Time Magazine had an article called “it’s time to retire the 401k“. The article says the “401k is a lousy idea, financial flop, and a rotten repository for our retirement reserves.” From the end of 2007 to March 2009, the balances in 401ks had dropped 31%. Oh boy!
But here’s a statement in the article that I believe cuts to the heart of the issue…”the 401k was NEVER meant to replace the employer-guaranteed pension fund, supplemented by Social Security as the cornerstone of retirement planning.”
So what happened? Companies cut their generous pension benefits because it was too prohibitive in cost. Basically it was an unsustainable model. Well then, of course it can’t compare.
Look at the first example given Robert Shively, he was supposed to get $1396/month with a 36 year pension from Occidental Petroleum. Instead he got $225/month from his new pension, $180/month from profit sharing, and $70k left in his 401k. Why isn’t even close? Well let’s be HONEST. He didn’t save into his 401k for retirement. Is it really the 401ks fault that he only makes $405/month from his “pension” instead of $1396/month?
With 21% of all American workers covered by a pension (1 in 5), then 80% of us should be saving on our own. Is it really the fault of a 401k plan that we aren’t? The article says it was a scam that you could save enough.
Well is it really a scam? I don’t expect to get a pension, nor does my DH unlike our parents. So we are saving the maximum into a 401k account annually ($16.5k/year). If we don’t save what are we going to live on?
The truth is it’s not the fault of 401ks that retirees don’t have enough to live. The truth is, it’s a heck of a lot easier to bank on a monthly pension than to save your own money. And the suggested retirement insurance? Same problem as a normal pension, whose going to fund it?
The truth is, our retirements are in jeopardy, but not because of the 401k. Rather because we aren’t saving enough period. Americans counted on 3x their monthly retirement income from an unsustainable retirement plan. And now that the idea has been killed, the new idea, 401ks for retirement savings is blamed instead. Truth is any way you cut it, people need to save instead of blaming the vehicles for savings.
8 responses so far ↓
1 Inkstain // Oct 30, 2009 at 9:22 am
The problem is simple: people don’t want to take responsibility for their own retirement.
2 Tmoney // Oct 30, 2009 at 10:12 am
What Ink said. Why save ourselves when we can push it back upon the government who have done a phenominal job running the SS program. Kudos to Time on a totally irrational and amazingly poorly argued article. Then again, I think every PF blog has picked up this story so it probably has driven up hits to their website to numbers never seen before…wait, is this a troll article???
3 Megan // Oct 30, 2009 at 10:24 am
I haven’t read the article, but I think retirement is really difficult for people of that generation.
I came of age, started working, when it was expected that you would save for your retirement. It was known that SS wouldn’t have very much to offer and the pension plan was – for the most part – a thing of the past. So, retirement savings was built into my budget from the get go. Not very much at first, but Husband and I are at a place where we are very close to contributing the max.
However, for that generation – pension plans were the norm. People’s budgets were not based on having to save for retirement and the dollar amounts that people would need were not as clear. I mean, those costs aren’t clear now. Healthcare costs have soared astronomically and suddenly finding savings for retirement when you’ve never had to consider it and playing catch up puts people in a difficult situation. Furthermore, if you have a job without much upward mobility and are only getting cost of living increases – there’ s not always room to find those dollars. Throw in the economic meltdown and a lot of the boomers are screwed.
Hell, I just had a baby and financial planning articles that I read tell me I need to find an additional 300-400/month to save for my child’s education. In addition to the money we need for life insurance and childcare etc. I’m not complaining – and for the most part we can swing the changes in our budget, but it’ll take a while for some. So I do feel for people of that generation – facing retirement without much of a safety net.
4 Deborah // Oct 30, 2009 at 11:40 am
Did you even read the article? The point was that people retiring now were supposed to have a pension. the 401k wasn’t even around when they started working, so they did not have 30 years to contribute to it. Also, good for you for contributing the max, but that is out of the question for most people. Sorry, but when the average salary is less than $40 k, people cannot just divert almost half that to retirement. Also, you completely gloss over the point in the article of the risk involved in putting our retirement funds into stocks and bonds that can fluctate wildly. Many people saved for years and years and lost almost half when the market went down last year. I can’t wait until that happens to you, and there is no back up plan or reform. Guess you’ll be living on the streets then.
5 Inkstain // Oct 30, 2009 at 11:44 am
” Sorry, but when the average salary is less than $40 k, people cannot just divert almost half that to retirement.”
First, the average salary is closer to $50k.
Second, sure they can, they just choose not to. I have a wife and a kid, and our yearly expenses are less than $25k, easily.
Third, if you are close to retirement and heavily invested in stocks and bonds, you’ve ignored the most basic retirement investing advice there is: lower your risk the closer you get to needing the money. Whose fault is it if you get greedy or lazy and choose not to follow that advice?
6 LAL // Oct 30, 2009 at 1:52 pm
Ink, Tmoney, no I think the article is questioning the validity of 401k.
Megan, I wouldn’t worry about college. In most places it says save for retirement because there are no loans. And $300-400/month? Is that for a private university and not a public state school? I’m expecting our first child and my DH and I will be saving for a public university education period.
Deborah, who said pensions were guaranteed ever? And most planners say that you should be saving 15% of your salary, not the maximum. I don’t want to be eating dog food so the maximum it is.
If you make $40k/year then you should be saving $6k/year. Is that so impossible? Built in with a 25% PITI and no car loans, no college savings, because if you make that little your kids will qualify for scholarships.
PITI of 25% is $10k/year so your housing cost shouldn’t be more than $850/month. Are you spending more than that? If so your housing is out of line with making $40k and something else has to give. New job or cutting costs.
Third, I agree with inkstain. What the hell are people investing so heavily in stocks so close to retirement? Isn’t that another basic tenant? You use 110-age = percent in stocks? Or 100 or something?
Funny my mom is retired and lost NOTHING last year because she’s so conservative she was invested in BONDS. My Dad is super risky and lost BIG. She even mentioned that OVER and OVER, he’s 80!
He deserved what he got. Good thing they don’t need the money, but I asked her why were they invested so heavily in stocks. Her answer? Greed and an investment advisor.
So reap what you sow. My Mom FULLY admits it. Thus why she was like “I am in bonds earning 3%”. I want my money to just stay put.
Sure it doesn’t keep up with inflation but she also has a guaranteed pension! So she’s set. And I’m not worried.
7 Josh // Oct 30, 2009 at 2:44 pm
The author of this time article seems to be misunderstanding 401K.
“Here’s why: Remember, the biggest factor in whether the 401(k) works as designed has to do with when you retire. If the market rises that year, you’re fine. If you retired last year, you’re toast. And the chances of your becoming a victim of this huge flaw in the 401(k) plan are pretty high. The market fell in four of the nine years since the beginning of the decade. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market.”
I thought you were supposed to alter your portfolio as you go along steadily. There isnt some dramatic shift the day you retire, it should be a steady progression, say every 5 years or thereabouts.
“Imagine a worker who earns $100,000 a year for 30 years. Each year she puts 5% of her income into her 401(k). Through most of her working life, the market does pretty well, boosting her diversified portfolio 5% a year on average. When she retires, our worker will have $332,194 in her account. Now imagine a second, thriftier worker contributing 7.5% of his salary, or $2,500 more a year, to his 401(k). But in this scenario, the market does a 2008 in the last year before he retires, and his account drops 30%. Result? Even after saving 50% more a year for 30 years, worker No. 2 ends up with a balance of $327,194 — $5,000 less than the first worker. ”
Why didnt worker #2, alter their portfolio over time, it shouldnt be that be that they just leave it alone. There should be gradual adjustments to it over time depending on your level of risk.
8 LAL // Nov 3, 2009 at 11:32 am
Greed is why people don’t alter their portfolio, that and honestly not understanding why they should and HOW they should rediversify their portfolio.
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