401k's growing but woefully inadequate...

[DblDoc]

It's frightening how poorly prepared many are for retirement - at any age. 401(k)s grow, but savers are still worried Andrea Coombes' Ways and Means - MarketWatch

Looking at people who have contributed continuously for 10 years, the average balance is $191,000, and among those who are 55-years-old or older and have contributed continuously for the past decade, the average balance is $233,800, said Beth McHugh, vice president of market insights for Fidelity.

DD

 

[ChadR]

I will go read the article but 10 years of contributions including more than half of them at the 401k cap of 16,500 did not give me the $191K average noted above...

Go go go starting work in 2001 and investing the last decade...

 

[Major Tom]

Although savings into 401(k)'s are probably a reasonable rough gauge, there are also IRA's and taxable savings. Plus some folk help fund their retirement by either selling their principal residence or reverse-mortgaging it.

I do agree though that many people are not properly financially prepared for retirement.

 

[nun]

Although savings into 401(k)'s are probably a reasonable rough gauge, there are also IRA's and taxable savings. Plus some folk help fund their retirement by either selling their principal residence or reverse-mortgaging it.

I do agree though that many people are not properly financially prepared for retirement.

Most people don't have much taxable savings or IRAs as it's a stretch just to do the 401k. Reverse mortgages or selling a home is obviously an issue in this time of falling house prices.

The numbers in the article remind me of the inherent Catch 22 of the dogma that states you should retire on 80% of pre retirement income. To do that you'd have to save an insane amount and get ridiculous returns. Something under 50% might be possible to fund, but a lot of people are going to be looking at SS and a small fraction of their pre retirement income.

 

[wmackey]

I'm actually expecting to go out with ~55 %, but I also will not have a whole lot of expenses I currently handle.

 

[nun]

I'm actually expecting to go out with ~55 %, but I also will not have a whole lot of expenses I currently handle.

I live on 60% of my salary, but once the mortgage is paid off I'll only need 33%. As I have a rental property that provides 15% I only need my investments to replace 18% of my salary in ER to maintain my current lifestyle.

 

[nun]

These numbers are interesting when you also consider the large number of people who don't believe that SS will be around for them. If that's the case the average $50k a year earner would have to have a retirement nest egg of $1M to generate 80% of $50k ie $40k, using the 4% rule. To get $1M they'd need to save $12k every year for 30 years and average 6% return. That's 24% of their salary. Obviously this is a best case as the $12k would be a higher percentage of salary at the beginning of a career.

The issue here is that if they have to save 24% they are living off 76% of salary, so they don't need 80% of salary.

 

[LightningDawg]

These numbers are interesting when you also consider the large number of people who don't believe that SS will be around for them. If that's the case the average $50k a year earner would have to have a retirement nest egg of $1M to generate 80% of $50k ie $40k, using the 4% rule. To get $1M they'd need to save $12k every year for 30 years and average 6% return. That's 24% of their salary. Obviously this is a best case as the $12k would be a higher percentage of salary at the beginning of a career.

The issue here is that if they have to save 24% they are living off 76% of salary, so they don't need 80% of salary.

Don't forget they have to pay taxes out of that 76%, so they are living off less than that....

 

[nun]

Don't forget they have to pay taxes out of that 76%, so they are living off less than that....

Yes taxes would have to come out of the gross amounts I used.

The conclusion from this is that you need to LBYM in a major way to have a hope of saving enough to retire and maintain your lifestyle. If SS stays around the minimum people should be saving is 10% of salary, if it goes away up that to 20% or 25%. Given falling salaries, the inevitability of tax increases and the increase in healthcare, college, and energy costs I don't see America having a happy retirement.

 

[ziggy29]

Don't forget they have to pay taxes out of that 76%, so they are living off less than that....

True, though with a progressive income tax the percentage of money paid out in taxes is considerably less than it would be when living on a higher income. I would bet a 24% drop in taxable income would probably cut one's income taxes almost in half, especially if it took them down from (say) the 25% to the 15% federal tax bracket.

 

[Webzter]

Highest effective tax rate we paid was 18.92% filing married join dual income on just over $210k in 2008.

Lowest effective tax rate was last year where we paid an effective rate of 6.22% on $45k (married joint single income).

Aside from owning a house in 2008 and not owning one in 2010 (well, not until the end of 2010) and both of us maxing out 401(k) contributions, there were no fancy deductions or loopholes to get us to that number.

Anecdotally, since our spending patterns are about the same (curtailed a bit), it was a lot easier saving for retirement in 2008 than it was in 2010... in fact, it didn't happen at all in 2010.

 

[SunsetSail]

I will go read the article but 10 years of contributions including more than half of them at the 401k cap of 16,500 did not give me the $191K average noted above...

Go go go starting work in 2001 and investing the last decade...

I've been contributing for almost 11 years and received a 6% match for 4 of the years and I'm not that much higher than the average. Maybe this includes catch up contributions for those over 50?? I guess I should read the article also.

 

[Webzter]

I will go read the article but 10 years of contributions including more than half of them at the 401k cap of 16,500 did not give me the $191K average noted above...

From the article:

About two-thirds of the increase in account balances is due to market gains, and one-third is employer and employee contributions, she said.

Which puts the actual employee/employer contributions per year much, much lower.

 

[nun]

True, though with a progressive income tax the percentage of money paid out in taxes is considerably less than it would be when living on a higher income. I would bet a 24% drop in taxable income would probably cut one's income taxes almost in half, especially if it took them down from (say) the 25% to the 15% federal tax bracket.

This is another advantage of LBYM. I paid 16% tax last year as I max out state defined contribution plan, 403b and 457 accounts which significantly reduced my taxable income. In ER I'll be in 15% tax band.

 

[FinanceDude]

I have seen it firsthand. The worst was a short time when I worked at Chase Bank. We had bank employees with 20-25 years in that were not even doing enough 401K to get a full match!

 

[Andre1969]

I started contributing to my 401k back in the last two weeks of 1997. At the time I was still recovering from an expensive divorce, and still had a lot of bills to pay, but finally decided to start putting a bit into retirement. Initially it was just enough to get the company match (4% and they'd give you 1%), although as my situation improved, I bumped it up slightly. In 1999 I contributed around 11-12%.

By 2004 I was contributing 17%, and mid-year, was able to bump it to 22%. Sold my condo in late 2004, and in early 2005, bumped up my contribution to 25%. I jacked it up again later that year, to 30%, and managed to hit the federal limit, which was $15K back then.

I've been hitting the federal max every year since then, as well. Nowadays I get a 4% match, which is pretty sweet in my opinion. My previous employer gave us 4% whether we contributed or not, so I would just leave my rate at 30%, and then when I hit the max, would just enjoy the extra-big paychecks later on in the year, while still getting the 4% from the company.

With my current employer though, they only match, so I have to fiddle with my contribution rate from time to time, and make sure that I don't hit the limit until the final pay period.

 

[teejayevans]

Don't forget they have to pay taxes out of that 76%, so they are living off less than that....

and if you are saving 24% of your salary, you probably don't need to replace 80% of your salary.
TJ

 

[Independent]

I'm sure that millions of Americans have lost a lot of ground due to our current financial woes. People who used to be on track to retire at age xx have been unemployed for months and have been drawing down savings instead of building them up.

But, the Fidelity data here isn't very useful. They quote the balance in one retirement account for an individual. Most people have more than one account. They've worked for different employers, they have money in other 401ks, IRA's, 403Bs or whatever. Many 55 year olds have some amount of DB pension. For two income couples, you've got to include two sets of accounts. The Fidelity numbers miss all this.

I'd like to see a study that interviews people applying for SS retirement benefits. The interview would cover the whole range of savings, pensions, home ownership, past expenses (mostly kids), and past incomes. It would be interesting to see real financial pictures for people as they leave the workforce. I'm going to guess that a fairly high percentage of people are positioned to continue their prior lifestyle.

 

[meierlde]

Assuming one followed Boogle, and bought S&P 500 index funds your only down about 15% now from the peak before dividends. If one had continued to contribute one would likley be more than even with dollar cost averaging helping on the contributions made in march 2009.

 

[megacorp-firee]

Assuming one followed Boogle, and bought S&P 500 index funds your only down about 15% now from the peak before dividends. I .

? S&P 500 is still down 15%. I'm lik'n my portfolio a lot more now

 

[samclem]

Here we go again. We (collectively) wring our hands all the time about the poor/distracted/stressed/overworked etc majority who aren't saving enough money.

Observation: We can't do anything about this issue.

Here are three potentially constructive way to channel the apparent energy we have concerning the future and our grasshopper neighbors:

1) Think of ways you might individually profit from the trend. What sectors, industries, or investments will benefit from a large cohort of old people who need to find a way to make ends meet during their twilight years? Will businesses that specialize in running group living arrangements do well? Dog food companies? Makers of furniture covers?

2) If the grasshoppers are going to demand that the ants support them, what steps can you take to protect what you have from forcible appropriation by the government, or even qualify for some of the spoils? E.g. I think we've mentioned often that reducing investment income by using a portion of your portfolio to pay off the mortgage might help in this regard.

 

[GregLee]

2) If the grasshoppers are going to demand that the ants support them, what steps can you take to protect what you have from forcible appropriation by the government, or even qualify for some of the spoils?

Now you're talking. There's little sense beefing about these unfortunate large scale trends, because they're going to happen, anyway. No one is listening. But it does make sense to try to anticipate and fine tune your own personal tactics to better survive in a strange future world.

I don't think it is any more a matter of the grasshoppers demanding support from the ants than it is the ants insisting on supporting the grasshoppers, whether they like it or not.

 

[jefipius]

.
With my current employer though, they only match, so I have to fiddle with my contribution rate from time to time, and make sure that I don't hit the limit until the final pay period.

You should check with your HR dept. If I max out before the end of the year, my company (mega corp) will 'true-up' their contribution at the end of the year to ensure that I get the full match.

 

[Independent]

Here we go again. We (collectively) wring our hands all the time about the poor/distracted/stressed/overworked etc majority who aren't saving enough money.

Observation: We can't do anything about this issue.

Here are three potentially constructive way to channel the apparent energy we have concerning the future and our grasshopper neighbors:

1) Think of ways you might individually profit from the trend. What sectors, industries, or investments will benefit from a large cohort of old people who need to find a way to make ends meet during their twilight years? Will businesses that specialize in running group living arrangements do well? Dog food companies? Makers of furniture covers?

2) If the grasshoppers are going to demand that the ants support them, what steps can you take to protect what you have from forcible appropriation by the government, or even qualify for some of the spoils? E.g. I think we've mentioned often that reducing investment income by using a portion of your portfolio to pay off the mortgage might help in this regard.

Good post.

I can't think of anything in (1). Regarding (2), I'm deferring SS and spending down 401k/IRA. Some people view that as doubling down on the SS political risk. I view it as reducing my assets for some future means-tested world.

I'm also getting more serious about trad IRA to Roth IRA conversions. Although I can see Roth being used for means testing, I can also see it getting some treatment that's more favorable than traditional. (For example, if they just add up your assets, the Roth dollar amount is lower because it's after tax.)

 

[PaddyMac]

2) If the grasshoppers are going to demand that the ants support them, what steps can you take to protect what you have from forcible appropriation by the government, or even qualify for some of the spoils?

Consider yourselves lucky you're invested in the US. Ireland is so broke it's placing a 0.6% levy on PRIVATE pension plans (public service employees have already agreed to contribute more to their pension plans).

Ireland to Impose Levy on Pension Funds to Finance Jobs Plan - Bloomberg