Meltdown calls 401(k)s into question - MSN Money
"Do 401k plans still make sense?" asks this article.
Interesting article. Obviously it is full of human interest anecdotes of people who were close to what they thought was their retirement, but after losing 25-35% of their 401k value, are now 5-10 years away from retirement.
Interesting bits from the article (all at the bottom of the last page
):
"Even if workers follow the golden rules of 401(k) investing -- saving early and diligently, holding a broadly diversified investment mix, never tapping their savings until retirement -- their success can still depend largely on the luck of the stock-market draw.
Boston College's retirement research center recently ran scenarios that assumed workers had contributed 6% of pay to a plan for 40 years, had invested in a target-date fund, had never touched their savings until retiring and had annuitized the assets at retirement. The chunk of pre-retirement income these savers could replace in retirement varied dramatically depending on when they retired. Those retiring in 1948 could replace just 19%; those retiring in 1999, 51%; and 2008 retirees, 28%."
and
"Julien Pierre has been a model 401(k) saver. The 32-year-old Santa Clara, Calif., software engineer started contributing to a 401(k) when he was 19, and he has made the maximum contribution for the past eight years or so. He has a well-diversified investment mix, including large-cap, midcap, small-cap and international stock funds.
He started last year with about $220,000 in his 401(k), but about $90,000 of that has been wiped out in the market meltdown. Though Pierre is still maxing out his 401(k) contributions, he sees his plans to retire early crumbling and thinks it may take years to determine whether his faith in the plan has been justified."
The quoted Boston College study is interesting. Save 6% all your life in your 401k and you have enough to replace between 19 to 51% of your pre-retirement income. Presumably that includes no employer match. So I assume if you double the contribution to 12%, you can replace 38-102% of your pre-retirement income.
The responsible super saver, Julien Pierre, has done really well by accumulating $220,000 at one point. Not sure how he started saving in a 401k at age 19, since I was under the impression 21 was the minimum age for a 401k. But the main point is that he is well-diversified, saving a lot, and saving continuously. Even now.
I'm like Julien Pierre (except I started saving in my 401k after age 21), in that I would be hurt by changes in the 401k tax advantaged status. The plan seems to work overall. Why not add a little better education to it, and open up the Thrift Savings Plan that all federal employees have access to as investment options for all plans (even at slightly higher expense ratios to cover administrative expenses).
I like the flexibility of 401ks. I like the society wide impact of having an ownership society. People care about the future of businesses and the economy. They depend on it for their current and future livelihood. We are all working together (in our own self-serving rational ways) towards economic prosperity that benefits us.
