You wont be retiring

Growing up I thought I understood the strategy of retirement. I couldn’t count on Social Security benefits getting me through my golden years. So, once I entered the workforce I would need to invest a significant percentage of my income in stocks and bonds through a 401(k) or other kind of tax shelter.

Well, Time magazine has come along and dashed that fantasy:

… the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that’s little help for those who retired — or were forced to — during the recession. In a system in which one year’s gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That’s because in your early years, your 401(k)’s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market-exposed it becomes. It’s a twist that breaks the most basic rule of financial planning.

401(k)’s replaced a tried and true system of employer provided pensions. As a reward for years of loyal service to your employer, they kept paying you a percentage of your retirement year’s pay until you kicked the bucket. As the Time article points out, most people will never get that kind of security from a 401(k):

If Occidental had stuck with its pension plan, Lucantonio might not have to work. When he retired, he had a salary of nearly $80,000. That means he would have received a pension check of about $3,100 a month. It would be nice if 401(k)s could produce a guaranteed check as pensions do. But most 401(k)s don’t generate enough income, and Lucantonio’s is no different. He retired from Occidental with $350,000 in his 401(k). That’s a hefty sum, but he can withdraw just 4% of it annually, or about $1,200 a month, to limit the chances of outliving his money. That’s 60% less than what the traditional pension would have paid him.

Like most defective features of our society, our broken retirement system was borne out of corporate greed. Pensions are very expensive for companies to pay and maintain, so shifting the burden to employees made a big difference for the Bottom Line. Employees bought into the idea because 401(k)’s weren’t tied to your employer, so hopping from job to job wouldn’t jeopardize your retirement savings.

We can pretty much rule out a voluntary move back to pensions, corporations won’t pay for it. But there is hope. Health care reform has been tough because it mainly benefits younger poorer people who aren’t a powerful voting bloc. Old folks on the other hand are a mighty constituency, so I wouldn’t be surprised to see some movement toward a government solution to what looks to be a looming retirement disaster.

5 Comments

  1. JM

    1) I don’t think our generation would buy into pensions because that essentially means tying yourself to a company. The current phenomenon is to keep it mobile.

    2) Just selecting the default options on a 401k will put you in greater risk than investing in indices. Despite the troubles recently, the S&P 500 is still 10x higher than it was 26 years ago and has returned about 9.5% on an investment made since then.

    3) You said: younger poorer people who aren’t a powerful voting bloc. Old folks on the other hand are a mighty constituency.

    Why? Because the Olds actually vote. The post-83 generation is actually larger than the Boomers and we would be a tremendous voting bloc if we actually went out and voted. The President is the figurehead but the important place to target is Congress. Midterm elections only get a minuscule turnout (something around 30% or less I think) so we could very easily shape a future Congress to our ideals if we so chose.

  2. Ian

    “Like most defective features of our society, our broken retirement system was borne out of corporate greed”

    Is that really the case? Or do they do it to remain competitive? If a corporation goes under, that’s a lot of jobs lost. Maybe the problem is capitalism?

  3. Jordan

    Maybe the problem is capitalism?

    Or at least the American version of it. If we want the social safety net that Europeans have (health care, retirement money, employment) then we have to be willing to sacrifice for it as a society. For some reason we got it in our heads that we can have permanent corporate / profit growth, low income taxes, and cheap anything. I think the fractures in that logic are becoming more exposed every day.

  4. Good post and interesting comments! You’re right, of course. However, to think that the European system is any better (as Jordan apparently hopes) is, in my view misguided. The result is a HUGE, costly, and annoyingly pointless bureacracy.

    The fact is, in my opinion, that those in a position of power do it (fairly logically) for THEIR OWN benefit and almost NEVER for the benefit of the people as a whole, although they may kid us (and even themselves?) that it’s otherwise.

    Republican capitalists (Conservatives in the UK) Care there to make profit for themselves, Democrats (socialist in the UK) are there to shove huge rainforests worth of paper around and increase their own sense of self importance.

    One thing’s for sure, whoever they are and whatever they do, by far the largest proportion of politicians are there to serve themselves and if Joe Public gets a few scraps out of it he’s darned lucky and it’s usually by accident!

    By the way, I like this site (found it from Info Ink) and linked to it…

  5. Chris

    Quin,
    Thanks for stopping by and commenting. I’ve added your site to my Google Reader (and the sidebar here). I’ll definitely be using it to keep up on the worrisome news out of the UK.