401ks and IRAs are they enough?

[chinaco]

This is a follow-on discussion from the Retirement Benefit's Poll.


About 1/3 (so far) indicated that they has Social Security alone. I suspect those of us that have something more than 401ks and IRAs are older (grandfathered on DB pension), or work for the last few companies that offer DB pensions, or work for some government entity.

Are most Americans actually capable of using self-managed deferred-tax accounts to prepare for retirement?

I am not very confident that they can. I also think that SS is going to be a critical safety net for most Americans (including those of us who have been somewhat successful saving).

Two things seem apparent (to me anyway)

1. SS seems very important as a pension vehicle. I personally would not want it to be an investment that might fail me.
2. Business (and Government) need to figure out something better than the current 401k/IRA approach. I think they are fine to enable people to build a nest egg. But they are not a substitute for a Pension.

Now that we are in the middle of this mess... what do you think of the idea of SS in a private account like a 401k?

Keep Wall Street Out of the Retirement Business

 

[ziggy29]

I think I have been as aggressively investing for retirement as anyone in my age group (I'm 43). Until a year ago, I actually had over $500,000 in my 401K and IRAs by putting money away for retirement until it hurt. (I do have a tiny pension from a previous employer coming my way, but it's not enough to significantly alter my ability to retire or the age at which I do.)

Having seen it whacked by nearly 1/3, I'm reaching the conclusion that very few middle class families with no DB pension plan will ever be able to fully retire. Even if I got a real 5% on the money already there, at age 60 that's $779,000 in current dollars. That's less than $20,000 a year (current dollars) in retirement income at a reasonably safe rate of withdrawal, AND assuming pretty good returns over the next 17 years! And I suspect I am ahead of more than 95% of the people my age who have to rely on defined-contribution plans and WAY ahead of the majority.

And if I, despite my extreme diligence with respect to retirement investing and asset allocation, am looking at a fairly puny income from my DC plans, what are the majority of people going to do? (I think the average 401K/IRA balance for my age group is less than $50,000.)

They may be able to get by with Medicare, SS and a part-time job as a Wal-Mart greeter. But the days of a gold-plated retirement are over for most of us. And that's at normal retirement age -- forget any hopes of *early* retirement. And that will have a ripple effect on the employment market as we can't get those geezers out of the workforce to provide jobs for a new generation of young adults. And then it could get really ugly, both in terms of economics and in terms of political friction between groups (i.e. old and young, pension haves and pension have nots, et cetera).

It's a shame we're going down this route.

 

[LOL!]

401(k)s and IRAs are more than enough if you continue to work until you are eligible for SS and medicare. The financial industry and media (and especially this "early retirement" forum) would have you believe that you can barely get by with even a huge nest egg.

The reality is that thousands (millions!) of folks get older every year and somehow continue to live. If retirement was such a disaster, wouldn't we have 90% of our seniors sleeping under bridges and eating at soup kitchens? So despite all the prognostication that seniors are in deep doo-doo, most of them have comfortable lives with the assets they have and the SS they get. For instance, my mom has about $100K in investable assets, owns her own home, and gets SS. She is doing just fine.

 

[chinaco]

A big problem is the average American is not even beginning to save. Guess who will wind up bailing them out?

But for those that try and diligently save... many are not capable of managing a portfolio.

And for those of us that have a basic plan... Wall Street and Financial Institution Greed and/or carelessness seriously imperils our chances of of accumulating a sizable nest egg.

IMO - The small investor has the game stacked against them.

Individual Investors Lose

Wall Street is rife with conflicts of interest, and the average worker is the loser. Who said that? Consumer firebrand Ralph Nader? No, it was David Swensen, the legendary chief investment officer for Yale University's endowment fund. In his book Unconventional Success: A Fundamental Approach to Personal Investment, Swensen wrote that "Individual investors lose. Mutual fund managers win."
Swensen makes a strong case that profit-maximizing mutual fund managers always choose to line their own pockets at customer expense through high fees, opaque charges, excessive trading, and other financial shenanigans. "When a sophisticated provider of financial services stands toe-to-toe with a naive consumer, the all-too-predictable conclusion resembles the results of a fight between a heavyweight champion and a 98-pound weakling," he writes. "The individual investor loses in the first-round knockout."

 

[ziggy29]

If retirement was such a disaster, wouldn't we have 90% of our seniors sleeping under bridges and eating at soup kitchens? So despite all the prognostication that seniors are in deep doo-doo, most of them have comfortable lives with the assets they have and the SS they get.

Let's see how this changes as fewer and fewer of them have pensions. I suspect you will see a LOT more seniors unable to retire at any age until they become infirm, have to sell their homes (if they own one) and live the rest of their days in subsidized, assisted living.

 

[chinaco]

...

If retirement was such a disaster, wouldn't we have 90% of our seniors sleeping under bridges and eating at soup kitchens? So despite all the prognostication that seniors are in deep doo-doo, most of them have comfortable lives with the assets they have and the SS they get. For instance, my mom has about $100K in investable assets, owns her own home, and gets SS. She is doing just fine.

You make a good point. That SS check is her pension. Still... think about the expenses one has in a month. One SS check goes only so far.

The government puts poverty level income at $10,400 for 1 person in the 48 contiguous states.

2008 Federal Poverty Guidelines

 

[kyounge1956]

chinaco wrote:

(snip) Are most Americans actually capable of using self-managed deferred-tax accounts to prepare for retirement? I am not very confident that they can. (snip)

and

SS seems very important as a pension vehicle. I personally would not want it to be an investment that might fail me.

IMO, both of these statements are correct.

Now that we are in the middle of this mess... what do you think of the idea of SS in a private account like a 401k?

Keep Wall Street Out of the Retirement Business

That depends on what you mean by "private accounts". If you mean another type of self-managed account like a 401K, I think you've answered your own question. ISTM that putting a pension vehicle that must not fail (an individual's SS account) under the control of an incompetent manager (most Americans) is asking for trouble. If Americans on the whole do a poor job of managing our 401k's, why would we do any better managing this other account?

However, if by "private" you just mean "non-governmental and non-employer", I think that might work, and be a way out of the impasse. Some of the ideas proposed toward the end of the article are interesting. I also wonder if it would be possible to set up cooperative, defined-benefit pension funds through various organizations that people affiliate with, such as their church, labor union, service club, alumni association or similar, or through credit unions. I think at least some insurance companies originated as mutual assistance societies of various sorts...why not pension funds?

These cooperative pension funds could be professionally managed, as corporate or governmental defined-benefit pension plans are now, and offer the same type of benefits for the lifespan of the employee, with options such as a survivor benefit for spouses, possibility of getting a lump sum payment etc. I'm not enough of an economic analyst to know whether it would be feasible to allow employees to redirect the social security tax they now pay into one of these funds, or to split it between SS and a cooperative pension plan. For ER, allow contributions into a cooperative pension plan over & above the amount of SS tax, or retain IRAs, or both. The plans would have to be checked before allowing SS tax to be redirected to them, to make sure they are financially sound, and regularly audited to make sure they stay that way. This could be gov't regulations, or perhaps not. Imagine Consumer Reports with an annual "Cooperative Pension Plan" review issue, like they currently have for cars! I wonder how they would rate the Social Security system itself in that issue.

If I had the option of creating another lifetime guaranteed income stream to supplement my City pension, I might well decide to do that rather than trying to figure out what to do with my 457 and IRA, and given what I hear about the possible insolvency of SS late in my lifespan, I'd likely divide my current SS tax amount between SS and such a cooperative plan if I were allowed to do so. If I weren't eligible for any defined-benefit pension, I would almost certainly take the opportunity to have a defined, lifetime benefit, if it were offered to me, and very probably take half SS and half cooperative pension rather than put all my eggs in one basket.

 

[FIREd]

SS benefits span a wide range, from $0 to $2100 a month at full retirement age for 2008 with an average benefit payout of $1100 a month currently. If you are living solely on your SS benefits, how much you are getting from SS each month can make a huge difference between living below the poverty level or comfortably above it. A single person getting $700 a month from SS is going to be much, much worse off than a couple of professionals getting the full $4,200. So some people might do quite well just living off SS even with meager retirement savings. Theoretically my wife and I should be in that category. Based on our latest SS statements, the both of us are supposed to receive about $4,000 a month from SS at full retirement age. Right now we spend about $5,000 a month, so we would need few retirement savings to supplement SS and our 401K/IRAs could easily fund the shortfall. If we don't get SS, then I am pretty sure that our 401K/IRAs would not be sufficient to fund our retirement.

 

[jazz4cash]

Two things seem apparent (to me anyway)

1. SS seems very important as a pension vehicle. I personally would not want it to be an investment that might fail me.
2. Business (and Government) need to figure out something better than the current 401k/IRA approach. I think they are fine to enable people to build a nest egg. But they are not a substitute for a Pension.

I probably won't be around, but I expect it will be a disaster for most average workers that have only DCB and SS. Most will not have the discipline (and luck) to get it all right. SS might be adequate in lower cost areas, but folks in coastal states will be pressed to maintain a nice lifestyle.

401k was a great supplement that got subverted into a primary retirement vehicle. It seems like Wall Street is being enriched with fees on DCBs and now every other TV commercial is the "Income for Life" annuity pitch. Despite this, some form of very low cost deferred annuity investment for a percentage of savings is what's needed or something like the G-fund available to Federal employees.....I understand its a bond fund with no principal risk. FERS retains the three legged stool approach with SS, cola'd DBP and DCP with super low expense ratios....the perfect storm.

 

[chinaco]

401ks suck.... many employers only offer limited funds. In some cases they take excessive fees.

The fund offerings at my megacorp have high fees and poor performance compared to the indexes.

The 401k program is flawed. The govt should do away with 401k and just increase the Traditional IRA limits to about $20k tax deferred... increasing the contribution limit yearly by about 5%.

Add a few job changes over the years and one has a fragmented portfolio of 401ks that are difficult to manage. Even if the old 401ks are rolled into you IRA... you still have a patchwork of funds to attempt to manage your 401k, your Spouses 401k, and IRAs.

High Fees: http://voices.washingtonpost.com/thecheckout/2008/04/your_401k_can_cost_you.html

Changes may be coming. But I am not sure I like some of the ideas.

http://online.wsj.com/article/SB122662401729126813.html?mod=special_page_campaign2008_mostpop

 

[Moemg]

. A single person getting $700 a month from SS is going to be much, much worse off than a couple of professionals getting the full $4,200. So some people might do quite well just living off SS even with meager retirement savings. Theoretically my wife and I should be in that category. Based on our latest SS statements, the both of us are supposed to receive about $4,000 a month from SS at full retirement age. Right now we spend about $5,000 a month, so we would need few retirement savings to supplement SS and our 401K/IRAs could easily fund the shortfall. If we don't get SS, then I am pretty sure that our 401K/IRAs would not be sufficient to fund our retirement.

The problem is if one of you die your SS stops and then you are living on $2,000 SS and your expenses will not be 50% of what they were .

 

[FinanceDude]

Targeting Your 401(k) - WSJ.com

She's a whackjob. She calls 401K a "failed experiment", I call SS a "failed experiment"..........

 

[brewer12345]

A big problem is the average American is not even beginning to save. Guess who will wind up bailing them out?

But for those that try and diligently save... many are not capable of managing a portfolio.

And for those of us that have a basic plan... Wall Street and Financial Institution Greed and/or carelessness seriously imperils our chances of of accumulating a sizable nest egg.

IMO - The small investor has the game stacked against them.

Dude, get some Prozac or something. The world simply isn't that dour or scary.

 

[chinaco]

She's a whackjob. She calls 401K a "failed experiment", I call SS a "failed experiment"..........

I can't vouch for her.

But I can say with certainty that the 401k program is lacking in two obvious ways.

1. It is not an adequate replacement for a professionally managed pension (looking at just the company contribution... if they do).
2. The money I contribute is saddled with extra fees and funds that do not beat the indexes (hardly ever). I could do better on my own. I am sure others have the same problem

Then the nature of the thing having built-in fragmentation (trying to manage money in multiple 401k/IRA accounts.

 

[SteveL]

The advantage of SS is that it is involuntary. As much as I would like to believe that any person can save and manage their own retirement, it isn't true. Self-control, whether in reference to food, espresso drinks, booze, credit, gambling, shopping, or sex, seems to not exist for large segments of the population.

 

[SteveL]

Despite high fees etc. if a 401k provides a match of half or 3%, then even a person making $10/hour for 40 years could end up with a significant accumulation. The challenge, is that a person making $10/hr can't afford to save 6% via a 401k, and still eat. SS provides 15% savings (with employer taxes) and a minimal pension at full retirement age. With Walmart (at minimum wage) employing over 1,000,000 Americans, how else can these folks survive at age 66?

 

[chinaco]

Despite high fees etc. if a 401k provides a match of half or 3%, then even a person making $10/hour for 40 years could end up with a significant accumulation. The challenge, is that a person making $10/hr can't afford to save 6% via a 401k, and still eat. SS provides 15% savings (with employer taxes) and a minimal pension at full retirement age. With Walmart (at minimum wage) employing over 1,000,000 Americans, how else can these folks survive at age 66?

I agree that a company match is good... what I do not like is the way the plans are managed. (limited fund choices and high fees).

 

[SteveL]

I worked for the same employer for 29 years. Don't think this is as possible today. Most folks change jobs every few years, maybe not by their own choice. Each job change is a chance to move that 401k to a self-managed IRA. These IRA's can easily be combined into a single account.
For 401k's , the key is the match. If you get the match, you should participate despite the fees. The match will usually be more than the fees!

 

[chinaco]

...
For 401k's , the key is the match. If you get the match, you should participate despite the fees. The match will usually be more than the fees!

I know. My point is that it could be structured better and made more owner friendly.

 

[Architect]

I would prefer it for me, but it depends too much on the details of the implementation to say for most people. I would say that the more control people are allowed in general, the worse it would be.

The data shows that in general, people don't have much financial sense, so giving them control of their stop gap retirement funds probably isn't a great idea.

 

[jazz4cash]

I agree that a company match is good... what I do not like is the way the plans are managed. (limited fund choices and high fees).

It's ironic that the Employer loves the lack of long term liability/responsibility for DCB participants yet retains so much control (in selecting key provisions of the plan that include fees, options, etc.) It's more reasonable IMO to consider 401k as an ongoing experiment. It is being used in a way that was not foreseen and is afterall a clever manipulation (loophole, accident, whathaveyou) of the code.

Recent developments incl Target funds, automatic signup, etc. are improvements, I believe.

It's important to consider this IS the worst financial market in 60-70(?) yrs and not overeact.

 

[Architect]

It's ironic that the Employer loves the lack of long term liability/responsibility for DCB participants yet retains so much control (in selecting key provisions of the plan that include fees, options, etc.) It's more reasonable IMO to consider 401k as an ongoing experiment. It is being used in a way that was not foreseen and is afterall a clever manipulation (loophole, accident, whathaveyou) of the code.

Recent developments incl Target funds, automatic signup, etc. are improvements, I believe.

Well said! I'm skeptical of 401k's - about 1/3 of my net is in mine, and it hasn't worked out well. Initially we had crummy funds and I was an uneducated investor, and it did terribly. On other other hand I did eventually save 1/3 of my net worth, but you're right, it's an ongoing experiment.

It's a wee better now, they actually junked the Fido lifestyle funds and went to Vanguard, amazing they broke the Fido stranglehold.

It's important to consider this IS the worst financial market in 60-70(?) yrs and not overeact.

Goddamn brilliant.

 

[W2R]

Despite high fees etc. if a 401k provides a match of half or 3%, then even a person making $10/hour for 40 years could end up with a significant accumulation. The challenge, is that a person making $10/hr can't afford to save 6% via a 401k, and still eat.

I am skeptical about that, although it is obvious that a person living on that amount would not be living up to the standards of past workers in similar jobs.

$10/hour is $400/week which is $400*52/12 = $1733/month. Minus 6%, it is $1629/month. As I recall, at this income level and low tax bracket my take-home pay was about 80% which would be $1303/month take-home pay.

This is enough for a single person with no dependants to eat. If food costs $300/mo, and if the individual shares the rent for a $700/mo apartment with one other person, that leaves $653/mo to pay for other expenses besides food and rent. This is not a life of luxury, or a life in San Francisco or Manhattan (neither of which is affordable for many of us who have higher salaries, either) but it is not true that it is not enough to live in most U.S. locations and still eat.

Now, the difference in take-home pay using the above assumptions and no 6% contribution would be $83/month - - $1386/mo take-home vs $1303/mo take-home with a 6% 401K contribution.

Neither of these salaries are enough for an individual to support an entire family nicely. The days in which even low income families could support a non-working spouse seem to be over. And sadly, single parents with low paying jobs are having to moonlight. But I don't blame the 401K for these economic problems, because I think most people would have difficulties in making ends meet while supporting a non-working spouse or being a single parent even without paying into a 401K.

 

[samclem]

Just to be clear: What we are saying is that people, in general, are not capable of taking care of their financial lives. The electorate (composed of those who fail and those who do not) has decided that those who fail should be taken care of by those who are successful (or at least those who have not yet failed). So, we all have an interest in assuring no one fails, even if this results in reducing the chances for others to succeed (by confiscating their money at higher rates, forcing them into approved "safe" investments with lower yields, etc). This may all be a good thing, I just want to strip off the bark and see what we are talking about.

Social Security and welfare programs can perform a valuable function. By providing a minimum stipend that allows the poorest to keep body and soul together, they reduce the motivation for rioting, mob action and other socially/economically disruptive events. Taxpayer-funded retirement benefits above the subsistence level don't help accomplish this goal, and they reduce the vital link between work and reward. Right now Europe is cutting their cradle-to-grave welfare state benefits because these economies can no longer compete in the world market--it's not the time for the US to discover the beauty of socialism.

401Ks and IRAs are not enough, but they are a start. They could be simpler.

Maybe we can benefit from some type of additional account that has training wheels and handholding (more nanny-stateism, but better than some alternatives): A small government (taxpayer) match, a slate of investment options that is bounded, and withdrawal options that include a set of private or even government-sponsored single-premium annuities for those who want them. I'd rather do this than have some more "everyone throw their money into the big pot with everyone else and we'll all get something out later."

 

[NW-Bound]

SS as it is right now is a form of welfare. Person A who puts in twice as much as person B, whether by contributing twice as much or working longer will not draw twice the benefit.

In the current system, SS subsidizes low-wage earners with contribution from higher earners. You can go to ssa.gov to download the benefit calculator, enter in different hypothetical salary histories to see for yourself. For me, if I continue to work till I am 65, vs cruising until then, the difference was only a few percent in payment.

That said, same as samclem, I believe SS provides a safety net for most people. However, despite the problems with the incredible shrinking 401k accounts, expanding SS and taxing workers more will not work, unless fundamental changes are made. How about personalized accounts, with additional contribution encouraged?

It is sad that efforts to have truly personalized SS accounts failed. People will save more if they know additional contributions mean more money for them later on, and not being diverted to spendthrifts who later complain of being among the have-nots.