> Most will discover that their 401K, despite maximum contributions, will be insufficient to retire on.
How will that happen when there has been so much growth in the S&P?
How will that happen when there has been so much growth in the S&P?
https://www.gao.gov/blog/growing-disparities-retirement-acco...
https://www.gao.gov/financial-security-older-americans
(401k plans were a way for capital to con Americans that ditching pensions was the way to go; pension contributions became shareholder profits, and most did not or could not contribute to 401ks in any meaningful fashion)
I don't believe what you're saying that 401k's are somehow not going to be enough to retire.
Unless you meant retire where housing prices are rising the fastest.
Per the GAO:
> Even for those who do have access, traditional defined benefit pensions have become much less common as defined contribution plans, such as 401(k)s, have become the primary type of retirement plan. This shift has increased the risks and responsibilities for individuals in planning and managing their retirement. Yet research shows that many households are ill-equipped for this task and have little or no retirement savings. As of 2016, about half of households with a worker age 55 and older had no retirement savings, and 29% had no retirement savings or a defined benefit plan. Policymakers will need to consider how to best encourage expanded pension coverage, adequate and secure pension benefits, and more effective use of tax preferences to foster workers’ retirement security.
40% of Social Security recipients have no other income.
https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
https://web.archive.org/web/20231028173718/https://www.nirso...
Regardless of whether and how much private equity is affecting growth in prices of stocks for public companies, the S&P in which people's 401ks are invested has grown a lot, and will probably continue to
Low balances in 401k's are therefore due to insufficient contributions and not insufficient growth in S&P prices
> The 401k generation will begin think about retiring in the next few years. Most will discover that their 401K, despite maximum contributions, will be insufficient to retire on.
The maximum individual contribution—not counting employer contributions—is $22,500. Or if you’re over 50, it’s $30,000. If You’re maxing out your 401k, you’ll pass $71k after working just a few years.
To retire with just $71k after working a typical career of 40 years, you’d have to save less than ~$600/year. In other words, saving $600/year—~4% of a minimum wage salary—is enough to surpass this median $71k number after a 40 year career and a conservative 5% avg return.
I suspect most of these people have other savings.
Please show me the data, because all available public sources indicate this is not the case, and in my travels, the data confirms my conversations with these cohorts (because I am very curious). If they have other savings not showing up in the data, what and where is it? We cannot simply assume it exists. Hope is not a strategy.
https://www.federalreserve.gov/econres/scf/dataviz/scf/chart...
I must strongly emphasize that vehicle equity is not retirement savings if you must keep the car for mobility. Home equity is not retirement savings if you must have a place to live and there is nowhere to downsize to, unless we are expecting 55+ to sell their homes and live in a van down by the river, burning through their housing proceeds and hopefully dying before it is exhausted.
I don’t know what point you’re trying to make here. Is US retirement a mess? Yes. But I don’t think the magnitude of bleakness is quite as high as you’re describing.
While hardship exists, and I think we’d probably agree that there needs to be a much better safety net in place for people, I think it’s also true that many capable people neglect to save enough for the future. And, to be honest, I think often it’s because of rhetoric like yours. People are hopeless, and just give up trying. Reality is not that grim. Saving even $1M in a 401k over 40 years has been attainable for most people by following the boring “save 10%” strategy.
You're welcome to assume that retirees have paid off their mortgages, but it's a wholly unsupported assumption, given just the information in this thread. If you want anyone else to give it credence, cite some sources for it.
Most Americans over 65 own their homes outright without mortgages.
In order to determine whether you can afford to retire, you need to be looking at recurring expenses, not illiquid assets. If you have an expected monthly income from your 401k of, say, $1200, but your mortgage payment is $800/month, it doesn't matter that you've got $150k already paid into it and only another 10 years left to go; you can't afford to retire now![0]
Yes, it's theoretically possible (depending on how much equity you actually have, and your credit score) to take out a home equity loan to provide you with money to live on in your retirement, but a) there's interest payments to think of, which put you right back at the top of this post looking at monthly expenses, and b) if this is a significant part of your net worth (which, for many of these people, it absolutely will be), this means that at best you're leaving your heirs with a bunch of debt and no house, and at worst the bank just won't let you do it in the first place. And while there is certainly a perfectly reasonable discussion to be had of whether it's better to use the money for yourself now, and not care about your family, making that selfish choice is far from universal.
[0] No actual numbers were harmed in the making of this post. All numbers are entirely made up.
As for leaving an estate for heirs, that's a separate issue from retirement planning. There's no way to leave a bunch of debt to heirs. If you die with liabilities exceeding assets then any debt which remains after selling off assets is simply defaulted. The heirs will inherit nothing of significant value, but creditors can't force them to pay off the remaining debts either.
Don't worry, I'm sure they'll get together and vote to distribute everybody's 401(k) balances equally among all retirees so that they people who did save will also end up with nothing.
Many people have their retirement savings entirely in rental real estate (I know several like this). Many people have small retirement accounts but millions of dollars in ordinary taxable investment accounts due to the myriad restrictions that the government places on what you can put into retirement accounts. All of these are outside the definition of "retirement savings", despite being actual retirement savings, but none of them are rare.
Certainly not many people, at least not many in the context of retirement population. Any people with access to millions of dollars of assets in retirement are rare.
The fact that people contribute less to their 401(k) means they care less about saving for retirement, not that the plans themselves are a con. I personally don't even have a 401(k) because I am self employed and there are other options.
https://www.usnews.com/news/national-news/articles/2021-03-1... ("Median household owns $15k in equities")
(unless you're wealthy, you are a token participant in the capital markets)
Congrats on the luck (no snark, honestly). But let us not extrapolate luck and personal anecdotes to solutions for systems. "In God We Trust, all others must bring data", working backwards from first principles, etc.
The fact that many would rather spend than save does not change that these opportunities are for everyone. The best selling car in America is the F-150 which is quite expensive...
Are you sure it's not luck?
https://blogs.scientificamerican.com/beautiful-minds/the-rol... ("The Role of Luck in Life Success Is Far Greater Than We Realized")
https://www.technologyreview.com/2018/03/01/144958/if-youre-... | Ref: https://arxiv.org/abs/1802.07068 ("Talent vs. Luck: The Role of Randomness in Success and Failure")
https://www.pbs.org/newshour/economy/making-sense/analysis-i... ("Analysis: If you’re rich, you’re more lucky than smart. And there’s math to prove it")
https://www.marketwatch.com/story/when-you-realize-how-much-... ("When you realize how much luck goes into investing, you might change your methods")
A couple living on social security + 2 million in assets may be financially secure but they are still middle class.
To be fair, F-150 and other pickup truck sales figures are buoyed by fleet purchases. The better figure to cite may be that the average new car transaction is now north of $48k; ten years ago, it was around $30k, and this rise has beaten general inflation.
This article says about 20% of vehicles sales are to fleets. It says vans are the most popular fleet vehicles. It syas "light trucks" (which includes vans) outpace cars in fleet registrations at 22.5% vs 17.3%. https://www.autoserviceworld.com/fleet-registrations-continu...
Based on that data, I see strong evidence that the F150 is not boosted over other types of vehicles. I certainly found nothing to support the idea that it is, and if it is, it does not seem to be a strongly dominant consideration.
What does it mean to you to live in world with other people in general? Are we all fundamentally competitors like this? Winners and losers in a game of skill (and definitely not of chance)? Does the existence of losers reinforce the necessity or merit of the game, of the structure in question? Or are we trying to make everyone winners, trying to teach them to get it together enough to not buy all their flashy cars and such?
We can certainly extrapolate if we look at the last 13-14 years.
Unless maybe "the game" is meaning a broader economic "game", which is (apparently) rigged because some people are (way) richer than others? You'd expect something like 80/20 just from a Pareto distribution, which if I understood the paper correctly, generally occurs whenever people have free choice. I guess one could required "not rigged" to provide equal outcomes, but since people have unequal ability, equal outcomes seems "rigged" to me, just in the other direction, of pulling down the highly skilled.
This is tautologous. "Wealthy" means mostly "built, and still owns a decent chunk of, a company whose shares are highly valued".
Also, I could, like my parents, own nothing in the stock market, but have a paid off house and decent savings and a state pension, and be doing well. Proportion of capital markets ownership is too skewed a metric to reason about.
No, it's not, and it's a problem that you're thinking this way. A tautology would be "Americans in the top 10% of wealth are wealthier than the bottom 90%." A tautology is necessarily true according to logic.
Logic does not dictate that the top 10% own 90% of the equities. And, in fact, there's a strong argument that societies with extreme inequality in wealth distribution are structurally unsound societies (I don't mean that they're economically unsound, though I'd argue that, too).
> there's a strong argument that societies with extreme inequality in wealth distribution are structurally unsound societies (I don't mean that they're economically unsound, though I'd argue that, too).
This just depends on how you define "structurally unsound" and "economically unsound".
That's still not a tautology just because in practice it is usually true, and is easily disproven as such: Stock values could all nosedive to nothing, and the wealthiest people would still mostly all be the wealthiest due to non-stock assets.
Not that easy. If the wealthy own 90% of the stocks and 90% of their wealth is in stocks, and the stocks disappeared, they may still be wealthy due to the remainder, but still the bulk of the their wealth was in stocks.
The exact percentage is exactly critical informarion.
Imagine, for the sake of argument, that the 10% own 100% of all net worth. Imagine net worth of 90% of the population is exactly at zero. Do you think democracy would still function, liberty would survive?
The folks at zero would be closer to slaves than to anything we recognise today.
They are also riskier.
People see the generosity of pension plans and (understandably) want that, without having the risk.
They shouldn't be "caring" so much about the high cost of living I guess?
That said, the old pension model forced workers to make large contributions. The 401k model does not. (Unless your company has some amazing match deal… I’ve only ever seen shitty deals like 25% of up to 4% of salary, whereas more like a 30% savings rate is what’s really needed.)
Defined benefit plans should never have died out, they should have been part of a total mix. There is no reason you can’t have pensions along side social security along side 401k/IRA plans. This gives retirees multiple avenues for payout each with their own risk profile. The 401k is a great idea as a retirement supplement for folks who are interested in saving more and managing investments. But many (most?) people are not sophisticated enough to (a) take advantage of tax deferred savings vs paying rent and buying food, (b) muck with investment options roll overs and all the like.
We are about to see a mass humanitarian catastrophe over the next 20 years as the 401k dependent generations retire, social security buckles, and we learn why pensions existed to begin with all over again.
The only defined benefit pension plan that has a leg up on index funds is a taxpayer funded one, because it has the power to tax, assuming the taxing jurisdiction will remain sufficiently economically productive decades into the future (see Detroit for an example of one that did not and hence was able to cut benefits to DB pension recipients).
Personally, I would only value a DB pension paid by the federal government, since it can always print money. Otherwise, give me my 0.03% expense ratio index funds.
You (and I) aren’t the issue here - it’s the majority of people who are unsophisticated. They are autopiloting through life, assuming social security is a retirement plan or that they’ll save later when they’re closer to retirement. This is an awful lot of people. The truth is as a society we will be carrying them in their old age because we didn’t pay up front, instead we set up an optional plan assuming they would pay up front. Instead we will collectively be figuring out a way to deal with the massive underprepared aged population using present dollars rather than compounded dollars.
I think the other argument going on above is that "defined benefits" isn't actually possible without some escape mechanism (like tax collection) to provide the benefits when it turns out the fund didn't perform as well as hoped. When a private pension fund gets in trouble, its participants lose their safety. The others want a system that prevents future-damaging choices by fund operators, and see defined contributions as the only viable way to do this. You own a chunk of the fund and can transfer it to different stewards.
https://www.nytimes.com/2021/03/07/business/dealbook/bailout...
If they didn’t, PBGC would have easily failed. The whole thing is an excercise in who has sufficient political power to get bailed out, and if I am playing that game, why not just directly put my hand in the SP500 and ensure I am bailed out directly rather than maybe via proxy.
This is just scare talk, nobody says that a checking account is impossible without "some escape mechanism" meaning FDIC.
What happens to the proportion of workers who buy the target date fund (even narrowing ourselves to the ones who contribute appropriately and so on) who effectively outlive their money? Kicked to the curb?
I work for my state's government and we have exactly that.
Replace all pensions with defined contribution plans. Individual employees might make poor decisions and end up short of retirement funds but at least there are no systemic risks.
For the '01 case, it's hard to find much sympathy for a stock heavy portfolio that took a 50% haircut, considering that grew 400% in the 10 years that preceded it.
The foreign share is a roughly similar breakdown to the domestic share.
How do you think Pension Funds get a return if not investing in equities in similar ratios to most people's 401k allocation?
burying the lede here, killer.
to be clear, the 2% mgmt fee in a lot of 401k plans is terrible and is absolutely scamming the average folks.
but you can't retire on something you didn't contribute to, either because you didn't or couldn't.
https://www.cnbc.com/2023/10/31/biden-administration-to-crac...
https://www.whitehouse.gov/briefing-room/statements-releases...
I wouldn't trade my 401k.
Pensions are kind of always problematic because you take control away from people and give it to people with misaligned incentives.
It's the same if you give people control over their own retirement because they can not contribute or mismanage how the money is invested. Defined contribution pensions are maybe an improvement on this because at least you know there is money there and can have a regulatory framework that is simple and heavily restricts how the money can be used. I would really like to see broad market index funds only. Dumb money should stay dumb.
Maybe if you pull the responsibility up to the federal government you minimize the risk of mismanagement, but it's still pretty large.
Seems like we are doomed to pick an option that is still risky and it's every person for themselves. You need to super save and not rely on any framework provided by others. And this is where 401ks shine. Sure I am stuck relying on the stock market, but I think the distribution of outcomes there are more in my favor than if it were managed by someone else. Whatever is in my 401k (or IRA or whatever) is owned by me and is heavily diversified.
Maybe I'm the weird one, but I don't necessarily want control of my retirement fund. My primary requirement is that it exists when I need it. Somehow the financial industry convinced the public that being able to micromanage their retirement investment and pick their own stocks and mutual funds is somehow beneficial. I can probably count on one hand the number of people I know who find this kind of micromanagement interesting.
I just want "money goes in" and "enough money eventually comes out" and I don't think I'm alone in that. You can accomplish that with a well-run pension, a well-run government plan, and so on. Lots of options that don't involve me having to decide between stock and bond funds.
However, before the advent of discount brokerages and widespread 401(k) plans investing really was only for the extremely wealthy and inept fund management - resulting in extremely high expense ratios - was rampant. Now investment is more accessible and ETFs are offering near-zero (or actually zero (!) - see FNILX) expense ratios on the strength of the economy, which has been a net win for a larger segment of the population than the 0.1%. We're up to 20% now!
I would like to see a much larger percentage of the population to be able to get in on this opportunity. Doing away with wealth and income inequality will get us halfway there. Trust-managed investing addresses what you're asking for, where a company manages your investments and retirements for you at some level of expense ratio. (These companies exist today for retirees.)
It is called a target date fund.
The stock market is a circus- that’s common knowledge- yet we rely on it for retirement? Okay. That’ll work until it doesn’t.
No one can guarantee stock market returns, but over decades it's a lot safer than depending on pension contributions from a single company. And most 401(k) plans now offer target date mutual funds which automatically reduce stock exposure over time, thus reducing risk of capital loss as you approach retirement.
The merry-go-round of debt ceiling and budget confrontations in congress doesn’t help. Any gains from this year are probably going to be wiped out by that continuing drama.
Finally the increase in cost of living expenses and cost of long term medical care will quickly eat into your 401k once you stop contributing.
The math looks ugly once you sit down and figure it out.
So you are working on the assumption that LifePath or similar ETFs are going to be correctly managed for their cohort (shifting into safer investments as the retirement date approaches).
Historically, it looks like the risk of being in stocks as you approach retirement is pretty low. Let’s say you planned on retiring in 2009 at age 65. 2009 hits, stocks fall 50%… if you just continued working for 2-3 more years, your retirement account would be back at fresh all time highs AND you’d be collecting a larger SS paycheck each month when you retired at 67-68. Not exactly tragic.
I'm no expert, but I thought that was one of the big problems with recessions.
I wish assisted suicide was more popular. I think it will be more popular as time goes on, especially in the US. If you worked your whole life to have say $2 million in assets, would you rather piss it all away on a boring, painful, purposeless existence in a retirement home, or would you rather your kids have a shot at owning their home?
Almost no one gave the obvious answer: Most 401 K plans are not investing in the S&P. Many give you the option to, but it's not the default, and probably over 90% of workers are unaware of the fund.
And quite a few do not even give you the option to invest in it.
If you invested in an index fund, you will get very close to the S&P 500/Russell 3000/Whilshire 5000/etc.
If you invested in an actively managed fund, then the fund manager takes their cut, but also probably tries to be 'too clever' and doesn't get as good returns as a plain index, and so you're not getting as high returns.
They also told me I couldn't cash out my money until I left the company I worked for which I am pretty sure is untrue.
Definitely 401ks are obscure and confusing and full of deception. I think John Oliver did a segment on them. Your experience is not atypical.