Companies cutting 401K contributions - fewer ERs in the Future

[dex]

In my opinion fewer will be able to ER in the USA in the future due to a reduction in the ways in which they can obtain their goals. Some might say that this is an injustice of some sort. I look at it from a different point of view.

Prior to WWII ER was not an option form most except for the wealthy. Social Security was enacted to in an attempt help the old from being destitute. The idea of ER or even a funded retirement is unusual in history. (The Roman legions did have a system - again unusual.)

The post WWII generation - those who are about 50 now might be the last (except for government workers who still have the plans eliminated by business) who can realistically ER in relatively comfort. In other words this generation* will be unique in history. It is the generation that will be pointed to as people say - my father/mother was able to retire at 50. Just as we said my father worked with the same company for 30 years (that is unusual in history also).

*Pinning it down a bit more it is the first half of the baby boomers (born prior to about 1956) and their parents are the people. They rode the wave of post WWII prosperity and population growth.

Why is all that will follow not have the same potential for ER as we did? Because they do not have the same options to save as we did.

(clarification - Those of us in our 50's and older had some if not all of the items below - those that follow will not)
While working
Defined pension plans
401K with company matches
Low or no medical plans contributions
Low or no house appreciation - a large portion of saving for many
Low global competition

Government
Low taxes of all kinds - income, corporate
Lower limits to SS and medicare contributions while working

After stop working
Relatively low income taxes
SS & medcare benefits secure

So those that are working towards ER need to plan their finances without counting on the above ways to save money and income streams. LBYM, tax avoidance, career advancement, and other means must be found to meet your goal.

I see tougher times for all wokers and those out of work for a very long time.
Wages, stagnate, benefits continue to be eliminated
Workers must work more years to live in the face of declining opportunities

Like many I did not think this housing mortgage crises would be this sevear. I did think the results we are seeing now would happen; but years in the future - I thought I would be OK.

My spread sheet calculation tell me I will still be OK but I'm less sure of that.

I disagree with the comment below - it is a sign of the individual not planning for their graying. But more than that it is a sign of unreasonable financial and life style expectations. This is not to blame the victum. In this situation the person is a victum and a victumizer.

http://www.nytimes.com/2008/12/21/y...retire.html?pagewanted=2&_r=1&ref=todayspaper

"To many retirement policy specialists, the lost contributions are one more sign of America’s failure as a society to face up to the graying of the population and the profound economic forces it will unleash."

 

[thefinancebuff]

*Pinning it down a bit more it is the first half of the baby boomers (born prior to about 1956) and their parents are the people. They rode the wave of post WWII prosperity and population growth.

I agree this generation is fortunate because of the factors you wrote. However I don't think it is sustainable when the factors are simply not there because the United States faces global competition now more than it did in those years.

 

[bubba]

Agree with your comments, dex. We had hoped to retire in 6-8 years, and now we are looking at retiring at 65 (13 years out), which I guess is still considered normal retirement age. Our portfolio has taken too large a hit to recover any time soon. I'd love to have a pity party, but what good would that do? Better to deal with the reality that neither of us have a pension or any kind of health care subsidy. Since the 401K is pretty much it, the paper losses at this point have removed the possibility of leaving the work force before Medicare age. So, we'll press on and worry about how our 22 year old son will be able to support himself in his old age..... I will admit holding out this little secret hope that the market will spring to life and let the portfolio recover. If/when that happens, who knows; maybe the plan gets reworked again.

 

[lazygood4nothinbum]

Low or no house appreciation - a large portion of saving for many.

how curious to choose & pick out from housing stock but not from stock stocks. according to the black swan guy (see charlie rose interview) predicting "capitalism 2" as a result of the current crisis, perhaps even current e.r. status is not protected for long. maybe stocks won't appreciate in the future just like housing could flatten. maybe this is the end of ponzi money making ponzi money so that instead we go back to the old fashioned way of working for it.

 

[ejman]

I agree that relatively large numbers of people being able to ER is the result of the confluence of a unique set of circumnstances that will probably not be repeated as Dex pointed out. Having said that, I think that the concept of LBYM will continue to result in folks that are able to pick and choose how and where they spend their time so that many may be able to semi retire and live comfortably from their employment in things they really enjoy doing. A lucky (fewer) LBYM will be so motivated they will still ER even withouth 401k matches, low taxes, pensions and low cost health care

 

[dex]

how curious to choose & pick out from housing stock but not from stock stocks.

A large part of the wealth for the parents mentioned above came from home appreciation not stocks - (low ownership rates - memories of depression; lack of knowledge, high trading costs - prior to the internet). Similar housing wealth growth situation for many other people post WWII - until now.

Stocks and other investments will have their ups and downs - there is always a bull or bear market somewhere. So there will be money made in stocks. However, wage earners will be less likely to invest in them for a couple of reasons - lack of disposable income to invest and the memory of today's market.

 

[mickeyd]

I read this article with interest this AM in the local newspaper. What got my attention was this comment by a FedEx worker that will be affected by this change:

“We will have to work more years and retire with less money,” said Lee Higham, a 44-year-old senior aircraft mechanic at FedEx, who has worked there for 20 years. “That’s what we are up against now.”

It is as if the worker has only one option to save~ his 401(K).

Has he not heard of a Roth IRA? Has he not read about a traditional IRA? Is he not aware of the fact that he is allowed to save/invest on his own without it being a deduction to his pay check? We have all had numerous options to save for retirement over the years, many that were around long before payroll deduction 401(k) plans were popular.

 

[ERD50]

I read this article with interest this AM in the local newspaper. What got my attention was this comment by a FedEx worker that will be affected by this change:

Quote:
“We will have to work more years and retire with less money,” said Lee Higham, a 44-year-old senior aircraft mechanic at FedEx, who has worked there for 20 years. “That’s what we are up against now.”

It is as if the worker has only one option to save~ his 401(K).

Has he not heard of a Roth IRA? Has he not read about a traditional IRA? Is he not aware of the fact that he is allowed to save/invest on his own without it being a deduction to his pay check? We have all had numerous options to save for retirement over the years, many that were around long before payroll deduction 401(k) plans were popular.

Note that FedEx is not eliminating the 401K, they are eliminating (for now) their matching contributions. I wonder what % of employees take advantage of the match? I'd bet a fair number were leaving that free money on the table.

More education is needed, so that people take advantage of what they are offered. I honestly don't think people know, they are too wrapped up in the present tense. Which is understandable.

I think those SS statements should go out to everyone every year - and they should spell out how much the person needs to be saving on their own to have enough to maintain their income in retirement. Maybe that would wake a few people up.

-ERD50

 

[ziggy29]

This was largely my thesis when I started this thread:

http://www.early-retirement.org/for...once-in-a-civilization-opportunity-39548.html

Bottom line is, as much as I hate to say it, I think the "age of middle class retirement" was an economic fluke brought on by an extremely fortunate positioning of post-WW2 American industry. And ultimately, that positioning was unsustainable.

 

[FinanceDude]

There's a lot of apathy out there. Why would we expect folks to prepare and invest for retirement, when the news reported LAST NIGHT that 40 MILLION Americans haven't STARTED shopping for X-mas yet.........

 

[ziggy29]

There's a lot of apathy out there. Why would we expect folks to prepare and invest for retirement, when the news reported LAST NIGHT that 40 MILLION Americans haven't STARTED shopping for X-mas yet.........

To me it's somewhat contrarian -- as I see it, the fewer people there are who plan ahead for retirement savings (and the fewer who can retire at a young age), the more secure it will be for those who are planning and saving/investing aggressively for it.

Between more people conducting economic activity instead of saving, and people working longer to keep Social Security more solvent, it would seem like it's in the the FIRE-aspirer's best interests for the masses to keep spending instead of saving -- as long as it's not excessively debt-financed.

In other words, I think for the future of "young dreamers" who are aggressively saving for FIRE until it almost hurts, the best case scenario would be for most people to continue to live right about AT their means -- not significantly above, not significantly below. Too much debt brings what have now; too much increased emphasis on saving will continue to be recessionary and possibly deflationary.

 

[dex]

This was largely my thesis when I started this thread:

http://www.early-retirement.org/for...once-in-a-civilization-opportunity-39548.html

Bottom line is, as much as I hate to say it, I think the "age of middle class retirement" was an economic fluke brought on by an extremely fortunate positioning of post-WW2 American industry. And ultimately, that positioning was unsustainable.

Great minds think alike.
Maybe you planted the seed in my mind.

 

[Independent]

I'll agree with the general concept that "many years of healthy, financially comfortable retirement" is a new, and likely short-lived phenomenon. And, there are a number of factors involved. I want to add a couple of fundamentals that I think explain some things that we see.

First, during the first 20 years after WWII, fertility in the US averaged 3.3. During the next 20 years, fertility averaged 2.0. Most of us can see why that should have a big impact on Social Security. If everything else stays equal, the second generation can get benefits only 2.0/3.3 = 61% of the benefits the first generation got. (Or, the 2nd gen's children will have to pay taxes that are 3.3/2.0 = 165% of the taxes the 1st gen't chidren paid.) Those are very big changes.

But the drop in fertility impacts private retirement plans, too. Private DB plans and retiree medical plans struggle when companies don't grow and add new workers. Stock returns are impacted by slower GDP growth and a shortage of workers.

Second, the "social contract" changed. After WWII, people who owned lots of capital were justifiably concerned about socialism. Both recent experience with the depression and the trend toward socialism in Europe made them worried about what could happen here. I think they were more willing to "share the good stuff" with their workers just to keep everybody satisfied. Unions were okay, we limited immigration and outsourcing. This was easier, of course, because of other favorable economic trends. During the last 30 years, I think the attitude has shifted toward maximizing the bottom line.

I'm less certain about the "social contract" theory than about fertility, but I think they are both at the roots of some things we see today.

 

[Texarkandy]

..... The idea of ER or even a funded retirement is unusual in history. (The Roman legions did have a system - again unusual.)
....

A big reason I joined "The Legion", er, military then Fed Law Enf 29 years ago.

(not kidding - if not for the guaranteed prospect of a modest but relatively secure retirement at 50 I wouldn't have stayed past the first few years & would have left to seek my fortune in the private sector)

 

[lazygood4nothinbum]

I wonder what % of employees take advantage of the match? I'd bet a fair number were leaving that free money on the table.

my x-employer now begins new employees in their matching program, automatically saving the matched amount out of employee pay. so the new employee doesn't have to take any steps to start their 401k match; instead they'd have to take steps to stop it.

Between more people conducting economic activity instead of saving, and people working longer to keep Social Security more solvent, it would seem like it's in the the FIRE-aspirer's best interests for the masses to keep spending instead of saving -- as long as it's not excessively debt-financed.[/quote]

since most people live pay check to pay check just to pay their bills, where do you suppose they'd get the money to spend so that your stocks perform well?

 

[ERD50]

my x-employer now begins new employees in their matching program, automatically saving the matched amount out of employee pay. so the new employee doesn't have to take any steps to start their 401k match; instead they'd have to take steps to stop it.

Making it the default is a good step.

since most people live pay check to pay check just to pay their bills...

I prefer to look at it another way - most people *spend* paycheck to paycheck. If their paycheck was 10% bigger, they would spend 10% more.

Yes, some people make just enough to get by.

-ERD50

 

[ziggy29]

my x-employer now begins new employees in their matching program, automatically saving the matched amount out of employee pay. so the new employee doesn't have to take any steps to start their 401k match; instead they'd have to take steps to stop it.

I would make three changes to how 401K plan defaults have traditionally been offered to new hires:

1. Make the default to be IN the plan, with specific signed authorization be given to opt out;

2. Make the default contribution level 5% OR the lowest amount that would capture the entire company match (if any), whichever is greater;

3. Make the most age-appropriate "lifecycle" fund the default investment.

Many are doing #3 now and I think more employers are starting to do #1. Don't know where those default contribution amounts are being set, though. When I started this j*b, the default was opt-out and the default investment was a money market fund.

 

[dex]

3. Make the most age-appropriate "lifecycle" fund the default investment.

If this was available for SS we all would be better off.

 

[jIMOh]

I actually could take the position ER will be MORE common.

Consider- people are living longer and now know not to count on government help (SS). The government help is going to change (lower benefit, older age or modified in some way to help keep system solvent).

In order to get ahead of this, young people will save more (because they are being enrolled in 401k automatically), and begin to see they can retire even before government benefits are available.

My best example is a 25 yo saving 10% of income for 40 years will
a) already be trained to live on 90% of income
b) have less taxes in retirement than the 90% of income (because 20-30% of this will be swallowed by payroll taxes like SS)
c) have significant compouding, especially those last 10 years of retirement (money might double twice)
which then allows
d) early retirement to reduce taxes

Meaning the common tax advice given to workers might be to retire to save on taxes. Most of us agree taxes are going up, my bet is that it will be payroll taxes and not income taxes.

 

[wildcat]

Will the real culprit please stand up:
It may be more difficult to ER but I have a feeling it will have more to do with the amount of debt consumers have on their books. The deleverage process will force younger people to not spend, not save but put after tax/expense $$ towards debt repayment. Less $ to fund a retirement in that case.

If stocks are cheap enough, future returns will improve. For the young working stiff that can mean a lot but ya have to have to savings to put towards it.

On my soap box:
Although it will never happen, companies and the govt should send a message to the American population that you are on your own in terms of retirement. Why string people along just to end up cutting benefits later b/c it becomes too expensive? But that's probably too harsh, in other words it tells people the truth.

The only thing we need are viable vehicles to take us towards a decent quality of life when we are old and wearing Depends.

 

[Texarkandy]

....
On my soap box:
Although it will never happen, companies and the govt should send a message to the American population that you are on your own in terms of retirement. ....

Well, as long as we're getting on the soap box:
Aren't 401k's & IRA's merely a govt subsidy of retirement savings? Those vehicles are not exactly 100% pure in the being "on your own" department. When one starts drawing down those accounts in their later years, do they pay the govt interest on 40 years of taxes deferred?

If people were to be truly "on their own" in terms of funding their retirements, there would not be tax breaks.

What's the difference in your company subsidizing your retirement (as part of a mutually agreed upon contractual compensation package for work performed) or the government (out of the beneficence of the other taxpayers)?

 

[Grep]

I doubt that we have seen a unique golden age of early retirement.

ER has always existed, and it has always been reserved for a few fortunate, foresightful and/or stubborn types. One means of getting there may ebb, and inevitably some people will find some other means of getting there. If not, that doesn’t mean they can’t – more likely they will take stock and determine that working longer is in their simple best interest. Sure, there will be over-all ebbs and flows in ER just as there is a vast breathing in and out of the global world circumstances. But our great-forebearers would probably retire early now anyway, if they had half the chance we did.

There will always be fortunate types as well as stubborn types, and ER will continue.

 

[Grep]

P.S., It's not like "early retirement" is anything so uniquely special or important either. It's just a trade-off that a certain sub-set of people make. Lighten up.

 

[ziggy29]

P.S., It's not like "early retirement" is anything so uniquely special or important either. It's just a trade-off that a certain sub-set of people make. Lighten up.

Easy to say, when according to the post linked below you have:

... a very secure job, a satisfactory middle-class income, no debt, solid savings sufficient for a modest early retirement, and expectations of a reliable pension and reasonably-low cost health benefits.

http://www.early-retirement.org/forums/showpost.php?p=701359&postcount=1

I think a lot of people would be "lightening up" a bit more about their retirement prospects if they had what I boldfaced above. The fact that a growing number of people *don't* have those things are a big reason why ER is feeling like it's becoming more endangered. These are very important ingredients in the quest for FIRE and they are harder and harder to come by -- and increasingly less within our own control.

 

[Grep]

Ziggy, since you are making this personal, and taking advantage of bold text as you have, you might have missed the part about how every penny I have, and every benefit I am due, was earned through great personal sacrifice. You are welcome to follow in my footsteps if you think otherwise. Really!

My comment stands. It's just a trade-off. Most of us, including myself, are compulsive savers, hence we are well positioned to retire early. And I'm not special either: my very modest pension and job security has surprisingly little to do with my ability to retire early.

But if I were to be dead by now, I'd be p*ssed at all that wasted hard work and unspent savings!