Author Topic: The 401(k): Americans ‘just not prepared’ to manage their own retirement funds  (Read 4195 times)

the fixer

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This is just sad. The 401(k) is an amazingly useful rope, as long as you don't hang yourself with it.

http://www.washingtonpost.com/business/economy/the-401k-americans-just-not-prepared-to-manage-their-own-retirement-funds/2012/04/03/gIQAnQV1uS_story.html

The example of someone only saving 6% with a 3% match during their entire career and winding up with a whopping $320k is awful. And then on page 2, they cite a 2007 study showing workers nearing retirement had about $78,000 saved.

arebelspy

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The example of someone only saving 6% with a 3% match during their entire career and winding up with a whopping $320k is awful.

The person doing that (6% + 3% match) is pretty darn close to doing what the traditional advice is (10-15% gross towards retirement .. he's doing 9%).

That just tells me the traditional advice needs to change.  Instead of telling people 10-15% (knowing people will always do the minimum, or a bit less even), the advice should be 20-30%.

That won't get them an early retirement, MMM (or ERE) style, but it'll at least get them a retirement.  Unlike this silly 9% nonsense.

The standard needs to change, people need to start hearing 20-30% in the mainstream.  Because the stories like your article above are all too common, sadly.
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sol

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The example of someone only saving 6% with a 3% match during their entire career and winding up with a whopping $320k is awful.

The person doing that (6% + 3% match) is pretty darn close to doing what the traditional advice is (10-15% gross towards retirement .. he's doing 9%).

That just tells me the traditional advice needs to change.  Instead of telling people 10-15% (knowing people will always do the minimum, or a bit less even), the advice should be 20-30%.

I'm not so sure.  That quoted 320k smells bogus to me, because they don't tell you how it was arrived at.  Any web retirement calculator will tell you that if you make 50k and save 9% and work for 40 years, even a conservative portfolio will top out at close to a million dollars.  That 320k number must assume really terrible returns, or a short working career, or both.

I think the traditional advice is perfectly sound, for people who work between the ages of 22 and 62 and expect their retirement nest egg to provide something less than 100% of their full retirement salary.

AJ

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The example of someone only saving 6% with a 3% match during their entire career and winding up with a whopping $320k is awful.

The person doing that (6% + 3% match) is pretty darn close to doing what the traditional advice is (10-15% gross towards retirement .. he's doing 9%).

That just tells me the traditional advice needs to change.  Instead of telling people 10-15% (knowing people will always do the minimum, or a bit less even), the advice should be 20-30%.

I'm not so sure.  That quoted 320k smells bogus to me, because they don't tell you how it was arrived at.  Any web retirement calculator will tell you that if you make 50k and save 9% and work for 40 years, even a conservative portfolio will top out at close to a million dollars.  That 320k number must assume really terrible returns, or a short working career, or both.

I think the traditional advice is perfectly sound, for people who work between the ages of 22 and 62 and expect their retirement nest egg to provide something less than 100% of their full retirement salary.

I'm not sure what calculation they are using, but I plugged the $320k into an inflation estimator and it came to almost $1m in 2052. So, maybe they're saying you'll end up with $320k in spending power.

the fixer

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In the end in a different calculation they use an assumption of 4% average return on investments in a retirement portfolio. That seems REALLY conservative to me. I agree the $320k number is a bit shady since few of the inputs are given for the calculation, but that's what I expect from a newspaper.

What's really striking is even if 10% savings rate is safe, people aren't following the advice properly if their balances are really low. I think there are lots of contributing antimustachian factors (people taking loans against their retirement, high expense ratio mutual funds, poor choice of investments, chasing performance, ...) It just fits the theme that in the mainstream consumer lifestyle, even a late retirement isn't really possible. The 401(k) is DIY retirement so if you don't know what you're doing you'll be in trouble.

arebelspy

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I'm not sure what calculation they are using, but I plugged the $320k into an inflation estimator and it came to almost $1m in 2052. So, maybe they're saying you'll end up with $320k in spending power.

This.  When people think 320k, they think in terms of today's dollars.

Sure, you could take a 50k salary and save 9% and in 40 years get a million.. but by that time, a million will have the same spending power as that 320k.

Or, to put it in reverse: the person retiring now with 320k likely didn't make 50k avg over their career, which started 40 years ago.  Likely their beginning salary then was closer to 5-8k/yr.  So they run a retirement calculator back then, and see they'll have 320k, and that's amazing, but 320k in today's dollars isn't that great.  Back then, it would have been.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

TheDude

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I just went back and watched a Frontline story on the 401k system. They profiled someone who once had 120K (their goal) in their 401K and then they watched it drop to 52K and then he retired. He pulled it all out at once and says he ended up with about 26K.  WTF!

Some people need to hire professionals. People tell me I should do something with financial planning and I always say my investment portfolio is so damn simple (I believe in a balanced portfolio with low low expenses) that I wouldn't feel right charging people. But dang I guess there are some people who really have no idea.

velocistar237

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[I'm not sure what calculation they are using, but I plugged the $320k into an inflation estimator and it came to almost $1m in 2052. So, maybe they're saying you'll end up with $320k in spending power.

Articles use present dollars or future dollars depending on the point they want to make. Want to stress that you should save more? Use future dollars for positive encouragement or present dollars for negative encouragement! Oh, and you can save $200K if you pay your mortgage off early, so you should do that! Or you'll only save $30K if you pay off your mortgage early, which won't beat investing, so you should do that instead!

I respect MMM for consistently using present dollars.

the fixer

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Some people need to hire professionals. People tell me I should do something with financial planning and I always say my investment portfolio is so damn simple (I believe in a balanced portfolio with low low expenses) that I wouldn't feel right charging people. But dang I guess there are some people who really have no idea.

I have thought about this too but feel the same way; it just seems so wrong to charge people to tell them what they could have read online for free. But the bigger problem is that it's not enough; you can advise someone what's good for them financially (buy and hold, limit debt, don't buy one car per member of household) but ultimately it's up to them to listen to you. I know a family member who went against their financial adviser's advice not to buy a second house and regrets it now.

So the only options are to successfully, fully educate a person to be an intelligent independent investor, or to take their money away from them and manage it yourself (like pension funds, annuities, social security). Neither would be as easy or elegant as I'd like at a larger scale.