for display only
Big Blue Interactive The Corner Forum  
Back to the Corner

Archived Thread

NFT: Was the creation of 401k's a mistake?

Hammer : 2/6/2014 7:39 pm
I saw this short article on govexec.com and thought it might spark a thoughtful debate about retirement savings now and into the future.

Some of comments below the article are interesting in their own right.

The link follows:
Was section 401k of the internal revenue code a mistake - ( New Window )
Pages: 1 2 <<Prev | Show All |
My wife still has  
Rick5 : 2/7/2014 8:04 am : link
a pretty good DB plan working for the state government and we also put 10% of her salary into a 457B (that has a modest match). I max out my 403B every year, and also have a large contribution from my employer, but it is a *major* pain in the ass. I put more money into that thing every month than I pay for my house! It seems to me that it is a major struggle once you have a family and a house (unless you have a really high income or came into money some other way). I can completely understand why many people can't save adequately for retirement. I can't even imagine what it must have been like in the old days when many people had nice pensions.
Just curious what some of your advice would be  
UConn4523 : 2/7/2014 8:09 am : link
to a 28 year old married man with 2 household incomes. I currently get a good company match and sock away a decent amount biweekly to my 401k. No major debt, don't own property, and only have 1 car which is leased.
RE: Just curious what some of your advice would be  
Jim in Fairfax : 2/7/2014 8:43 am : link
In comment 11497953 UConn4523 said:
Quote:
to a 28 year old married man with 2 household incomes. I currently get a good company match and sock away a decent amount biweekly to my 401k. No major debt, don't own property, and only have 1 car which is leased.


Avoid the clap.


What advice are you looking for exactly?
general rules of thumb, perhaps  
UConn4523 : 2/7/2014 8:50 am : link
since I know each situation is different it would be impossible to give very specific advice.

I am Clap free and going strong!
RE: My wife still has  
Jim in Fairfax : 2/7/2014 8:54 am : link
In comment 11497951 Rick5 said:
Quote:
I can't even imagine what it must have been like in the old days when many people had nice pensions.

A pension was great. But you stuck with a job you hated because you couldn't afford to lose that pension. Especially since your wife didnt work and thus had no pension of her own and she also didn't get Social Security. You of course qualified for Social Security but it had much lower benefits back then. Also, there was no Medicare system, so you were on your own paying for heathcare after you retired.
RE: general rules of thumb, perhaps  
Jim in Fairfax : 2/7/2014 9:03 am : link
In comment 11497980 UConn4523 said:
Quote:
since I know each situation is different it would be impossible to give very specific advice.

I am Clap free and going strong!

Keep contributing to the 401K, the most you can. Keep it mostly in stocks at this point in your life -- while there's more risk, but you'll do better in the long term. Also establish an emergency fund for at least 6 months of living expenses (this should not be your 401K money). Owning a car and keeping it for 10+ years will save you money vs. leasing. Don't buy a house until you are reasonably certain your jobs are stable and you won't need to pick up and leave the area. And also sock a away a good amount for a down payment and other house expenses first.
Not a mistake, PARTICULARLY for small business  
njm : 2/7/2014 9:14 am : link
The article presents an overly rosy view of defined benefit plans. No mention of:

* Vesting. 1978 was also part of the era of 10 year cliff vesting. Work for a company for 6 years and leave for another job and under the terms of the plans you got squat. Yes, there were plans with 4/40 vesting as well, but to get these "wonderful" benefits you essentially had to be an employee for life.

* Expense. The article talks about investment advisory fees but fails to mention the fees associated with DB plans. How many small businesses passed on establishing a plan simply because they didn't want to pay an actuary every year to calculate the required contribution?

* Risk. How much worse would have 2008 been if all those businesses had faced a monumental contribution requirement because of the down stock market? How many would have gone under or simply terminated their plans?

401(k)s have the benefits of portability, immediate vesting of at least the employee's contributions and have "top heavy" rules that actually make them more "fair and balanced than DB plans.

A very slanted, one sided article.
sounds good  
UConn4523 : 2/7/2014 9:23 am : link
i recently bumped up my 401k and my wife will be starting hers next month as there was a grace period with her new employer. I also made my contributions more aggressive over the last 6 months which will hopefully workout in the long-run like you said. I've got a 6 month emergency fund and I'll probably purchase our next car after this lease is up (I only leased because we weren't sure if we were staying in the area, or going back to NYC).

For us, buying a home is the big decision. I'm hoping to "buy" my father's house when he retires, but set it up in a way where I'd have no mortgage; essentially pay him an agreed upon sum each year with a % of the estate coming back to me each time. Still need to look through logistics, but it would keep us from having a $400k mortgage and allow us to use the money we have saved to upgrade everything around the house.

I'm hoping it works out that way, would save a ton of money and would allow us way more flexibility in saving for the future.
RE: RE: My wife still has  
Rick5 : 2/7/2014 9:37 am : link
In comment 11497981 Jim in Fairfax said:
Quote:
In comment 11497951 Rick5 said:


Quote:


I can't even imagine what it must have been like in the old days when many people had nice pensions.


A pension was great. But you stuck with a job you hated because you couldn't afford to lose that pension. Especially since your wife didnt work and thus had no pension of her own and she also didn't get Social Security. You of course qualified for Social Security but it had much lower benefits back then. Also, there was no Medicare system, so you were on your own paying for heathcare after you retired.


This reminds of a rumor I heard as a teenager on LI during the early 1980s. One of our neighbors (across the street from us) committed suicide. The rumor was that he had been working for a company for 25 years or so and needed to have 30 years in to receive his pension. They let him go at 25 years. The story around the neighborhood was that this left him with no pension (or maybe a tiny fraction of what he would have received at 30 years) and then he subsequently committed suicide because of it. Possible or bullshit?

401k's are great if you can afford to contribute. Useless if you not.  
BeerFridge : 2/7/2014 10:37 am : link
And they present some risk, if not managed correctly. Market volatility and all.

I think that they work fine in tandem with SS. IMO, they should beef up SS, not scale it back that would be better for the middle and lower classes.
RE: RE: RE: My wife still has  
njm : 2/7/2014 11:14 am : link
In comment 11498030 Rick5 said:
Quote:
In comment 11497981 Jim in Fairfax said:


Quote:


In comment 11497951 Rick5 said:


Quote:


I can't even imagine what it must have been like in the old days when many people had nice pensions.


A pension was great. But you stuck with a job you hated because you couldn't afford to lose that pension. Especially since your wife didnt work and thus had no pension of her own and she also didn't get Social Security. You of course qualified for Social Security but it had much lower benefits back then. Also, there was no Medicare system, so you were on your own paying for heathcare after you retired.



This reminds of a rumor I heard as a teenager on LI during the early 1980s. One of our neighbors (across the street from us) committed suicide. The rumor was that he had been working for a company for 25 years or so and needed to have 30 years in to receive his pension. They let him go at 25 years. The story around the neighborhood was that this left him with no pension (or maybe a tiny fraction of what he would have received at 30 years) and then he subsequently committed suicide because of it. Possible or bullshit?


That's bull. By the early 80's the latest you could reach 100% vested was after 10 years of covered service. But it is possible that what the pension provided was something much smaller than expected.
UConn  
Mark from Jersey : 2/7/2014 12:11 pm : link
you are still young and probably need or want to start saving for large purchases such as a home or car.

I recommend to put as much in the 401k as you can but at a bare minimum, you should contribute the minimum required to recieve the maximum company match.
Even if you make a modest income, the 401K makes  
buford : 2/7/2014 12:13 pm : link
sense. Especially if your company matches. It lowers your tax liability, so contributing 3% isn't going to hurt you that much because the final result is negligible when you factor in the tax savings.

Many people don't save because they have been told from birth that SS will take care of their retirement. For most of us, it should just be a supplement.
Max out 401K contributions  
PEEJ : 2/7/2014 12:18 pm : link
even if you have to scrimp in other areas. Especially, when you're young. The power of tax-deferred compounding is incredible.
NJM  
McLovin28 : 2/7/2014 12:22 pm : link
that's most likely BS. Pensions nowadays most likely work like this:

years of service x a certain percentage of salary x final average salary

For example: A guy's final average salary is 100k and he gets 2% per year and he was there for 25 years

He'll get a annuity for (100k x 2% x 25)50k a year in retirement.

Now there maybe other incentives that this guy would've gotten at 30 years but no plans allow for a 30 year vesting schedule.
Really great thread here, learning a lot  
knicks3031 : 2/7/2014 12:25 pm : link
Quick question for anyone that may be able to help. Should I be contributing pre-tax or after-tax to my 401k? I'm 25 single, no kids if that factors in to the decision at all. Thanks!
McLovin  
njm : 2/7/2014 12:29 pm : link
Even back then 10 years was as longest you could go without being vested. The rules are even tighter now. We agree there is no way he would have been entirely shut out of benefits.
RE: Really great thread here, learning a lot  
GIANTSr01 : 2/7/2014 12:30 pm : link
In comment 11498265 knicks3031 said:
Quote:
Quick question for anyone that may be able to help. Should I be contributing pre-tax or after-tax to my 401k? I'm 25 single, no kids if that factors in to the decision at all. Thanks!


For most people pre-tax. The assumption is that you'll be earning more and thus be in a higher tax bracket now than when you are retired and withdrawing from your 401k.
RE: Really great thread here, learning a lot  
njm : 2/7/2014 12:31 pm : link
In comment 11498265 knicks3031 said:
Quote:
Quick question for anyone that may be able to help. Should I be contributing pre-tax or after-tax to my 401k? I'm 25 single, no kids if that factors in to the decision at all. Thanks!


Pre-tax or after-tax really depends on your individual situation, in particular your current marginal tax rate But without question you should be contributing.
RE: 401k Is A Great Deal For Americans  
Patrick77 : 2/7/2014 12:35 pm : link
In comment 11497768 blright said:
Quote:
the S&P consistently outperforms 90% of all mutual fund managers.


This. Investing in indexes, keeping fees low, and saving what you can. You don't have to make/save a huge amount of money to realize the benefit of this.
When I had my first job that had  
buford : 2/7/2014 12:50 pm : link
a 401K and a regular savings plan, I utilized the regular savings plan because I was saving to buy a house. I saved enough to put a small down payment on a condo on LI. But the matching I received had to remain. When I left the company 15 years later, I was able to take out all the money since I was vested and that little sum from the matching had grown to $100K. If you are young, save whatever you can.
Anyone want to share thoughts on having 401K funds...  
tony stg : 2/7/2014 1:03 pm : link
... invested in Target Date funds? OK / Good for those without the time, resources or knowledge to research individual funds? Or do you prefer some other route?


Target date funds are OK in theory  
PEEJ : 2/7/2014 1:20 pm : link
but you pay a lot in expenses to have someone allocate your money to other funds.

If you have an overall allocation strategy, you can do it yourself with little time investment.

If your plan offers low cost index funds, you can achieve a higher return by using these funds in a proportion that you're comfortable with.
Thanks guys.  
knicks3031 : 2/7/2014 2:38 pm : link
Also, that $1.5-2 million retirement number that was being discussed earlier, is that per person? Or Per couple/household?
knicks  
UConn4523 : 2/7/2014 2:40 pm : link
I believe per person.
Well, that's quite the mood killer  
knicks3031 : 2/7/2014 2:41 pm : link
on this otherwise great Friday
RE: Really great thread here, learning a lot  
Hammer : 2/7/2014 2:46 pm : link
In comment 11498265 knicks3031 said:
Quote:
Quick question for anyone that may be able to help. Should I be contributing pre-tax or after-tax to my 401k? I'm 25 single, no kids if that factors in to the decision at all. Thanks!


I'm glad I started it. Hopefully, a bunch of people will get a better perspective on how to save for retirement from reading it. If that happens, than it was well worth it.
RE: knicks  
Hammer : 2/7/2014 2:47 pm : link
In comment 11498517 UConn4523 said:
Quote:
I believe per person.


I think that figure is per household/couple.

I cannot envision needing twice that amount per household, although I'm just guessing here.
RE: Not a mistake, PARTICULARLY for small business  
Hammer : 2/7/2014 2:50 pm : link
In comment 11498001 njm said:
Quote:
The article presents an overly rosy view of defined benefit plans. No mention of:

* Vesting. 1978 was also part of the era of 10 year cliff vesting. Work for a company for 6 years and leave for another job and under the terms of the plans you got squat. Yes, there were plans with 4/40 vesting as well, but to get these "wonderful" benefits you essentially had to be an employee for life.

* Expense. The article talks about investment advisory fees but fails to mention the fees associated with DB plans. How many small businesses passed on establishing a plan simply because they didn't want to pay an actuary every year to calculate the required contribution?

* Risk. How much worse would have 2008 been if all those businesses had faced a monumental contribution requirement because of the down stock market? How many would have gone under or simply terminated their plans?

401(k)s have the benefits of portability, immediate vesting of at least the employee's contributions and have "top heavy" rules that actually make them more "fair and balanced than DB plans.

A very slanted, one sided article.


I was unaware of the 10 year cliff vesting rules in the 80's.

When did they amend ERISA to require no more than 5 years cliff vesting and 7 year step vesting?
RE: RE: knicks  
GIANTSr01 : 2/7/2014 3:00 pm : link
In comment 11498542 Hammer said:
Quote:
In comment 11498517 UConn4523 said:


Quote:


I believe per person.



I think that figure is per household/couple.

I cannot envision needing twice that amount per household, although I'm just guessing here.


It's per person though it depends on a lot of assumptions. If you want a better estimate for your particular situation, there are multiple online calcs that will estimate it.

Just keep in mind that the more you save at an early age, the "easier" it will be thanks to compound returns.
Retirement Calc - ( New Window )
Another question  
UConn4523 : 2/7/2014 3:08 pm : link
I have stocks with eTrade, Schwab, and Fidelity. I'm trying t consolidate and just haven't had the time yet, but I am also trying to edit how I have my dividens set up. I own 4 or 5 stocks that produce a dividend and I believe I set them all up to NOT re-invest which I'd like to reverse. Is that possible after I made the purchase?

I really don't feel like sitting on the phone for 30 minutes with each site.
Uconn, I believe on eTrade  
knicks3031 : 2/7/2014 3:17 pm : link
you can enroll for DRIP right on their website. I don't use the other platforms for trading so I can't comment on that. Just google "etrade dividend reinvestment" and it'll bring you right to that page, you can select your stocks for which you want to reinvest dividends
10 year cliff vesting  
njm : 2/7/2014 3:19 pm : link
It ended sometime between 1982 and 1986. I think the provisions were tucked into one of the tax bills of that era. My main point was that when 401(k)s were created in 1978 it was still permitted.
knicks, that worked  
UConn4523 : 2/7/2014 3:31 pm : link
thanks!

Now I just need to figure out Schwab.
RE: RE: RE: I could be completely wrong  
mattlawson : 2/7/2014 4:29 pm : link
In comment 11497554 Hammer said:
Quote:
In comment 11497550 mattlawson said:


Quote:


In comment 11497527 UConn4523 said:


Quote:


but doesn't this generation of younger people need to plan on having upwards of $1.5-$2 million in total retirement net worth to live comfortably? This is assuming you retire at 65 and live to 90.

Again I can be completely wrong but I thought I've read around that ballpark on multiple occasions.



2 million and dont bank on social security. that's essentially the figure we're looking at.



Matt, I disagree with your statement about social security. I truly believe that SSI will be around until the end of time (figuratively, of course).

In fact, I am inclined to believe that SSI payments will increase, not decrease, in the future, funded by an elimination of the contribution cap. This is one thing that the populist movement can latch onto and ride.

Its just a feeling I have, nothing more.



theyve been "raiding the lockbox" for years. SS will be bankrupt
I don't buy the SS will be gone  
UConn4523 : 2/7/2014 4:36 pm : link
it will exist in some entity. Too many people would retire and have absolutely nothing without it which will snowball into more problems.
RE: RE: RE: RE: I could be completely wrong  
Hammer : 2/7/2014 4:45 pm : link
In comment 11498801 mattlawson said:
Quote:
In comment 11497554 Hammer said:


Quote:


In comment 11497550 mattlawson said:


Quote:


In comment 11497527 UConn4523 said:


Quote:


but doesn't this generation of younger people need to plan on having upwards of $1.5-$2 million in total retirement net worth to live comfortably? This is assuming you retire at 65 and live to 90.

Again I can be completely wrong but I thought I've read around that ballpark on multiple occasions.



2 million and dont bank on social security. that's essentially the figure we're looking at.



Matt, I disagree with your statement about social security. I truly believe that SSI will be around until the end of time (figuratively, of course).

In fact, I am inclined to believe that SSI payments will increase, not decrease, in the future, funded by an elimination of the contribution cap. This is one thing that the populist movement can latch onto and ride.

Its just a feeling I have, nothing more.




theyve been "raiding the lockbox" for years. SS will be bankrupt


No one is raiding "the lock box", and SSI, while if nothing is done will only be able to pay out approximately 70% in promised benefits beginning in a decade or two, it will not be "bankrupt".

The OASDI trust fund is separate and apart from any governmental general fund. It is, however, required to be invested in Treasury bonds.

As a matter of fact, as of 2010, the last year I have data for, there was about 2.7 trillion dollars in the fund. In that regard, there has never been more money in the fund since it was created in 1983 pursuant to the Greenspan commission recommendations. Up until that time Social Security existed under a pay as you go paradigm.

The reason why everyone is so concerned about the OASDI trust fund into the future is multifaceted, but boils down to two main issues. 1) as the population ages in the US there are going to be fewer people working paying into the fund supporting more and more people receiving benefits, and 2) the Greenspan commission, when setting up the income cap on contributions, did not envision the disparity in income would rise to the level it has.

Give or take, more or less, the future issues with SSI can be corrected by removing the income cap on contributions. I realize that his is overly simplistic, and I'm sure that some of BBI's superior economic minds will weigh in, but the research I conducted for my 2007 thesis paper bore out my conclusion.

Fire away.
the govt  
igotyourbackman : 2/7/2014 9:21 pm : link
will eventually just take 401ks...to pay their debts. then pretend they are investing it for you to keep it "safe."
the key is to save and invest  
Feb.3,2008 : 2/8/2014 1:15 am : link
Great conversation.

Big believer in 401ks and personal retirment or college saving accounts.

For those just getting started.

Consider.
1. Max out 401k or as much as you can and get the match especially while you are young and be aggressive in your plan 90-100% stock. Go pretax IMO.
2. Once 401k is maxed invest in a RothIRA or IRA based on your income.
3. If you want to buy a home save the 20% for down payment, so you dont need to do the PMI. Not sure what PMI rates are these days.
4. 6 month savings. This is the hardest IMO, because it is easy to "borrow" from.
5. Prioritize saving over spending. Are family only eats dinner out once a week and we bring our lunches every day. We buy things when we need them, but save for expensive items. We bought a home in our budget and didnt over spend.
6. Hire a really good money manager. Some can do it on their own, but I have other job skills that pay me that i enjoy doinh more than to manage my money. Let a pro do it unless you have the time or interest. I went through 2 managers before finding the right one, live and learn.

Ive considered going and getting a Govt job partially for pension and insurance reasons, but I think like all of the Fed benefits (military) you see being cut or taxed it isnt worth giving up a 401k that I control.

Either way by doing those steps above that 2 million amount per person, 4 million as a couple doesnt scare me an more.
Data -  
Rick5 : 2/8/2014 8:54 am : link
It looks like only about 6.7% of people max out a 401K and only 28% of people who make over $100,000 per year do it (see link below). I think the percentage of households with incomes > $100K is about 20%, right? I couldn't find the percentage for individuals, but I seriously doubt it is more than 10% to 15%. Bottom line: $1.5 - $2 million per partner in a marriage is probably completely unrealistic for the average American family. They can't afford it.
link - ( New Window )
RE: Data -  
Jim in Fairfax : 2/8/2014 11:12 am : link
In comment 11499317 Rick5 said:
Quote:
It looks like only about 6.7% of people max out a 401K and only 28% of people who make over $100,000 per year do it (see link below). I think the percentage of households with incomes > $100K is about 20%, right? I couldn't find the percentage for individuals, but I seriously doubt it is more than 10% to 15%. Bottom line: $1.5 - $2 million per partner in a marriage is probably completely unrealistic for the average American family. They can't afford it. link - ( New Window )


They can afford it. They just choose current consumption over saving for retirement.

If you put away $9000 per year starting at age 25, you would have $2 million by age 65. That's around $6000 on an after tax basis. If you get employer matching, so much the easier.
Unfortunately $9K is ~ 20% of the median  
Cam in MO : 2/8/2014 11:32 am : link
US household income. Even being very frugal it is difficult to save 20%...much less if you have children.

You should really think about moving from Missouri Cam.  
Spackler : 2/8/2014 11:40 am : link
South Carolina is where the sweeeeeet life is now. You can stay with me and my family for a while until you get your new life in order. We wear flip flops to work here. Spring through fall we'll drink and swim in the ocean and get really tan. The bar is right near the beach.
To add  
Rick5 : 2/8/2014 11:43 am : link
to what cam wrote, I was referring to the number per person in the discussion above, so it would be $18K per year for a married couple. That sounds very unrealistic to me for the average family.
Sounds very tempting buddy.  
Cam in MO : 2/8/2014 11:43 am : link
I'm pretty flattered (with and emphasis on "pretty"), but I don't swing that way.



it's not just about the 401K  
buford : 2/8/2014 11:47 am : link
You should at least save a % to get the company matching and the tax savings. But other things you can do is buy a modest home and pay it off before you retire so hopefully you can use the gain to supplement your 401K and SS income. Also not getting into credit card debt or buying a new car every few years will free up a lot of money to be saved.
he's got  
Spackler : 2/8/2014 12:52 pm : link
the funny back.
Jim, what am I missing  
knicks3031 : 2/8/2014 1:36 pm : link
$9,000 a year for 40 years gets you to $2 million?
Knicks - Rule of 72  
Feb.3,2008 : 2/8/2014 7:59 pm : link
He is referring to this.
Pay yourswlf first.

9k a year is a decent amount for some people, but based on where you live you may not need 2mill to retire.
Rule of 72 - ( New Window )
RE: Jim, what am I missing  
Jim in Fairfax : 2/8/2014 8:46 pm : link
In comment 11499700 knicks3031 said:
Quote:
$9,000 a year for 40 years gets you to $2 million?

I'm assuming you invest it and get an average return of 7%, which is very doable over a long period.
Pages: 1 2 <<Prev | Show All |
Back to the Corner