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 - (
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Also defined benefit plans are not perfect either. They can work well for people who stay at the same company for life. But most peope don't do that anymore, and thus would not qualify for a pension or would only be partially vested.
My though is that this view is a bit odd. One, there are plenty of money managers that have low fees, Vanguard for instance or Fidelity, that's where my current 401K is. Also, people aren't saving enough? Well how would getting rid of 401Ks help with that? Plus many companies match part of the 401K to help with savings. How is that a bad thing?
Defined pensions are gone and were going before 401ks were implemented. And all these public pensions are vastly underfunded and will be the next huge bailout that is needed.
If I put my tin foil hat on, this just seems like another preamble for the government to seize 401K assets or require you to invest in government bonds to save the country from the financial disaster they've brought on.
Either people would have less per year or the plans would be largely insolvent because of the growth in benefits needed.
Like every thing, focusing on the consequences without focusing on the evolution of the underlying system (like age structure, amount of time spent in good health, ...) means the author doesn't understand what he should.
Allowing the NFL to be a non-profit. That is a mistake.
Religious organizations tax exempt - that is a mistake.
Allowing a hard working middle class family to attempt to sick away money over the course of their life, which amounts to what some people make in a month in this country -- is the LEAST you can do to cut a square deal
My though is that this view is a bit odd. One, there are plenty of money managers that have low fees, Vanguard for instance or Fidelity, that's where my current 401K is. Also, people aren't saving enough? Well how would getting rid of 401Ks help with that? Plus many companies match part of the 401K to help with savings. How is that a bad thing?
Defined pensions are gone and were going before 401ks were implemented. And all these public pensions are vastly underfunded and will be the next huge bailout that is needed.
If I put my tin foil hat on, this just seems like another preamble for the government to seize 401K assets or require you to invest in government bonds to save the country from the financial disaster they've brought on.
In regard to defined benefit pension plans "going away" my recollection is that in 2000 60%, or thereabouts, of employers offered defined pension plans and today its in the neighborhood of 17%.
Given that data, at the time 401ks were created, and for more than 20 years after, defined benefit pension plans were still around and offered much more often than not.
The earlier poster correctly identifies the changing nature of the workplace and the fact that long term employment at one job is quickly becoming a thing of the past, thereby making 401ks more practical.
I remember when the 401k was created, and I do not recall any debate about what impact they would have on defined benefit plans. I recall the debate being out increasing the savings rate of Americans, and that these new plans would do that.
In another point your raise regarding defined benefit pension plans in the public sector, it is undisputable that a main reason, but not the only reason, many of these plans are severely underfunding is that municipalities and state governments refused to properly fund them. As a case in point, in New Jersey, during the Todd Whitman administration, the state did not properly contribute to the pension plan of state workers for ten years.
In another case in point, the NY Times ran an article about 15 years ago that compared two public employee pension funds in Texas. One fund was fully funded and invested prudently, the other minimally funded with much more risky funding alternatives. The premise was that the later plan would be in trouble sooner or later, and sure enough, that is what happened.
Since ERISA minimum funding rules do not apply to publicly funded plans, there is no regulation forcing states or municipalities to properly fund plans. As a matter of fact, public sector unions sued to force New Jersey to contribute to the plans when Todd Whitman was governor and the State Supreme Court said that the Eleventh Amendment to the Constitution protected the state from being sued, and that the court could not compel New Jersey to contribute to the plans.
As a remedy in New Jersey, in the pension reform bill passed under the Christie administration, the State explicitly agreed to subject themselves to suit if, in the future, the executive or legislative branch refused to fund the pension plan.
I worked for the State of NJ briefly. The state never makes required payments. My 401k...nice company match now.
Pension doesn't flow into your estate. You die, only your spouse gets a portion of what you got depending on your survivorship. Your 401k plan will flow to your estate. Whatever you don't spend can be picked up by your kids.
I heard someone complaining about estate taxation and it sounds criminal.
I heard someone complaining about estate taxation and it sounds criminal.
I think that present federal estate law, which is a moving target, exempts the first 3.5 million from estate tax and New Jersey exempts the first $660,000 from state estate tax.
Its really a trick question, because if you don't know how long you are going to live you have no idea how much to spend.
I guess the prudent thing to do would be to turn your 401k into an annuity, which would then, functionally, give you a defined benefit for life, or, in other words, a defined benefit pension plan.
Interesting conundrum.
The progression in my career has been: traditional defined benefit plan to cash balance plan to 401K with generous match to 401K with less generous match to 401K with no match.
Again I can be completely wrong but I thought I've read around that ballpark on multiple occasions.
Best bet is to hold onto 401k as long as you can until you absolutely need it, then take minimum distributions at 70 1/2.
If you need it earlier than 70 1/2, you want to take minimum draws...only what you need.
The game never changes, only the players. In a globalized world, you have a lot more players to compete with.
Yep, that, in a nutshell, is the bottom line.
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.
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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.
My mom is 80 and in her 46th year of teaching at a community college. She has no plans to stop working. Of course, she has that work ethic of America in the 1950s, and thinks you should work as long as you are physically able to do so. But if she had a defined benefits plan like I do in CA, she would have reached the maximum benefit years ago.
So, every new "idea" they come up with solves one problem but creates another one. If my mom had my plan. she would have retired ten years ago and would have been replaced by a younger teacher making half her salary. So, the taxpayers are still on the hook: it is just in salary instead of retirement. And there is some young woman out there who doesn't have the job she was trained to do because my mom is still working.
with the big stock run the last 30 years, there is no reason for any public retirement fund to be in financial straits other than mismanagement
Allowing the NFL to be a non-profit. That is a mistake.
Religious organizations tax exempt - that is a mistake.
Allowing a hard working middle class family to attempt to sick away money over the course of their life, which amounts to what some people make in a month in this country -- is the LEAST you can do to cut a square deal
matt, please explain why allowing the NFL to be a non-profit is a mistake with regards to taxes.
It already has. Anyone born after 1959 has to wait until they are 67 to receive full Social Security benefits.
A bunch of studies have found that, even with the recent recession, many people have 65 as their target retirement age.
A bunch of studies have found that, even with the recent recession, many people have 65 as their target retirement age.
That's not the mindset of an increasing number of people. Over 30 percent of people between 65-69 are still working, and that number has been trending up for decades.
More Older Americans Working - ( New Window )
Target and reality often fail to meet when the person hits the target age.
Pensions are a wonderful idea, but not in 2014 and beyond.
I don't know anything about the plan or the company you reference, but terminating a plan does not end the plan sponsor's withdrawal liability. If in fact a plan is 50% underfunded and the plan sponsor is financially viable, they will be on the hook for the unfunded liability, liability which typically runs into multiples of millions of dollars.
Federal courts are highly intolerant of entities shirking their obligations to fund pension plans. More so, those courts have been known to find parent corporations, subsidiary entities, and, occasionally, majority shareholders in closely held corporations liable under ERISA.
I have recently seen, specifically, in the coal industry, a corporation that tried to spin off its pension and health care liabilities to a new entity get banged over the head to the tune of hundreds of millions of dollars in withdrawal liability for doing so. If you want, I can find the circuit court opinion, which I recall was the 7th circuit.
I understand that the when the public hears that a plan has been "terminated" they think the employees are going to get screwed, but that generally is not the case. Even when a company goes bankrupt the PBGC, under very specific formulae, picks up the lions share of the pension obligation.
Again, I don't know the particulars of the situation you cite, I'm just talking about the generalities of withdrawal liability and what normally happens when a pension plan is terminated while being grossly underfunded.
Pension plan termination really means that employees will no longer accrue additional benefits going forward, but the promises of benefit accrual in the past are legally enforceable, and woe to the entity that attempts to get out from under their obligations.
I'm a corporate bankruptcy lawyer, and I see underfunded pension funds routinely. I would trust a 401k fund controlled by me before a defined benefit pension plan any day.
The act of saving is one that is itself beneficial in my view. Beyond that, investing in diverse equities over a long period of time consistently outpaces any other investment. I have my kids 501 accounts in S&P index funds too; the S&P consistently outperforms 90% of all mutual fund managers.
I'm a corporate bankruptcy lawyer, and I see underfunded pension funds routinely. I would trust a 401k fund controlled by me before a defined benefit pension plan any day.
The act of saving is one that is itself beneficial in my view. Beyond that, investing in diverse equities over a long period of time consistently outpaces any other investment. I have my kids 501 accounts in S&P index funds too; the S&P consistently outperforms 90% of all mutual fund managers.
401k's are great for all Americans in the top, say, 20% of wage earners. For the rest, not so much.
Would you agree with that statement?
Ouch. Point made
There are a lot of poor people in America for whom a 401(k) is about as likely a prospect as a Lexus December to Remember event.
I don't really feel like educating you further cause I'm tired, but US gov't bonds are historically a great investment (especially when accounting for risk, as these low-income individuals presumably are doing). If you own a target date retirement fund, you probably own (and benefit from) some yourself.
Disposable income needed to save for retirement is sorely lacking in the bottom 80 or so percent of earners.
Avoid the clap.
What advice are you looking for exactly?
I am Clap free and going strong!
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.
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.
* 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.
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.
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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?
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.
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In comment 11497951 Rick5 said:
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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.
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.
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.
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.
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.
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.
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.
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.
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.
I think that figure is per household/couple.
I cannot envision needing twice that amount per household, although I'm just guessing here.
* 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?
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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 )
I really don't feel like sitting on the phone for 30 minutes with each site.
Now I just need to figure out Schwab.
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In comment 11497527 UConn4523 said:
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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
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In comment 11497550 mattlawson said:
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In comment 11497527 UConn4523 said:
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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.
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.
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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.
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 )
I'm assuming you invest it and get an average return of 7%, which is very doable over a long period.