401(k): The Lie.


Do you have a 401(k)? Have people suggested you open a 401(k)?

Either way, read this:

You need to know this number: $18,433.That’s the median amount in a 401(k) savings account, according to a recent report by the Employee Benefit Research Institute. Almost 40 percent of employees have less than $10,000, even as the proportion of companies offering alternatives like defined benefit pensions continues to drop.

Older workers do tend to have more savings. At Vanguard, for example, the median for savers aged 55 to 64 in 2013 was $76,381. But even at that level, millions of workers nearing retirement are on track to leave the workforce with savings that do not even approach what they will need for health care, let alone daily living. Not surprisingly, retirement is now Americans’ top financial worry, according to a recent Gallup poll.

To be sure, tax-advantaged 401(k) plans have provided a means for millions of retirement savers to build a nest egg. More than three-quarters of employers use such defined contribution plans as the main retirement income plan option for employees, and the vast majority of them offer matching contribution programs, which further enhance employees’ ability to accumulate wealth.

But shifting the responsibility for growing retirement income from employers to individuals has proved problematic for many American workers, particularly in the face of wage stagnation and a lack of investment expertise. For them, the grand 401(k) experiment has been a failure.

Most Americans have zero retirement savings. Their plan is to retire on Social Security and Medicare. It is a stupid idea. These people are going to get shafted.

Then there are the Americans who have a 401(k). They thought they outsmarted all the other workers who refused to save for retirement.

They thought wrongly.

Let’s step inside the shoes of the 55 year-old demographic mentioned in the article. The median amount of savings was $76,000. Any 55 year-old who thinks they’ll be able to retire in their 60s and maintain a middle-class living (at least) on a nest egg of $76K is living in fantasy land. How much does this person need to live comfortably in retirement? Over $1 million. $76K is nothing. It’s peanuts. It’ll get a retiree by on a middle-class living for a year… as long as it isn’t eaten up by cancer treatment or other old-age medical problems.

The 401(k) is not the magic bullet it is sometimes made out to be. From the very beginning, it had one purpose, and one purpose only: to entice people into showing the IRS where their assets are. The Federal Government, especially the IRS, does not like financial privacy. They dislike undeclared assets, like money in a vault or under the mattress, because it makes it more difficult for them to suck people dry and exercise control over money. The 401(k) was a brilliant way to fool people into identifying their assets.

But the government is not the one at fault here. Neither is the IRS. Most Americans do not have sufficient retirement savings because they refused to plan for the future. They were present-oriented.

“Live in the moment” is a great platitude for fortune cookies and motivational posters. But it makes for a piss-poor retirement plan.

Don’t be a victim of the scam. Don’t presume you can stuff a few thousand dollars per year into a 401(k) for a few decades and retire in the lap of luxury.

Plan accordingly.

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One Comment on “401(k): The Lie.”

  1. Sam March 26, 2015 at 3:43 am #

    No doubt. I completely agree – 401(k)s tend to hurt more than they help. An employer sets a 3% match rate, so the employee only contributes 3%, and is saving nothing else towards retirement? Craziness.

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