The "Retirement Crisis" is worse than we thought

[Midpack]

I wonder how many people don't save for retirement because what they make barely covers their living expenses.

Of course.

That's what most of my former co-workers told me. It never seemed to occur to them to reduce their living expenses, and I never suggested it knowing what their response might be. Most couldn't imagine 'having less,' felt they were entitled to what they had, and more. Most of them made less than I did, yet they had nicer homes, cars and more/newer toys than DW and I. We make our choices, and live with the outcomes?

I had access to the contribution data on all our employees, about 2/3rds didn't participate in our 401k at all, and very few contributed 10% or more. And too many took out "loans" on their 401k's.

 

[ER Eddie]

Yeah, a lot of people live paycheck-to-paycheck. A lot of people carry significant debt, too, so the idea of putting money in a retirement account probably looks impractical to them.

 

[NW-Bound]

Here's some data from Fidelity thru my midicorp chemical company's internal website:

"1 in 6 people contributing to a 401(k) aren't saving enough to get their full company match."

And in the fine print, "Fidelity analysis of 772,000 participants contributing to 401(k) plans that offer an employer matching contribution as of March 31, 2015. "

That was from a campaign to get people to save more, but if you re-arrange the message to 5 in 6 are getting the full company match, it has a more hopeful ring to it. As the old accountant said, "what do you want the numbers to say?"

You can lead a horse to water, and all that...

And this is why social security will never go away or be diminished, the tax rates for it will just keep climbing because too many people will have nothing else to retire on.

And that makes them count on SS even more and more. Why should they save anything?

Yeah, a lot of people live paycheck-to-paycheck. A lot of people carry significant debt, too, so the idea of putting money in a retirement account probably looks impractical to them.

Many surely do.

I knew a couple of engineers at megacorp who lived paycheck-to-paycheck. One had the same pay grade I did. He even tried declaring bankruptcy to get out of credit card debts, spent money on a lawyer just to hear him say that it would not work because the judge would garnish a big chunk of his pay, leaving him with less to live on.

I left megacorp to be on my own at the age of 40, so no more 401k after that. I eventually retired at 55, while he still toiled away last I heard, probably till 70 if they let him.

PS. The banks love this guy. He volunteered that his credit card debts were more than $50K, way back then. At 21% APR, that's $875 per month in interest. And that was some time more than 20 years ago.

PPS. What is peculiar about this guy is that he has nothing to show for his spending. No big house, no fancy car, no vacation. Where does his money go? He eats and drinks out a lot, buys a lot of electronic toys, but those should not use up all his money. Maybe his wife's a big spender. Maybe somebody's on drugs. His spending habit would make an interesting study.

 

[Chuckanut]

I family member just got a new job and brought the retirement stuff over for me to look at. If nothing is done about 4% of the salary goes into a delayed compensation plan with a Target fund aimed at the year of retirement. I figure this is done because most people just blow it off figuring that SS will pay their way or they will inherit their Uncle's gold coin collection. (I won' repeat that story.)

I like the comment one woman made about her ex-husband's retirement plan. "He's a waiter." No, she did not mean he would get a job in retirement serving tables in a restaurant. She meant he was waiting for some relative to die and leave him enough money to retire.

 

[Sojourner]

Why should many people even bother with saving in a 401(k) plan at all?

Where does that kind of thinking come from anyways?

There are many other ways to save for retirement for most people that don't lock up their money. There is quite a lot of confusion about what constitutes "saving for retirement" anyways.

...

And the first linked article does people no great favors. It does NOT EVEN MENTION IRAs and things like the Savers Credit.

This is an important point. My dad worked as a blue-collar laborer for 30+ years before he retired at 65, and he never had access to a 401(k) that entire time. He managed to save some modest amounts in IRAs over the years, but never put a dime into the stock market -- only CDs. Now he lives quite comfortably on just his SS income, supplemented by that small savings nest egg that he never touches unless absolutely necessary (for large medical bills, or a major house repair, etc). I think there are millions upon millions of "non 401(k)" people like my dad out there who are in reasonably good shape when it comes to retirement. They won't be living large, but they won't be starving. They'll be comfortable, and that's pretty much all they aspire to. (Of course, this assumes there aren't substantial cuts to SS coming down the road.)

 

[Danmar]

These studies always make me feel smart and lucky. Do feel a little sorry for all those people who haven't got a clue though. Not that sorry though. Keep 'em coming.

 

[NW-Bound]

I family member just got a new job and brought the retirement stuff over for me to look at. If nothing is done about 4% of the salary goes into a delayed compensation plan with a Target fund aimed at the year of retirement. I figure this is done because most people just blow it off figuring that SS will pay their way or they will inherit their Uncle's gold coin collection. (I won' repeat that story.)...

A while back, I read about a movement making retirement savings a default choice, meaning one has to opt out. I do not know if that was made into laws or not.

In several threads, I mentioned the Australian system, which is forced savings like federal and state systems are in the US, but uniformly applied to all workers, and portable from job to job. One can put in more if he likes because the money is his, not put in a common "lock box" like SS.

 

[NW-Bound]

Have not heard anybody making fun of Suze Orman recently. The financial illiterates need to be scolded and yelled at by some authority figures like her. We need more Suzes. The problem remains that the hotshot engineers I described earlier would not listen to Suze, because they thought they were smarter than her.

 

[exnavynuke]

These studies always make me feel smart and lucky. Do feel a little sorry for all those people who haven't got a clue though. Not that sorry though. Keep 'em coming.

I only feel sorry for the ones that want to save more but can't (who do exist). In my experience, most people "know" they should save and invest but choose not to or choose to do so at a pitifully small rate. When they get more income they spend it all and don't even consider doing what they know they should, often until it's too late for the savings to have much of an impact.

 

[haha]

EDIT: Numbers is hard.

Holy crap, that's insane if only 5% of the workforce is thinking ahead in life.

But that can't be the whole picture, right? There are some places that still offer pensions, and then there's the military with retirement.

Let's invade Canada, Mexico, and anywhere else we can get to without needing too much equipment. Then we'll need more men and women in uniform, and the US retirement situation won't be anywhere near as dire.

Ha

 

[Danmar]

I only feel sorry for the ones that want to save more but can't (who do exist). In my experience, most people "know" they should save and invest but choose not to or choose to do so at a pitifully small rate. When they get more income they spend it all and don't even consider doing what they know they should, often until it's too late for the savings to have much of an impact.

Agree. Brings the debate about luck and smarts back into focus, ie the posters on this site: lucky, smart, or a combo? These stories always paint a bleak picture, but somehow people muddle through?

 

[Danmar]

Let's invade Canada, Mexico, and anywhere else we can get to without needing too much equipment. Then we'll need more men and women in uniform, and the US retirement situation won't be anywhere near as dire.

Ha

Wouldn't need any more men to invade Canada. Couple hundred thousand troops could easily do it, at least initially.

 

[REWahoo]

A while back, I read about a movement making retirement savings a default choice, meaning one has to opt out. I do not know if that was made into laws or not.

I don't think it is required by law but many companies have made contributing something from a new employee's paycheck to a 401k plan a default, forcing them to submit paperwork to opt out. My company enacted this 15 years ago, a 1% default contribution as part of the employment package. IIRC it did improve the percentage of 401k participation somewhat, but not significantly.

 

[GTFan]

The company 6% matching is what did it for me. In ~25 years my 401k was worth well over 1m.

You can also contribute far more to a 401k than you can to a Roth, you can borrow against it with no penalty, you are protected from claims etc.

So I don't agree with the comment about why should anyone contribute to a 401k. There are tons of reasons to do so even for those with limited income.

But the issue really isn't 401k vs. IRA or savings account or whatever. It's simply that many people want to live beyond their means. The vehicle isn't going to be used no matter what it is.

 

[NW-Bound]

Let's invade Canada, Mexico, and anywhere else we can get to without needing too much equipment. Then we'll need more men and women in uniform, and the US retirement situation won't be anywhere near as dire.

Ha

Wouldn't need any more men to invade Canada. Couple hundred thousand troops could easily do it, at least initially.

In the most recent trip to Canada, I spent more time at museums in Ottawa, and the Halifax Citadel, and paid more attention to the exhibits, and actually read the narratives (a sure sign of getting older). It appears the Canadians still recollect about the American Invasion of Canada 200 years ago. It worried them so much that they built and rebuilt the Halifax Citadel a few times, each time reinforcing it and making it a better fortress, preparing for an invasion force that fortunately never came.

Or it may just be that Canada has not had many wars on its land, so there are only a few events that they can talk about, and it is not because they still hold a grudge.

I did not go through high school here to know if this invasion is taught in school. One day, I will remember to ask my children.

 

[exnavynuke]

You can also contribute far more to a 401k than you can to a Roth.

I don't really understand the comment about why anyone should contribute to a 401k. There are tons of reasons to do so.

If the company isn't matching, and you aren't going to contribute more than you could to an IRA, then IRA's have the advantage of (generally) having significantly more investment options. The average mutual fund expense ratio is still around 0.7% and many 401k plans average that or worse for their offerings while most IRAs will let you invest in just about anything, allowing you to invest in 0.1% expense ratio index funds instead for instance.

The primary downside for such people is that the creditor protection of that money may not be as secure as a 401k (depending on state laws).

 

[W2R]

We can scold these people, wag our fingers at them, , and feel ever-so-superior to them.

But still, as I begin to reflexively do these things, I start feeling very guilty about my judgmental behavior because there for the grace of G*d, go I.

Some of them have parents, kids, disabled, or extremely ill relative who are dependent on them just to survive. Some have mountains of debt due to divorce or failed businesses. Some poor souls are just unable to do even the simplest arithmetic and cannot budget because they are mathematically incapable of doing something like that. And I am sure there are many other unexpected and burdensome situations that could arise, that I haven't thought of.

I don't think very highly of anybody that just blows all their money on booze and the casino. But I am not sure I believe that all of these people fall into money wasting habits.

For those that do, I have but one response: Shame on you!

 

[Danmar]

In the most recent trip to Canada, I spent more time at museums in Ottawa, and the Halifax Citadel, and paid more attention to the exhibits, and actually read the narratives (a sure sign of getting older). It appears the Canadians still recollect about the American Invasion of Canada 200 years ago. It worried them so much that they built and rebuilt the Halifax Citadel a few times, each time reinforcing it and making it a better fortress, preparing for an invasion force that fortunately never came.

Or it may just be that Canada has not had war on its land, so there are only a few events that they can talk about.

I did not go through high school here to know if this is taught in school. One day, I will remember to ask my children.

We did have a war on our land. The war of 1812 was a very close call for "Canada". The US should have been easily able to defeat the British. Bad strategy, leadership (on the part of the US) and luck saved the day (for us).

 

[Danmar]

We can scold these people, wag our fingers at them, , and feel ever-so-superior to them.

But still, as I begin to reflexively do these things, I start feeling very guilty about my judgmental behavior because there for the grace of G*d, go I.

Some of them have parents, kids, disabled, or extremely ill relative who are dependent on them just to survive. Some have mountains of debt due to divorce or failed businesses. Some poor souls are just unable to do even the simplest arithmetic and cannot budget because they are mathematically incapable of doing something like that. And I am sure there are many other unexpected and burdensome situations that could arise, that I haven't thought of.

I don't think very highly of anybody that just blows all their money on booze and the casino. But I am not sure I believe that all of these people fall into money wasting habits.

For those that do, I have but one response: Shame on you!

So you would lean towards "luck" being the difference between us and them? Certainly luck has a lot to do with it.

 

[Big_Hitter]

We did have a war on our land. The war of 1812 was a very close call for "Canada". The US should have been easily able to defeat the British. Bad strategy, leadership (on the part of the US) and luck saved the day (for us).

you guys had several conflicts on your land didn't you?

learned this when I went to QC 25 years ago

https://en.wikipedia.org/wiki/Plains_of_Abraham

 

[Mdlerth]

Saver? Spender? Or both?

I understand both perspectives: the spender and the saver. Upon getting my first real job, I wanted the American Dream and I wanted it right away: DW (complete with college loans), buncha kids, house in the burbs, cars, appliances... the whole magilla. We lived neither below nor beyond our means, but saved almost nothing for about 15 years. Retirement seemed so far away it felt fictional.

I finally got serious about saving about 20 years ago. I'd like to say the change was due to my keen financial insight and iron fiscal discipline...

...but of course that would be untrue. As much as anything else, it was a decline in interest rates which prompted us to refinance the mortgage (our first mortgage was 13%!), which allowed paying it off sooner, which freed up some cash for the first time. I put it towards maxing out my 401k, which dragged along glacially until hitting some inflection point (I don't remember exactly where that point was) when it began to grow palpably.

Do I wish today I had been more focused on investing 35 years ago? Certainly. I would already be ERd instead of counting down TMYs. Now that I'm close, I feel it intensely.

Did I understand the notion of compounding returns on investments over time? Well, yeah, I understood it fine, even 35 years ago. But it was the same sort of understanding I had regarding The Bohr atom or Gibbs Free Energy; I could manipulate the relevant equations but I didn't feel any urgency about the subject so I paid it little attention.

It is a hard truth that we humans are largely the product of our own decisions. But when I encounter articles about people not preparing for retirement, it would be hypocritical to find fault since I was just like them for so long. All I can do is hope that those folks get what they need, whether it's inspiration, a bit of good luck, a kick in the butt or a helping hand, to put themselves in a better spot.

 

[Souschef]

The company 6% matching is what did it for me. In ~25 years my 401k was worth well over 1m.

Amen! My company would match 3% to the first 6%. But I used the "catch up" provision to max out my 401k every year!

 

[Car-Guy]

So I don't agree with the comment about why should anyone contribute to a 401k. There are tons of reasons to do so even for those with limited income.

But the issue really isn't 401k vs. IRA or savings account or whatever. It's simply that many people want to live beyond their means. The vehicle isn't going to be used no matter what it is.

Agree.... To me it was like getting a 6% tax deferred raise "and" deferring the taxes on my contributions too. Once I started putting the money in, I forgot about it. As my salary went up, my contributions went up and so did the 6% matching. We had pretty good investment options in the plan too. After 25 years of continuing contributions I could have retired just on the 401k. It sure made a difference.

Now the problem is coming. RMD's.....

 

[NW-Bound]

We did have a war on our land. The war of 1812 was a very close call for "Canada". The US should have been easily able to defeat the British. Bad strategy, leadership (on the part of the US) and luck saved the day (for us).

Sorry for a bit of diversion here.

I miswrote in the above post. Yes, war was waged on Canada soil, but wasn't it the only one?

The Americans were blaming Canada for "the practice of removing sailors from American merchant ships and forcing them to serve in the British navy", among other harassment, and declared war in 1812. This was shortly after the Declaration of Independence, so the British were still sore, and enlisted the help of the Canadians. Canada did not achieve independence from England until 1866, so this could be considered a continuation of the Revolution War.

Jefferson, then a former president, said that it would be a piece of cake and just a matter of "marching" into Quebec. I guess it's that complacency that caused the invasion force to fail initially. In later attempts, the Americans did get far enough to burn some buildings in Toronto and blow up some forts. When the British sent reinforcements, it got too tough, so the Americans retreated.

Had the Americans succeeded, I would now be able to travel freely up north without stopping at the border. When I go to Alaska, I will have to cross the border twice each way, and do not like it (the US checks my RV fridge for contrabands and confiscates my lemons ). And the Canadians would be able to bring back as much booze and merchandise as they wish without worrying about customs. They would also learn what ACA is all about.

 

[Souschef]

Now the problem is coming. RMD's.....

I am deep into RMD's, and it has a threefold effect on us.
1. Pushes our AGI up so I pay tax on 85% of our Social Security
2. Pushes us over the AGI limit for CA renter's credit
3. Pushes us over the limit for low tax rate on LTCG.
But, I am still glad to have the $$$ that cause the problems