given such opportunities have managed to climb out of poverty. Let's stick with what we know rather than relying on prejudicial assumptions about a large swath of the American population.

WADR, at the same time there is also no evidence that all or even most low/middle class income people are in that circumstance despite making good choices but in my experience there is lots of anecdotal evidence that they make bad choices and those bad choices are a large part of the reason they have little wealth.

OTOH, there are loads of anecdotal evidence that low/middle class income people who make good choices can accumulate significant wealth as we often hear of millionaire next door type people who have modest income but make good choices and accumulate significant wealth. My aunt and uncle are a prime example in that she was a secretary and he was a postal carrier but they are LBYM almost to a fault and are multi-millionaires but still live quite modestly. I could go on and on.

OTOH, I have a middle income friend who I meet for lunch occasionally and one time he shows up for lunch with a new truck. He had taken his not so old, perfectly good truck (he takes really good care of his vehicles) to the local dealership for an oil change and was persuaded to trade his truck because he could have a new truck "and his payments would stay the same". I asked him how many payments he had left on his old truck. He responded and I then asked him how many payments he had to make on this new truck. You could literally see the light bulb going off in his head once he understood the mistake he had made. Since then, he has commented numerous times about how he plans to keep his current ride as long as it still runs well. Another example is SIL, who is not positioned as well as she should be but is where she is because she insisted on keeping a horse that she rarely rode for 10 years but that between food, vet bills, etc. probably cost her 20% of her gross each year that could have been saved.

How come it is that there are so much anecdotal evidence that low/middle income people who make poor financial decisions are in poor circumstances and low/middle income people who make good financial decisions are in good circumstances (millionaire next door types and people of modest means who die with multi-million estates) yet there are so few anecdotal examples of low/middle income people who make good financial decisions but are still in poor situations?

 

[2B]

How come it is that there are so much anecdotal evidence that low/middle income people who make poor financial decisions are in poor circumstances and low/middle income people who make good financial decisions are in good circumstances (millionaire next door types and people of modest means who die with multi-million estates) yet there are so few anecdotal examples of low/middle income people who make good financial decisions but are still in poor situations?

I can't give you one but I can certainly see how it happens. Here's my closest -- I knew a person that had a child with severe medical issues. He would change jobs every so many years as their medical insurance was approaching the maximum allowable (pre-ACA) - usually $1MM. I'm sure he would have continued to get care for his child even though it would have bankrupted him. I felt it was totally tragic because it was only prolonging his child's horrible life situation.

 

[pb4uski]

....You would think it would be easier to save money if you are well paid but LBYM is all that's really needed. We can wring our hands about social inequity but there is no "living wage" that assures people will adequately save for their retirement.

Great observation... I think we can all think of highly compensated people who are in good shape because they LBYM and other highly compensated people who live paycheck to paycheck because their lifestyle is equal to their earnings. Similarly, the same can be said of low/middle income people.

While I concede to bUU that it is easier to save if you have a good/high income, at the same time living below your means is a much more important factor in being comfortable economically and can be accomplished by those of modest means. We often hear the pundits telling us that how much you spend is more important than how much you make in determining wealth, and that certainly seems to be true.

 

[Midpack]

I wish I could differentiate between income and poor choices. I am sure it's not one or the other, and I'd be surprised if poor choices is simply "anecdotal." But I can't say with any certainty the relative influence of either. bUU's paper shows the trend, but not "why."

However, we can see there's been a dramatic increase in savings rate at all levels since the great recession (even the chart bUU offered shows an upturn in the bottom 90%). No evidence that real incomes have increased over that period, the difference may be largely planning/better choices? There is a group at the extreme low end who probably can't save much of anything, but where else did the middle suddenly find a way to double their savings?

I'll keep looking...

Psychologically, it is well-established that many of us discount the future. This means that if we are faced with a decision to enjoy a delight today versus a sacrifice for a gain tomorrow, we will grab the delicious delight today. Far too many of us are not good at delayed gratification. Sociologically, the phrases "keeping up with the Joneses" and "retail therapy" capture the commercial culture that seduces us to consume today, even going into debt, as an expression to ourselves and others, including strangers, that we have arrived or made it.

 

[scrabbler1]

I worked at a place, and one day the owner called me into his office to explain due to a bank issue, paychecks would not be coming out on Friday (the next day), but would be out Tuesday.

I told him, no problem.
He was shocked as so many folks had already whined/complained about how they were going to be starving over the weekend without their pay.

I told him I always keep a couple of thousand in my bank account, and consider it my Zero level, so I'll always have cash for any little hiccup.

This reminds me a little of what happened when I first switched from working full-time to part-time back in 2001. The next pay period came around 2 weeks into my part-time era came around and I didn't get paid. I went to my boss and she told me that it was because I had also switched from working on a straight salary to working on an hourly basis - my pay was now on a 2-week lag. She was apologizing profusely for not warning me beforehand but I was like, "No big deal, it's okay, don't worry about it." With my expenses so low thanks to LBYM and having paid off my mortgage a few years earlier, I had been living on one paycheck anyway.

She was somewhat surprised at my lackadaisical reaction.

 

[ArkTinkerer]

We all have our own personal experiences, but again, they're just anecdotal. The reason why such conflicting perspectives flourish is because they support conflicting intentions, and because there is no effective means of proving nor refuting any of them, because they have to do with the content of people's minds and hearts. All we can say with assurance is that the savings rates are different and have trended in a specific direction, correlated with other changes in economic indicators that track to the same categories.

I can't see dismissing the experiences as "just anecdotal" either. Having done rental property for years I see two distinct populations--people in transition (newlyweds, students, people new to the area, people who have had a recent tragedy) and people stuck at the bottom.

Those who are stuck at the bottom are there for one of two reasons--health or bad decisions. Those who made bad decisions have, without exception, continued to make bad decisions again and again and almost always wind up being evicted or forced out. By contrast, those with health problems often manage their meager income to avoid becoming homeless.

 

[Mulligan]

Great observation... I think we can all think of highly compensated people who are in good shape because they LBYM and other highly compensated people who live paycheck to paycheck because their lifestyle is equal to their earnings. Similarly, the same can be said of low/middle income people.

While I concede to bUU that it is easier to save if you have a good/high income, at the same time living below your means is a much more important factor in being comfortable economically and can be accomplished by those of modest means. We often hear the pundits telling us that how much you spend is more important than how much you make in determining wealth, and that certainly seems to be true.

I will not profess to have any understanding of whether it is possible to save at all on the bottom edges of societies wage rate. But I don't need a study to know what I have seen in the 50k-100k rural midwest income range. Yes, you can save, but HARD and SMART choices need to be made. Saving has to take a priority over a new car, an extra nice house, fancy cell phones. Simple things like lack of planning can consume thousands of dollars a year. Friends wonder how I can travel so much, but they don't understand I can take 3 vacations for less than their one yearly trip because I look daily and pounce on a deal. Not just ..."owe lets go on vacation and book it now".
And yes it is hard to choose savings over immediate impulses and gratifications. Lord knows I have failed gloriously at times. I have always been a nut that wished the govt could confiscate a small portion of each persons check (and not spend it) and then give it back in an annuity at retirement.


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