How much money is in your 401 (k) or similar DC plan?

[OttoVonBismarck]

We can quibble about "most" but I'm in the rare position of disagreeing with you here Yi and being in agreement with DGuller and Jacob in general here.

Alright, so here, and here is a list of bad statistics about retirement savings in America. In particular:

• 21% of employees covered by 401k plans choose not to participate
• Average account balance for people aged 55-64 is $70,000

There's serious problems afoot, the first large generation of people who have mostly been either partially or not at all covered by traditional db pension plans and instead should have been saving in IRAs and 401ks are starting to retire. What they are mostly finding out, is hey guess what, 1-2 years salary saved at age 65 isn't enough to live on for more than maybe 3-4 years if you cut back to subsistence levels of living and take social security. So they aren't retiring, they're probably going to be involved in some low level of working for a long time. This is also part of the reason we now have a "lost generation" of young people. The "Millenials" who graduated college from 2008-2010 had one of the lowest rates of first time job placement in a professional path of any generation we've ever graduated from college. What we've seen since then, is those people are not being given a chance to make up for it. Instead employers have basically "skipped them." When employers started hiring again, they went for the new college graduates, not the 2008 college graduate who got very unlucky and missed that key hiring window after graduation because of a shitty economy. Part of the reason it was so rough for them is so few people who traditionally would have retired were actually doing so. Some of the ones who had saved a decent bit lost so much in the market crash they had to continue to work, but most had never saved much in the first place and simply were not able to retire.

I'm going to make a lot of assumptions, but this is an accurate "ballpark reflection" of what needs to happen if you're an average American.

Posit this: 25 years old, you make $50,000 per year, you salary roughly increases with historical inflation rate, and you contribute 6% of your income to a 401k that your employer matches at 6%.

After 40 years, you're 65 years old and decide to retire.

You will retire earning about $108k a year (that's basically inflation rate raises, not any real disposable income increase.) You'll end up, with historical average returns (assume you dumped everything in a index fund of the S&P 500 or something), a 401k balance of almost exactly $2m ($2.035m or so.) Let's say you do the simplest thing possible and convert it to a 4% annuity (at time s in the past few decades that'd be a low annuity yield but right now it may be high, I haven't looked into annuities personally but my parents have one from the 90s with obscene yield compared to today), let's also say you go with a fixed annuity of 35 years because you either don't want to live past 90 or don't care what happens after then. That means your annuity payments are around $104k a year and it's all gone in 30 years, and you also of course get social security.

So you actually most likely retire and get a pay raise from your annuity + social security. As you age your annuity income gets less relative to cost of living increases but your social security will go up gradually with COLA. So most likely you end up okay. [Reality is you wouldn't convert your entire savings to a fixed annuity, you'd go for maybe a part fixed annuity, part variable annuity that has market growth potential with minimum income riders, or you do part fixed annuity, keep part in the stock market or whatever.]

The guy in my scenario did ok, and he still ends up with exactly what he needs. But in all reality he should have been contributing 10-15% for a few reasons. The biggest one is that outcome posits "average market returns." There have been sliding 30-40 year windows (equivalent to a career length) where the market hasn't hit the average return people point to from 1929-Present. I read an article the other day where a guy said you should assume no better than a 4% return over your career. That reduces our guy's 401k balance to $800k, which changes his situations substantially. But if he was contributing 15%, even in that bad market scenario he still gets to retire with $1.5m--which may be enough. It would mean probably a minor pay decrease instead of a pay bump at retirement, but he could probably get buy. At $800k total savings it's questionable.

People with a few hundred thousand in 401k plans are so far off that it's basically a joke. If you're 65 with $100k in your 401k just cash it out and go on a fancy vacation and then move into the poor house, because you're fucked anyway.

[Caliga]

What scares the shit out of me are people like my sister-in-law who don't understand the concept of saving money.... she makes peanuts, but whenever she does get money she blows it immediately on frivolous shit (yay! tax refund time!  time for a new widescreen TV! )  I'm guessing she'll end up begging Princesca and I for handouts eventually once her parents are gone and can't provide them anymore.   It seems like there are a LOT of people out there like her.

[OttoVonBismarck]

I actually should correct something (aside from all the typos), my scenario where the guy ends up with $2.035m is based on a return of 8%. That itself is less than historical average but is roughly the historical average of a 60/40 stock/bond split. If you want to assume the S&P 500 historical returns persist through this guy's career and he invests fully in that, his end balance would be $4.4m at a 6% contribution rate (with 6% employer match.)

I personally think 8% is a "best case scenario you should realistically expect", and 4% is "what you should plan for because who knows what will happen." If yields are much lower than 4% for your entire career I don't really know that there is much you can do, maybe you have to put money aside and do riskier investments like real estate or something to try and burn your own path. I don't know that the average American can retire at average savings, employer match and etc rates if the market yields less than 4% during their working careers.

[Admiral Yi]

We can quibble about "most" but I'm in the rare position of disagreeing with you here Yi and being in agreement with DGuller and Jacob in general here.

Alright, so here, and here is a list of bad statistics about retirement savings in America. In particular:

• 21% of employees covered by 401k plans choose not to participate
• Average account balance for people aged 55-64 is $70,000

"Only 42% of private sector workers age 25 to 64 have any pension coverage in their current job. That's lower than the 50% who had pension coverage back in 1979."

I agree that 21% non-participation by 401k eligible employees is a huge number, but it seems to me if we're looking for the drivers of low retirement balances, the one above swamps everything else.  Although IMO the results in both links are compromised by excluding IRAs.

[alfred russel]

If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

[OttoVonBismarck]

If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

Yeah, problem is that doesn't really work. If you actually do that to a point it would it basically impoverishes working people to give old people a 20-25 year retirement living at a guaranteed level of comfort. It only worked for a period of time before life expectancy shot up and before we quit having so many damn kids. There is a reason even Euroweenie countries have tweaked their systems, Sweden has defined contribution variable benefit which is simply the only system that might have broad applicability and would enable a country with an aging population and declining birth rate to actually keep such a scheme afloat. Then there are other approaches, Norway has a sovereign wealth fund that backs up its pensions, which is basically a really big state owned mutual fund that is worth like $700bn. However, much of the holdings are related to the Norwegian energy industry, so tis not an option for countries that don't fit the Norwegian mold (very small population, large oil reserves.)

[alfred russel]

If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

Yeah, problem is that doesn't really work. If you actually do that to a point it would it basically impoverishes working people to give old people a 20-25 year retirement living at a guaranteed level of comfort. It only worked for a period of time before life expectancy shot up and before we quit having so many damn kids. There is a reason even Euroweenie countries have tweaked their systems, Sweden has defined contribution variable benefit which is simply the only system that might have broad applicability and would enable a country with an aging population and declining birth rate to actually keep such a scheme afloat. Then there are other approaches, Norway has a sovereign wealth fund that backs up its pensions, which is basically a really big state owned mutual fund that is worth like $700bn. However, much of the holdings are related to the Norwegian energy industry, so tis not an option for countries that don't fit the Norwegian mold (very small population, large oil reserves.)

The tax cost of retirement plans is very expensive--if those were redirected to social security the math of the program would be quite different.

I also don't agree that social security doesn't work.

[OttoVonBismarck]

Okay.

[Admiral Yi]

The tax cost of retirement plans is very expensive--if those were redirected to social security the math of the program would be quite different.

I dunno Fredo.  Average 20% income tax rate on c. 10% of earned income, only for those who are in retirement plan is not going to finance a lush retirement, particularly when we hit the Baby Boomer trough and each retiree is mooching off of 1.5 workers.

It would also put a big dent in national savings.

[alfred russel]

Okay.

I was hoping you would look into the math for me. 

[Sheilbh]

My 401k has one of those age geared mixed funds too, as a default.  Don't want to think about it, just let it go there.  No big deal.

We're introducing an automatically opted-in national pension fund aimed at low-wage earners right now. I think they're going to have age based investments. They did a lot of research into the issue and it was quite interesting. They're being ultra-conservative with young people's money, for the first five years or so. Apparently young/new savers are really discouraged if they see their money suddenly fall. They're more likely to wonder what the point is and just opt out. So it's five years of conservative investment, then 30 years of varying risk and a few more conservative years at the end.

[MadImmortalMan]

If you want to make sure people have enough money in retirement, enhance social security so that happens. End all the 401k and IRA plans and use the tax money saved for social security. You would need to grandfather existing contributions to IRAs and 401ks into the new world to keep from screwing people over.

I support doing this plan. In roughly thirty years. 

[MadImmortalMan]

In theory that is great, but in reality most 20 year olds are going to have several stretches of serious hardship before they hit 65 (illnesses, prolonged unemployment, elder care, maybe even just the birth of a child, etc.).

And when they get back on track, the contribution limits keep them from being able to catch back up.

[Malthus]

In theory that is great, but in reality most 20 year olds are going to have several stretches of serious hardship before they hit 65 (illnesses, prolonged unemployment, elder care, maybe even just the birth of a child, etc.).

And when they get back on track, the contribution limits keep them from being able to catch back up.

In Canada, at least, the contribution limit is cumulative. But employer-matching doesn't increase it. Hence my surprise earlier in the thread at Sav having $600 K in his fund - in Canada, this would be impossible at his age without wild luck in one's investments.

[KRonn]

I started putting money into investments and retirement plans in my mid to late 20s, and I kept that up in some way all my life. Either through my own IRAs, a company 401k, plus other savings. Now at 60 I'm glad I did, as I can look forward to retiring in a few years with a lot less worry. I'm so glad that I saved, and wish I had done more.