Reuters Money
Why 401(k) plans will fall short for most Americans
It’s time to end the fraudulent notion that 401(k)-type plans are adequate retirement vehicles for most Americans.
They fall short in so many ways, but mostly because they’re too expensive, are exposed to excessive unhedged market risk, poor allocation and contain no income guarantees. There is a better way: Congress can fix the problem while boosting private investment.
With the latest market rout, it’s hardly surprising that most Americans say they are “not where they need to be” on retirement saving. Most are behind after two recessions, two market crashes and yet another downturn.
While most 401(k) balances rose over the past two years, more employees than ever before have taken out loans against their major source of retirement funds. The ever-worsening economy has forced Americans to treat their 401(k) balances like piggy banks.
Should future retirees be consistent hostages to market conditions, praying that a rebound in stocks will help fill the gap?
Since there’s no guaranteed, inflation-adjusted annuity incorporated into 401(k)s — regular monthly payments that rise with the cost of living — it will be difficult for future retirees to attain a dignified lifestyle. They will also be fully taxed on all withdrawals for conventional 401(k)s (Roth accounts’ payments are generally tax-free), so the biggest tax hits may be yet to come.
The 401(k) doesn’t work on a large scale because it exposes nearly every participant to market risk that can’t be fully hedged. No one can consistently predict market cycles and less than half of employers offer personal planning services that offer meaningful guidance to protect you from the pitfalls of market investing.
Retirement solvency “a growing challenge” says GAO
The risk that retirees will outlive their assets is a growing challenge, the federal Government Accountability Office said in a not-so-newsy report released on Friday. To meet that challenge, experts advise retirees to delay the start of their Social Security benefits, avoid spending down their nest eggs too fast and consider using annuities in some situations, says the study.
The report could be used to nudge forward policy initiatives already under consideration that would encourage companies to offer annuity choices to their retiring workers. The report was requested by Senator Herb Kohl, chairman of the Senate Special Committee on Aging. He has cosponsored a bill, called the Lifetime Income Disclosure Act, that would require 401(k) statements to include an annuity equivalent number — the amount of monthly income that the savings accumulated would support.
The Treasury Department has asked for public comment on the idea that employers, given some safe harbor against lawsuits, could encourage workers with 401(k) accounts to annuitize their savings. Mark Iwry, the Treasury Department official who has been looking at these retirement issues, commented in a letter to the GAO. “We will take the information and analysis in the report into account as we consider guidance to issue.”
To conduct the study, the GAO created sample retiree profiles at varying income levels, with and without defined benefit pension plans. It then asked a host of experts within the financial services industry, academia and a “retiree interest group” (I’m going to guess that it was AARP) how they would advise retirees with those profiles to protect their income for the long haul.
The experts generally recommended familiar strategies: (1) leave your money in your defined benefit plan and take an annuity instead of a lump sum; (2) make systematic (and not unreasonably high) regular withdrawals from your savings; (3) delay the start of your Social Security benefits; and (4) consider buying an income annuity to cover some basic expenses for the rest of life.
The GAO also surveyed retirees to see if they were following that advice and found, in general, that they were not. Roughly half of retirees take their Social Security benefits before their 63rd birthday, according to data cited in the report.
The experts surveyed by the GAO suggested that middle-net worth households that did not already have a defined benefit plan could gain the biggest advantage from buying income annuities, in which a sum of money buys a guaranteed lifetime monthly stream of income. “They should consider using a portion, such as half of their $191,000 in financial assets to purchase an inflation-adjusted annuity,” the report says, noting that it would provide an additional $355 per month until the death of the last surviving spouse, and grow in subsequent years with the Consumer Price Index.
I know it’s tough for policy makers to understand this but no amount of changes in policy will ever get people to prepare for retirement. The problem is part of our social mindset to avoid anything that has the slightest bit of discomfort today with a payoff that is 40 years in the future such as preparing for retirement.
I have made 900 bucks over 6 years with 38,000 in a 401k. I would have made more money at 1% interest in a money market account. Alley bank has a 1 year CD with .99 percent interest and this would have been compounded if I kept doing it. Therefore, I would have made more moeny in the bank. Inflation was 3.4% this year. Me and my husband make 100k together yearly. I believe we could live on just 38k very poorly. I found out I will need to have 105k when I am 65 to spend 38k a year. This is insane. Therefore, if I want to live to be 85 I need two million dollars, there is no way this can happen. Retirement is just a dream everyone is going to have to work until they die. Many old people now have social security and pensions. Even people who never paid a penny into social security are collecting (crazy). Our children and myself are screwed. There is no way we can save enough money. In addition America is going to go bankrupt so we could wake up one day and gasoline be 20 bucks a gallon because no one wants American money and our money will be worth nothing once we are bankrupt. The ONLY way to protect your money is to convert it to a different currency. I have not done it yet but thinking of doing it soon.