It was supposed to be a breakthrough innovation for personal finance, a way for Americans to augment their retirement savings. Instead, the 401k has contributed to a massive retirement savings crisis, and the original advocates of the 401K are remorseful:
“We weren’t social visionaires,” Whitehouse explained in an interview with The Wall Street Journal on Monday. Like many other early advocates of 401(k) plans — Whitehouse started doing this in 1981 — he didn’t anticipate the tax-deferred savings tool would be used as a replacement for pensions by employers seeking to cut expenses. As a result, only 13 percent of all private-sector workers have a traditional pension in 2016, as opposed to 38 percent in 1979.
“The great lie is that the 401(k) was capable of replacing the old system of pensions,” said Gerald Facciani, former head of the American Society of Pension Actuaries and an opponent of an effort by President Ronald Reagan to kill 401(k) plans, in his interview with The Wall Street Journal. “It was oversold.”
The result is that more than half of all Americans have less than $25,000. saved for their retirement, so that they will be entirely dependent on Social Security (which the GOP has vowed to cut). And those of us that have 401Ks see our savings eroded by diminishing employer contributions, poor investment choices, and exorbitant plan management fees. And most are woefully uninformed about 401k plans:
For example, only 24 percent of respondents could define a mutual fund and only 43 percent knew the percentage of their salary they should save for a comfortable retirement.
Moreover, one in four Americans claim they were not involved or can’t recall how they picked their 401k assets, and over 40 percent are not confident that they will reach their retirement goals.
Most financial experts tell us that we will need a minimum of 8 times our final annual salary for a modestly secure retirement. How to get there? A few recommendations:
- Contribute the maximum to your employer’s 401k plan (insist that the plan include options to invest in ETFs or Index Funds)
- Max out on your IRA if you are within the IRS gross income limits ($117K for individuals / $184K for joint filers.
- Consider funding a Roth IRA ($5,500 annual limit) which grows tax-free and you can use for any purpose after 5 years (e.g. buying a house or paying for college).
- Consider opening an account at a discount brokerage such as Vanguard, Fidelity, Charles Schwab and have a small amount ( as little as $50) each month automatically invested in an index fund. I like the Vanguard Total Stock Market Fund (VTSMX) but there are many other good index funds. (Vanguard is owned by us, the investors, and charges 0.05% management fee once you have $10K invested).
- Don’t try to invest in individual stocks, and don’t pay any attention to TV ads for Edward Jones, Ameriprise, Prudential ,etc.
We are pretty much on our own in the age of Trump, so stay informed. There are many good resources available on the Web to help you on your way — such as Bogleheads.org named after the legendary Jack Bogle, founder of Vanguard and the nemesis of Wall Street.
Please add other thoughts, strategies or resources in the comments.