It’s been a while since I’ve sat down and written like this, but sometimes you just need that spark or that something that just gets you fired up enough that won’t fit in the limited space on Facebook to sit back down and go at it again. After reading THIS ARTICLE yesterday entitled “The 401(k) Crisis is Getting Worse”, I got just the spark I needed. I encourage you to take the time to read the article before reading this if you can since I won’t be touching on every piece of it here, but I do want to highlight some things not only about this article, but about the overall misunderstanding of the current state of retirement options and the choices people make with them. I’ve read way too many articles recently about this and heard too many politicians discuss how badly we need to fix this that I need to bring some common sense back into the conversation. Let’s jump in.
“Tim Egan has been working since he was 14. He’s now 56 and has spent most of his career as a restaurant manager. He has virtually nothing saved for retirement and, until last month, never had a 401(k) account.
Little wonder: Only two of the 20 restaurants where Egan has worked in the past four decades had retirement-savings plans.”
So the article starts off with a heart warming story about a guy who has worked in the restaurant business for 42 years now and has very little in retirement. The article implies that the fact that most of his employers never offered any sort of retirement benefits, such as a 401(k) or similar plan, is the excuse why. The article goes on to say that our man Egan did finally set up an IRA in his 40’s when mistakenly most Americans actually start to think about how they’re going to afford retirement one day.
“Egan set up an IRA in his 40s. In a bid to make up for the years he hadn’t saved, Egan invested mostly in equities and lost a lot of his savings during the financial crisis. He currently has less than $20,000.”
Excuse #2: He invested in equities (mostly stocks which have more potential for gain while also holding a greater potential for loss) and equities took a dive back in 2008, so now he is only left with under $20,000. The problem with this scenario is that if he left his investments alone during this time, as any uninformed investor should do, he would have gained all of his money back plus an additional 30% from the previous peak back in 2007. Overall during the last 10 years had he invested in a boring S&P 500 Index fund, he would have averaged roughly 7% annual return during this time. If he has less than $20,000, it’s because he either only saved about $125/mo over this time or he tried timing the market on his own rather than leaving it invested and letting it do its things. I’m not bashing anyone who “only” saves 125/mo. because especially for young people, that’s a great start. However when you’re 40 and haven’t saved anything up to this point, you can’t expect miracles to happen.
The only “crisis” we have on our hands when it comes to retirement and accounts that are offered has nothing to do with what employers offer, but with the choices employees and Americans make and how they decide to use their money. Many young workers in the workforce (under 40) are too busy worrying about getting the bigger house, the bigger truck with a 6 year, $500/mo. note, and other toys. If you ask most of these people, they’ll either tell you they simply can’t afford to save or if they’re honest, they’ll tell you they just don’t care to. Retirement to them is so far down the road that they’ll have plenty of time to catch up and worry about it later. And if they’re of the liberal mentality, the government will take care of them (I pity you). So with that, I want to address three things I think we need to realize as a society that are COMMON SENSE solutions.
- A 401(k) account isn’t a retirement savior. Quite frankly, most of them suck.
The exception to this rule is if you have a 401(k) where your employer makes a matching contribution. I’m always amazed at individuals at workplaces who offer 401(k) with a X% match, and yet they aren’t investing anything into it. These people fail to realize that even if you invest the minimum X% to get the full match, YOU’RE MAKING 100% RETURN ON YOUR INVESTMENT! You can’t do that anywhere else you put money. You don’t have to invest it in anything at all just sit it in a Money Market fund, and by the time you’re done contributing, you’re money will have doubled. If you’re one of those people whose company offers a 401(k) with a match and you aren’t AT MINIMUM contributing to get the full match, shame on you and go straight to HR ASAP and get this changed!
The problem with many 401(k) offerings is that there’s a limited number of funds offered to invest in. At my employer, I would guess without looking that there’s about 20-30 funds I can invest in. Considering there are literally thousands available, this is pretty ridiculous and limiting. Also, with a 401(k) you don’t get to decide what company to invest with, meaning you have no say over fees. With my 401(k) company, a Retirement Date Fund has an expense ratio (annual fee) of about 0.63% of your account total. Other companies, such as Vanguard which is known for lower fees, would allow me to invest in a similar Target Date Fund for about 0.18% fee. These numbers may seem so small that they make no difference, but if you do the math (as I have), you’ll see that over a 40 yr saving period, this could mean upwards of $100,000 dollars difference between the two accounts simply because one took 0.5% more in fees than the other (assuming returns were even).
Personally, I invest the minimum amount in my companies 401(k) to get the matching contribution, and I invest the rest into a Roth IRA account with Vanguard. I like their funds offerings and low fees which makes them a more feasible place for me to put my money. Plus, if I ever left my employer, it makes no difference to them since it isn’t tied to my job. I could invest it somewhere else like TD Ameritrade which has THOUSANDS of investment offerings, but I personally choose to keep mine simpler. This brings me to my next point.
2. Well if 401(k)s aren’t retirement saviors, then what other options do I have?
As far as retirement options go, if your company doesn’t offer a 401(k) (or at least not a good one with matching contributions), then you have a few other options to choose from. Without going into too much detail, the two most popular are your IRA and Roth IRA. The difference between these two is how they’re taxed. Most of the time whenever you leave a company that you had a 401(k) with, if you can’t roll it into your new companies 401(k) then you’re best option is to roll it into an IRA. A person can open up either of these accounts at virtually any bank or online broker. I’ve already mentioned that I invest mine into a Roth IRA account at Vanguard, but for a lot of people I recommend online broker TD Ameritrade as well.
3. Regardless of where you save, YOU HAVE TO SAVE!
The chart above tells a beautiful story of how fast your money will grow whenever it isn’t being saved. The biggest problem we have in regards to retirement today isn’t the account types that are offered, but it’s the decision making and responsibility of individuals who aren’t taking it upon themselves to be prepared to retire some day. I have to go back to the story a second…
“The current 401(k) system was designed for a workplace that doesn’t exist for most people: lifetime careers at big corporations that offer benefits,” says Teresa Ghilarducci, an economist at the New School who researches retirement policies. “Saving consistently — which you need to do for just a modest retirement income — isn’t remotely likely.”
And that mentality right there is our problem. Saving isn’t a high enough priority for us. Whenever we sit down with our newlywed (or by ourselves) and look at how much we’re bringing home each month to decide how much house, truck, boat, etc. we can buy, saving is one of the last things mentioned. Instead, the mentality must change to where saving is the first thing you do. The best way to do this is to go to your HR at work and setup a payroll deduction for savings so that the decision is already made before it ever hits your bank account. This way you aren’t tempted to use that money elsewhere.
I could really go on for days about this topic, but the point of it is that we aren’t having a retirement crisis because we don’t have options of places to put money, but rather we have a crisis because individuals don’t do their homework and investigate this like they should. People today don’t think long term enough and consider the importance of saving for retirement. Quite frankly, people don’t think short term enough to save money for an Emergency Fund or buy life insurance for their families. When people put these items at the bottom of their priority list, then of course it will eventually catch up to them and the struggle will ensue.
Other Thoughts and Solutions:
You may be thinking now, “Ok so I’m supposed to be saving for retirement, but how do I do that? Where do I go? And really, how much am I supposed to save?” As far as how much to save, a good rule of thumb is 10% of your income. If you can’t achieve that immediately, at least contribute the minimum needed to get a full match in your 401(k), or start out with about 2-4% automatic payroll deduction. Once you feel comfortable with that, gradually increase it until you reach 10%. My recommendation would be not to stop there though and strive for 15% if possible. A lot of factors play into this though such as other debts you may have and the interest you’re paying on those debts. And as far as where to invest it, I would suggest an IRA or Roth IRA at a reputable broker such as TD Ameritrade, Vanguard, Charles Schwab, etc. or if you don’t feel comfortable enough to make these decisions on your own, seek out a financial planner in your area.
One last thought I want to touch on is in regards to taxes and how they affect your savings. Currently, we have plans like 401(k) and IRAs which allow you to defer taxes until retirement as incentive to save more today. Roth IRAs do the opposite where you pay taxes today and don’t pay them in retirement. There’s a lot of calculation that goes into these decisions that is necessary due to our current tax code. If our current tax code were simplified to either a flat tax or consumption-based tax, this would eliminate much of the confusion of which account type to choose. If a consumption based tax were introduced, you would essentially receive your full paycheck without all the deductions, meaning more money in your pocket on payday. This for many people would make saving a whole lot easier since they have the full amount to begin with. If the government truly wants to incentivize saving, they first need to address the tax code.
This is a subject I love to discuss with individuals so feedback is very much welcome. I’ll include some informational links below to also help anyone in their quest to make better money decisions for their future.