5 Mistakes That Will Crush Retirement Dreams

[Midpack]

You do not have to have meetings to meet the requirement..... just send out the paperwork provided by the 401(k) company....

I was at a mega company for 15 years and never once did I have a meeting about 401(k)s....

Could very well be. Our MegaCorp's interpretation was that some dialog/2-way interaction was required in the spirit of the (frustrating admittedly vague) regs since employees were self-managing a "portfolio." We held annual meetings and documented attendance as proof of our compliance, part CYA, part genuine interest in the employees. We also sent out lots of quarterly info.

But it was clear many employees could not understand even a basic one page mutual fund summary. I distinctly remember a 55+ employee standing in the breakroom telling everyone he had put his entire 401k in Templeton Foreign so he could retire sooner. I remember another employee in a control room telling everyone he had converted all his funds to cash in late Fall 2009, and buy in again after missing most of the run up that followed. I know 'management sucks/doesn't understand' - but it broke our hearts to watch employees do these things to themselves.

It all comes down to spirit of the regs.

But fair enough, I won't dispute that we might have not been required to hold actual meetings with employees...

 

[bubba]

Our company has had employee meetings about the 401K plan and planning for retirement. In fact, once HR scheduled a representative from Social Security Administration to speak. The SS person was a really good speaker and gave a great presentation. I am not in HR so I do not know percentage of participation, but I do know that if you work here and choose not to participate, it's not because you haven't been warned.

 

[LeavingOhio]

Interesting thread.

I DO think that 40% is way more than needed if the investor begins right out of college. It's simply not necessary, and there IS more to life than JUST saving for retirement. You can become wealthy by investing 15-20% of your income if you do it right from the start.

BUT, I don't think 40% is too much if you don't have children. If you are married and you both work and don't have children, then it is even easier. Quite honestly, if you are married and both work full time and don't have children, unless you live in a crazily expensive place like San Francisco, you should be able to save 60%...this is 60% of take home pay; after taxes.

I DO agree with the author that some people predict a larger return than they are to get, but he uses a bad example. He talks of an 8% return and then he puts in a bad year in there to show what can happen. When a person (an investor) predicts 8% return, they do that as an AVERAGE rate of return, understanding that some years will bring 20% and some -18%. My stuff on average since 1989 has returned ~11% annually on average. I won't expect that same kind of return in retirement, but if I were to drop it to 8% or 7% or 6% or whatever, that would be with the understanding that that's an AVERAGE and that some years are better and some are worse.

 

[ChadR]

Uhm...that's not true, is it? I'm not familiar with the US approach, but let's say I get a "100% match on the first 3% to 6%" as quoted in the article. That would be REALLY generous, I guess. Let's further assume that I make 100,000$ a year and contribute the maximum 17,500$. On the first 6,000$, I get a 100% match, meaning total payment into the 401(k) is my 17,500$ plus 6,000$ from my employer, which equals 23,500$. The match adds 34% (6,000$/17,500$) to what I contributed myself. Great!
Now what if I have contributed the maximum for 15 years? Even assuming 0% investment returns (because it is oh so smart to be "only in cash" ), my balance is 15 x 23,500$ = 352,500$. Now, the 6,000$ match means only a 1.7% (6,000$/352,500$) "annual return". Not too shabby still, but clearly not "3-6% annual return" (and most probably below the inflation rate). Any positive return on my balance increases the effect. And of course it does NOT compound because the match is only paid on new contributions, isn't it? Did I get that right?

You are correct that the employer contributions do not have a "compounding" effect. I had the same reactions as you when I read the article, so i ran the math in excel using IRR. However, the part above that doesn't make sense to me I highlighted in bold.

If I run a series of cashflows over 15 years with a contribution rate of 17,500 per year and ending value of 352,500 then using the XIRR function in excel that works out to be an annualized rate of return of 4.08%. If I carry the example out to 30 years then the IRR is 1.95%

 

[veremchuka]

Some man's "ridiculous" is another man's "perfectly normal"...

Santa in the off season?

 

[haha]

I think you need to re-check your math.

Now wait a minute partner. Who is to say that his math should use the same principles as your math, or anybody else's math. After all, it is his math. While his report might appear odd at first hearing, stranger things have been recounted on this board.

Ha

 

[Original Wally]

Before ER in 12/2009 my combined 401/457 contributions were the following percentages of my GROSS annual salary:

1999 15.3%
2000 14.8
2001 13.8
2002 25.6
2003 26.5
2004 33.5
2005 39.3
2006 40.6
2007 38.4
2008 36.9
2009 41.4

Reflecting the 2002 ability to max out BOTH 401 #and# 457 (2001 & prior, it was either / or), and the age 50 catch up that began in 2004, implemented fully in 2005)

 

[Original Wally]

+1 Yep! It's hard to pay yourself first when your uncle butts in line in front of you........

But... the 401(k) comes off the top before income tax is withheld.

 

[clifp]

It appeared to be an article for a general, mainstream audience. I critiqued it from that POV, not my own experience.

A lot of people HERE have managed to save 40% or more, but would you feel comfortable trying to convince a mainstream audience to do the same?

I dare you...

I think I'd have an easier time convincing them the earth was really flat.

 

[RISP]

You are correct that the employer contributions do not have a "compounding" effect. I had the same reactions as you when I read the article, so i ran the math in excel using IRR. However, the part above that doesn't make sense to me I highlighted in bold.

If I run a series of cashflows over 15 years with a contribution rate of 17,500 per year and ending value of 352,500 then using the XIRR function in excel that works out to be an annualized rate of return of 4.08%. If I carry the example out to 30 years then the IRR is 1.95%

ChadR, I didn't phrase it very well. What I meant is that the positive effect of the employer match, percentage-wise, decreases as the balance increases. Your way to study it is much more elegant, of course. Thanks for taking the time.

Your result is interesting: A 30-year working life would result in ER, so if a person works until regular retirement age, the IRR will be even smaller. Don't get me wrong, an additional 1 or 2% can go a long way - I just hate it when some "expert" discussing Finance does not get their math straight or makes claims like "the match you receive from the company will generate a 3-6% annual return all by itself and that will COMPOUND on a year over year basis."

 

[obgyn65]

Hello Ha - thank you for this. Well if there is not a single ER-approved, universal way to calculate savings ratios, then I stand by my initial figures : 80-90% savings rate. My formula makes sense (to me anyway )

Now wait a minute partner. Who is to say that his math should use the same principles as your math, or anybody else's math. After all, it is his math. While his report might appear odd at first hearing, stranger things have been recounted on this board.

Ha

 

[REWahoo]

Now wait a minute partner. Who is to say that his math should use the same principles as your math, or anybody else's math. After all, it is his math. While his report might appear odd at first hearing, stranger things have been recounted on this board.

Ha

As usual, you put forth 110% effort in your posts...

In other news, North Korea Says Its Archaeologists Discovered A 'Unicorn Lair' : NPR

 

[REWahoo]

Hello Ha - thank you for this. Well if there is not a single ER-approved, universal way to calculate savings ratios, then I stand by my initial figures : 80-90% savings rate. My formula makes sense.

 

[WestLake]

I'm currently saving 100% of my salary, having paid off all but two rental properties.

 

[catccc]

I should stay away from financial numbers. They don't really interest me since I am not materialistic nor greedy.

now, one need not be materialistic nor greedy to want to be interested financial numbers. In fact, it seems that quite the opposite characteristics drive people here to stay close to their finances/stats.

 

[crg7]

I should stay away from financial numbers. They don't really interest me since I am not materialistic nor greedy. What is more important, in my view, is what I do with my money, such as sending medicines to third world countries, give to United Way, or help support free clinics.

You need to check out what percentage of donations you send to the United Way actually go towards helping people. Historically it's been VERY LOW.

 

[REWahoo]

You need to check out what percentage of donations you send to the United Way actually go towards helping people. Historically it's been VERY LOW.

It is sad to see unfounded statements like this one.

Unfortunately the actions of one individual at the national level of United Way a few years ago created this misconception.

United Way charities are locally run and locally managed. While what you say may be true for some locations, that is the exception rather than the rule. I have comprehensive knowledge of two United Way organizations (San Antonio and Midland, TX) and can attest they are very cost efficient.

 

[Lazarus]

So how cost efficient or not cost efficient is United Way? I don't see any numbers.

 

[Stanley]

Saving 40% is a lot easier if it can be done before taxes. Having Uncle Sam help is nice.

 

[ziggy29]

It is sad to see unfounded statements like this one.

Unfortunately the actions of one individual at the national level of United Way a few years ago created this misconception.

United Way charities are locally run and locally managed. While what you say may be true for some locations, that is the exception rather than the rule. I have comprehensive knowledge of two United Way organizations (San Antonio and Midland, TX) and can attest they are very cost efficient.

Yep -- and if you go to a site like Charity Navigator and search on "United Way", you'll see that their ratings are all over the map, from excellent to, well, not very good.

Charity Navigator - America's Largest Charity Evaluator | Home

 

[Midpack]

You need to check out what percentage of donations you send to the United Way actually go towards helping people. Historically it's been VERY LOW.

Yep -- and if you go to a site like Charity Navigator and search on "United Way", you'll see that their ratings are all over the map, from excellent to, well, not very good.

Charity Navigator - America's Largest Charity Evaluator | Home

I was just going to suggest the same independent website.

While I'm not a big fan of UW, overall it appears their ratings are relatively good...

 

[Lazarus]

I would not donate to United Way no matter what. My reason is that the United Way drives at work were based on intimidation. They would get a manager to run the drive then insist on 100% participation. You had to turn your card in or you would be harassed. In addition UW tracked the "donations" by social security numbers that the company gave them.

So their score is 0 as far as I am concerned. And that is how much they will get from me.

 

[Original Wally]

It is sad to see unfounded statements like this one.

Unfortunately the actions of one individual at the national level of United Way a few years ago created this misconception.

United Way charities are locally run and locally managed. While what you say may be true for some locations, that is the exception rather than the rule. I have comprehensive knowledge of two United Way organizations (San Antonio and Midland, TX) and can attest they are very cost efficient.

I dislike the UW because of the pressure. I w*rked in a small group, and was *personally* responsible for our group not getting a "gold" award. I refused to allow my employer to have information on my charitable giving. That has no place in the w*rkplace. Too much employee time was spent on the drive (IMHO).

 

[2035]

I HATE the UW because years ago they cut off funding to Planned Parenthood because of pressure from the religious right. This is a fact! I was informed that they've since reversed this decision, but the respect was already lost.

 

[ziggy29]

I dislike the UW because of the pressure. I w*rked in a small group, and was *personally* responsible for our group not getting a "gold" award. I refused to allow my employer to have information on my charitable giving. That has no place in the w*rkplace. Too much employee time was spent on the drive (IMHO).

I do agree with that; we had something similar at my first Megacorp. I also remember that some people were resentful because they felt UW supported causes that they were personally opposed to, and they felt pressure to give anyway.