The 401(k)- a failure?

[mpeirce]

My primary objection to DB pensions is that it basically traps you with a specific company (or sometimes an industry depending on how portable the plan is).

I can't imagine working for the same company all my life. That would have been awful.

 

[ziggy29]

Thats the point. Shifting the complete responsibility of retirement saving on middle and low income workers during a 30 year flat wage economy has created a retirement disaster.

The 401k was created for high income executives to defer paying taxes.

This is largely true, and I'd add that the 401K was sold as an ADDITION to the defined benefit pension, not a *replacement* for it. In that sense it has truly been a trojan horse.

It's easy for people with higher incomes and "simple tastes" to simply say it's the workers' own fault for not maxing out their 401Ks, starting at an early age; it is true that those who did that in their 20s and 30s and just let it ride in a stock index fund will likely be just fine. But how hard is it to do that on a moderate income, dealing with mortgages, flat wages, kids, college funds , student loan debt...

I was lucky. The 401K worked well for me, even after my first Megacorp froze my pension. With no student loan debt and solid savings coming out of college (one perk for living with your parents and going to a state commuter school with a part-time job on the side), I was able to be pretty aggressive with it, saving close to 10% in my early 20s and getting that up to the maximum they would allow at the time (12%) in my late 20s and early 30s. After that I was putting in maybe 13-15% a year until the day I was whacked. Next thing I knew, I was a millionaire on paper, the "millionaire next door", thanks to my 401K investments since the late 1980s.

So it can work... but it requires a discipline few 20- and 30-somethings have.... and a fair bit of luck. I also had luck that both Megacorps had pretty generous matches. (M1 gave 60 cents on the dollar for the first 8%; M2 matched dollar for dollar up to $5K per year, and who doesn't like free money?) This is what helped me rest easy when I was laid off. I don't even need to touch it for income, but if push comes to shove, I can 72(t) some or all of it.

That all said, I won't take the "if I can do it, so can everyone else" road. I had a lot of luck and a perfect storm of variables where the winds blew in my favor.

 

[Midpack]

The data I mentioned earlier in the thread shows that when people earn enough they do save for the future.

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.

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

 

[ziggy29]

My primary objection to DB pensions is that it basically traps you with a specific company (or sometimes an industry depending on how portable the plan is).

I can't imagine working for the same company all my life. That would have been awful.

That is a concern, especially these days. It's not 1960 any more, where one could get pay raises that kept up with inflation, a good pension and decent health insurance at work and in retirement. And workplaces are, in many ways, more toxic on average than they were 50-60 years ago.

I like the *idea* of a portable DB pension in principle, but I waver "in practice". I just can't think of a way to implement it that is (a) workable and (b) ideologically/politically palatable with this country.

 

[48Fire]

At least articles like this take the heat off of those of us who've gained nicely from their 401k.

Instead of being vilified for not paying taxes on my gains; now I can play the part of a poor victim of a failed program!!

Haha yeah we are all victims

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[MaddMaxx]

[Emphasis added.]

. The data I mentioned earlier in the thread shows that when people earn enough they do save for the future.

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.

 

[aaronc879]

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.

Doctors have a different route to FIRE than any other profession. They typically don't make 'doctor money' until they're at least 30 years old. They often have around $200K in debt when they start their first real doctor job after residency. A doctor in his/her 30's is not likely to be saving a lot of money despite making $150-300K/yr. Once that debt is paid off, if they can resist the BMW and the McMansion, they should be able to save for ER very quickly.

 

[sengsational]

This article by Kotlikoff basically says that a plumber and doctor have the same amount of lifetime income because the plumber starts early, doesn't get hammered by the tax man (earnings spread out), whereas the doctor starts late, has student loans, and gets clobbered by the tax man. Besides, the plumber doesn't have to "look the part", by having the big house and fancy car.

Study This to See Whether Harvard Pays Off: Laurence Kotlikoff - Bloomberg Business

 

[Big_Hitter]

plus the doc gets divorced

 

[Walt34]

plus the doc gets divorced

...and she's driving this:

 

[MRG]

Yep, divorce hits a lot of people. A gal I knew gave 1/2 away twice! Two different guys that had nothing, till they divorced. Was only what she acumulated during the marriage but still a lot of money.

She also happened to be one of many that took loan after loan against her 401k. Of the people in my area that contributed probably 1/3 came and asked if I thought taking a loan against their 401k was a good idea. Don't know if any followed the advice, I know some didn't.

 

[Walt34]

A gal I knew gave 1/2 away twice! Two different guys that had nothing, till they divorced. Was only what she acumulated during the marriage but still a lot of money.

A guy I worked with was teased a lot because he was the only person we knew who bought the same house three times. Similar story.

 

[ziggy29]

This article by Kotlikoff basically says that a plumber and doctor have the same amount of lifetime income because the plumber starts early, doesn't get hammered by the tax man (earnings spread out), whereas the doctor starts late, has student loans, and gets clobbered by the tax man. Besides, the plumber doesn't have to "look the part", by having the big house and fancy car.

I think there's some truth to that, at least more than the usual "everyone has to go to college" meme will admit. And it's more true for college-educated occupations that are easier to send jobs offshore to India, China and elsewhere.

 

[HFWR]

A guy I worked with was teased a lot because he was the only person we knew who bought the same house three times. Similar story.

"Next time I decide to get married, I'll just find a woman I don't like and buy her a house."

Attributed to Rod Stewart...


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[mpeirce]

It's not 1960 any more, where one could get pay raises that kept up with inflation, a good pension and decent health insurance at work and in retirement. And workplaces are, in many ways, more toxic on average than they were 50-60 years ago.

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

 

[marko]

Friend of mine mentioned how there's a few guys in his office making $600K but have to bum $50 every Thursday.

They don't even have an extra $50 in the ATM the day before payday!

 

[ziggy29]

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

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.

 

[Walt34]

Friend of mine mentioned how there's a few guys in his office making $600K but have to bum $50 every Thursday.

They don't even have an extra $50 in the ATM the day before payday!

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.

 

[ziggy29]

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.

They bought the myth that you have to have a million dollar house and a $100,000 car to show everyone you've "made it".

 

[pb4uski]

....A UC Berkeley study showed that there is a high correlation between wage rate and savings rate, so it doesn't seem likely that people, in general, have frivolous reasons for failing to save, but rather it seems that if people earned more income then they would save more. That sound like a problem with wages, rather than a problem with saving. ...

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.

 

[Closet_Gamer]

again, your putting your hopes on someone else providing money to you at some future decade for retirement...a process that is failing all over this country.

While DB plans do provide more bang for the buck for the retiree, I cant see how you say they are more efficient to a company then DC plans, I don't hear of 401k plans failing and even if they did, you have the choice to leave that company and resume saving in a 401k somewhere else. Whats not to like about that?

If PBGC is so great, why is it that pensioners are having to settle for smaller pensions then were promised?

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.

 

[pb4uski]

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....

While you're certainly entitled to your opinion, it's never been that way and never will be so whatever.

What would happen is that companies with DB plans would not be able to get financing so they would suffer. More likely, they would simply curtail their DB plans at a faster rate than they are currently and that would be the end of DB plans.

 

[Dash man]

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.

http://www.ebri.org/publications/facts/index.cfm?fa=0398afact

In 1960 41% of private sector employees were covered by a pension, but that doesn't mean vested in it or surviving to collect it. In 1980 it was 46% and had headed down from there. My father was an engineer and changed jobs several times just like people today. I think people fool themselves into thinking things were always better back then.

 

[athena53]

Do you deny that the average career-oriented job in 1955 or 1960 was likely to be a job for life with a pension?

In the years before ERISA (not sure when it was enacted), a pension could disappear when the company went belly-up. It happened to my grandfather as well as to DH's father. In the case of DH's father it was a union pension and the pension funds had been invested in properties in Las Vegas that somehow weren't profitable. And don't get me started on "opportunities" for women back then.

Today's job market has its problems, and who knows what things will be like for my (almost one-year old) granddaughter, but the 1950s/1960s weren't Utopia, either.

 

[MRG]

...snip.. sorry about the pensions. .



And don't get me started on "opportunities" for women back then.

Today's job market has its problems, and who knows what things will be like for my (almost one-year old) granddaughter, but the 1950s/1960s weren't Utopia, either.

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.