401K program discussion

[tbvvw]

I love the freedom and personal responsibility behind the 401K and have been participating for 19 yrs, however, almost everything I'm reading these days on current retirement planning in the US tells me we are heading towards a huge cliff with incredible implications:

1) Size of baby boomer generation
2) People living longer, cost of HC in old age
3) People not participating in retirement programs
4) People underfunding retirement programs
5) Stock market fluctuations
6) Unable to self-manage funds
7) Bad advice, not able to understand future cost/standard of living
8) SS instability
9) etc,

...all equal up to some chilling statistics on what the average American has saved up / is saving up for retirement. Google for articles and metrics. Granted that traditional pension funds suffer from issues of mismanagement and insufficient future funds too, however I am of the humble opinion that the American 401K experiment is failing miserably and will conclude in a significant portion of the future 55+ demographic not having anywhere near the means to survive as they were accustomed to. Did I mention 401K programs generate $180M a day in fees?
Happy times!!

FWIW - my father retired 20 yrs ago after 35 yrs as a state university professor, he died 6 yrs ago. My mom gets his full pension for the rest of her life, plus SS = $6800/mo. And very good HC benefits. She has zero debt plus her own pretty decent savings. I checked the health of that pension fund and it's OK. My in-laws 2 combined pensions are even better. I get the feeling that in the near future we'll be refering to that scenario as the "good 'ol days".

Thoughts?

[dunhamjr]

would a pension have been nice but never worked where i would have one.

i agree that 401ks aren't quite the answer. but in the age of not having pensions its one of the best ways to save. a big issue i see with 401k's is that LOTS of people who are offered them do not contribute, even when a company match is provided.

i save a good % of income to my 401k. but i also put money in an ira, roth and have a rental property. not to mention the luck of an eventual inheritance.

as for your information about fees etc... $180M a day in fees for 401k's is a lot. but what percentage is that compared to 401k assets?

but now. how waht are the fees seen per day in ira's, roths, brokerage accounts... etc.

or if you added up the fees for all the pensions in the country, what would that number be per day? or by percent of assets.

[tbvvw]

The fee stat was just something I read today in a Fidelity report...not a big deal compared to total assets...

However, the big issue is that pensions were administered by CorpUSA and they took the brunt of the responsibility. Then 30 yrs ago they shifted 100% of the risk and responsibility to the employee...and the US employee population, based on # of total 401K user accounts and $ per account will not pay for people's retirement. Not enough employees have joined, not enough pay a respectable enough % into their accounts. Factor in HC costs, housing costs, cc debt, salary stagnation, unemployment, etc, etc...and the perfect storm is being created.

[tjl]

Many defined benefit pension plans at companies and governments are in poor shape due to past underfunding due to unrealistic investment return assumptions (and probably also underestimation of medical care cost growth in the case of retirement Medicare supplements). Yes, it is the company or government who is responsible to bail out an insufficiently funded pension plan, but the company itself may go bankrupt, and governments are under pressure from taxpayers who resent having to pay more taxes to get less government services, with pension recipients being the current favorite scapegoat.

In other words the same problem of people not saving up for retirement on their own in 401k plans is not all that different from companies and governments not saving up enough in their defined benefit pension plans for the retirement of the employees that they promised pensions to.

[tbvvw]

In other words the same problem of people not saving up for retirement on their own in 401k plans is not all that different from companies and governments not saving up enough in their defined benefit pension plans for the retirement of the employees that they promised pensions to.

Edit: There is a clear difference:

According to several reports I read, the main cause of the underfunding at most company/govt pension funds does not appear to be a failure to make contributions to the plans. It is due to the fact that investment markets have not performed well for a sustained period.
As for 401K funds, it is a combined lack of contributions and poor market performance.

[GeoffD]

The problem with a conventional 401-K is that the money you pull out of it at retirement is taxed as regular income. If you are diligent and build up a nice portfolio, it will be used against you when calculating your Social Security benefit. Unless you have a corporate match, a conventional 401-K or IRA is likely a sucker play. You want the bulk of your retirement savings to be after tax.

Today, I'm doing a Roth 401-K with after-tax money up to the corporate match. All my other savings and investment is done with after tax dollars. When I get there, I don't want 401-K and IRA distributions taxed as regular income to chew into my Social Security distribution.

[dunhamjr]

The problem with a conventional 401-K is that the money you pull out of it at retirement is taxed as regular income. If you are diligent and build up a nice portfolio, it will be used against you when calculating your Social Security benefit. Unless you have a corporate match, a conventional 401-K or IRA is likely a sucker play. You want the bulk of your retirement savings to be after tax.

Today, I'm doing a Roth 401-K with after-tax money up to the corporate match. All my other savings and investment is done with after tax dollars. When I get there, I don't want 401-K and IRA distributions taxed as regular income to chew into my Social Security distribution.

Can you explain/show proof this is what happens? Because if I am reading what you wrote correctly, it goes against everything I have read.

[GeoffD]

Can you explain/show proof this is what happens? Because if I am reading what you wrote correctly, it goes against everything I have read.

Right now, the only thing that happens is that most of your Social Security benefit becomes taxable if you're taking a reasonable-sized 401-K distribution.

For my personal retirement planning, I'm assuming that there will be a true means test by the time I start collecting. If I'm pulling $75K out as my 401-K distribution, I'm expecting to see a big reduction in my Social Security benefit. I've decided that I'm better off paying the taxes now. If it turns out that my assumption is wrong and there is no means test, I'm just paying some extra tax now.

[tbvvw]

Two interesting statistics I read yesterday when researching 401Ks and corp pensions.

When SS and US corp pensions were created and put into production (1930-40s):
1) the average US life expectancy was ~64 yrs old
2) there were 35 people working for every 1 person retired

By the year 2020 in the US:
1) the average US life expectancy is projected to be just over 80 yrs old
2) there will be 2 people working for every 1 person retired

[tall tex]

While it is nice to think that you have a pension now, there have been too many examples of reduced pensions or disappearing pensions in recent years for me to be comfortable with that idea.
While my company does offer a pension, I am saving as though there will be no pension when I decide to retire (many years to go). If there still happens to be a pension at that point in my life, then my children's inheretence looks that much better.

The problem with a conventional 401-K is that the money you pull out of it at retirement is taxed as regular income. If you are diligent and build up a nice portfolio, it will be used against you when calculating your Social Security benefit. Unless you have a corporate match, a conventional 401-K or IRA is likely a sucker play. You want the bulk of your retirement savings to be after tax.

Today, I'm doing a Roth 401-K with after-tax money up to the corporate match. All my other savings and investment is done with after tax dollars. When I get there, I don't want 401-K and IRA distributions taxed as regular income to chew into my Social Security distribution.

Right now, the only thing that happens is that most of your Social Security benefit becomes taxable if you're taking a reasonable-sized 401-K distribution.

For my personal retirement planning, I'm assuming that there will be a true means test by the time I start collecting. If I'm pulling $75K out as my 401-K distribution, I'm expecting to see a big reduction in my Social Security benefit. I've decided that I'm better off paying the taxes now. If it turns out that my assumption is wrong and there is no means test, I'm just paying some extra tax now.

That's some serious food for thought. I am going to have to investigate this myself, and if you are correct, I have some reallocation to do of my retirements savings.

[GeoffD]

That's some serious food for thought. I am going to have to investigate this myself, and if you are correct, I have some reallocation to do of my retirements savings.

I look at it as risk mitigation. 15 years from now, only 3 people will be working for every Social Security recipient. You can't just blame boomers because that ratio looks to be fairly constant over the next 50 years. Population growth would be negative if it weren't for immigration. People live longer.

so.... what are the possible fixes to this?

Raise the retirement age
Retiring at age 62 is nutty. I think the age will be moved up to 70 over the next 20 years.

Make the distributions more progressive
Right now, Social Security distributions are tax-free if you have low income. If you're taking large 401-K distributions that show up as income or you have investment income on unsheltered investments, you start paying income tax on your Social Security. I think this policy is likely to change. At some income level, they'll start reducing your Social Security benefit and they'll certainly start making you pay more for health care.

Lower the overall distribution
I don't think this is going to happen. The maximum right now is just shy of $39,000 and to get there, you have to show 35 years of maxed out contributions ($108K of gross income). To get to that number, you have to wait to age 70 to start collecting. Most people retire earlier and don't have anything like that for earnings so their benefit is more in the $12K to $20K range.

Increase payroll tax and self-employment tax rates
Count on it. The question is how much.

Eliminate the cap (currently $108K)
I also expect this to happen.

I'm 54. In my financial planning, I am using Social Security as insurance for "Geoff is unlucky and outlives his retirement savings". I am not planning to collect a dime until I turn 70 so I get the maximum benefit.

1% interest rates, today's uncertain financial landscape, and a somewhat unstable job market for what I do at the rate I get compensated is making it challenging to plan all this.

[tall tex]

I look at it as risk mitigation. 15 years from now, only 3 people will be working for every Social Security recipient. You can't just blame boomers because that ratio looks to be fairly constant over the next 50 years. Population growth would be negative if it weren't for immigration. People live longer..

I like the risk mitigation aspect, as that is part of my job in a different discipline. It sounds like you have a solid approach.

so.... what are the possible fixes to this?

Raise the retirement age
Retiring at age 62 is nutty. I think the age will be moved up to 70 over the next 20 years.

Make the distributions more progressive
Right now, Social Security distributions are tax-free if you have low income. If you're taking large 401-K distributions that show up as income or you have investment income on unsheltered investments, you start paying income tax on your Social Security. I think this policy is likely to change. At some income level, they'll start reducing your Social Security benefit and they'll certainly start making you pay more for health care.

Lower the overall distribution
I don't think this is going to happen. The maximum right now is just shy of $39,000 and to get there, you have to show 35 years of maxed out contributions ($108K of gross income). To get to that number, you have to wait to age 70 to start collecting. Most people retire earlier and don't have anything like that for earnings so their benefit is more in the $12K to $20K range.

Increase payroll tax and self-employment tax rates
Count on it. The question is how much.

Eliminate the cap (currently $108K)
I also expect this to happen.

I'm 54. In my financial planning, I am using Social Security as insurance for "Geoff is unlucky and outlives his retirement savings". I am not planning to collect a dime until I turn 70 so I get the maximum benefit.

1% interest rates, today's uncertain financial landscape, and a somewhat unstable job market for what I do at the rate I get compensated is making it challenging to plan all this.

I still have a number of years to go before I get to retirement age (25+). Given the projections of when SS may go bankrupt, I am not expecting it to be around in the capacity it is today - or any government social benefit for that matter. I am trying to plan accordingly, however if these benefits are still around by that time in my life, well great! I am just trying to do my part to not be a burden on my kids or society from a fiscal perspective.

[GeoffD]

I still have a number of years to go before I get to retirement age (25+). Given the projections of when SS may go bankrupt, I am not expecting it to be around in the capacity it is today - or any government social benefit for that matter. I am trying to plan accordingly, however if these benefits are still around by that time in my life, well great! I am just trying to do my part to not be a burden on my kids or society from a fiscal perspective.

Social Security is very close to being actuarially sound. It won't take much of a tweak to keep it stable forever. The "going bankrupt" is fear-mongering.

Medicare is a completely different story. ...but anything health care is in the same mess. What's happening right now with Medicaid and Medicare is that payments keep getting reduced. This is simply going to ripple down through the medical cartel pay structure. It may get ugly since so many hospital workers are unionized but labor costs are going to go down or hospitals will have no choice but to shut their doors since they can't keep running at an enormous loss. No different from what we've seen with automobiles.