Boomers Find 401K Plans Come up Short....

[Ava]

According to the Vanguard calculator, I'm on track to save "enough" for retirement based on anticipated 401k contributions & Social Security payments. Although I'm only 30 so I'm not really counting on getting full SS benefits. Ideally my annual income will be higher (and therefore I'll be able to save more) by the time I retire. Between my contribution & my employer match, I put 10% of my income into my 401k. We live frugally right now so my partner can be a SAHM to our DD, so I can't really afford to do more.

 

[Marionnette]

Unattainable perhaps if they are only considering NOW to save.

Unfortunately, too many young people starting out think they have plenty of time to save for retirement and don't max out their 401(k) savings right out of the gate. Doing so means they never 'get used' to having that income in their checks...it disappears into their retirement fund before they even see it and therefore, don't miss it.

If a young person has been saving like that all along they learn to live without that 'current income' and can sock away a significant sum by the time they are 40-45 and may need to cut back to help pay for college and other things.

My DH and I have been putting the max into retirement for nearly 30 years. Even through two significant down markets, we are already far, far ahead of the average - and with conservative gains will have close to four times what the "average american" will need.

You're talking about how things should be. I'm talking about how they really are.

Accordling to the article, Vanguard only recently upped their recommendation. Previous numbers were 9%-12%. So someone who was doing things the right way all along would now have to trim their spending in other areas by 3% in order to put more money aside. That's not an easy thing to do when you're already living on a tight budget, which most Americans are doing right now.

I think that it's wonderful that so many people on this board are in such great shape for retirement. But the truth is that y'all are a bunch of ants in a world of grasshoppers.

 

[AmberHeartsDisney]

We cant expect a government bail out. We need to help our selfs. I save whatever we can, and we live before our means. Im 26 now and I know i can not depend SSI.

 

[crisi]

People CAN significantly cut their expenses. Its possible to retire on a lot less, you just have to be willing to live the life that goes with it. However, we've come to expect that we will get luxurious retirements. And, for most people, it IS possible to save, but you might have to forgo the kids having cell phones, having cable in the house, and taking vacations.

For us, we are planning on downsizing sigificantly with retirement (actually, our kids have been given notice that its during their college years). We will move into the city and downsize to one, smaller car. I hate to drive and once I don't commute and drive kids around, probably won't do it much. Cable will go with the kids (again, its back and I hate it). Vacations for two are cheaper than vacations for four.

However, we do expect other expenses to go up. Medication and supplimentary insurance will increase for sure.

 

[allison443]

I never understood the 85% of income in retirement. I currently pay a mortgage which I will not have when I retire (if everything goes to plan). I currently save money for retirement which I will not need to do. I currently pay college tuition for one DD and save for college for another DD. These expenses will go away in retirement. I figure I can live quite well on 70% or even less in retirement. Of course the biggest unknown is healthcare, and no matter how frugal you are, there is just no pinching pennies for that.

I agree with you! I currently have a mortgage, retirement savings, college savings. Additionally we have three kids, we paid for private elementary and high school for three kids starting in 1992 and I have one still in high school, plus college out of pocket for one who graduated, one currently in college and one to come...Plus we have three cars with car insurance for four drivers...plus they do tend to eat, go to the dentist and doctor, need glasses/contacts/medicatons, lol. Plus clothing! All these expenses will decrease/disappear once they move out. And I forgot their cell phones with data plans lol!

I just don't think we will need 85% of our current income

 

[crisi]

I agree with you! I currently have a mortgage, retirement savings, college savings. Additionally we have three kids, we paid for private elementary and high school for three kids starting in 1992 and I have one still in high school, plus college out of pocket for one who graduated, one currently in college and one to come...Plus we have three cars with car insurance for four drivers...plus they do tend to eat, go to the dentist and doctor, need glasses/contacts/medicatons, lol. Plus clothing! All these expenses will decrease/disappear once they move out. And I forgot their cell phones with data plans lol!

I just don't think we will need 85% of our current income

I suspect a lot of us are young boomers - or post boomers. For a lot of us, we put off kids until our 30s, so we are in the midst of kid expenses and college as we look to retirement. We might get ten years between college and retirement.

That's a different situation than my recently retired parents. They had their kids young. My sisters and I have been out of the house for twenty years, so for twenty years my parents have had a nice income, and no kids to support. For most of that time they had no grandchildren to spoil either. Mine have been savers and fairly frugal....but I know some that haven't.

Neighbors of ours built their expensive dream home when their youngest finished school - with a 30 year mortgage. They were 50. The math on that one isn't working out. My in-laws were continuing to house shop - looking for something bigger - on their reduced income after my mother in law retired and took a long time before they figured out they weren't going to afford a larger mortgage. Kids leave and your lifestyle expands to fill all that newly disposable income. Then retirement cuts your income, but you are used to a nicer car than you ever drove when the kids were home, and dinners out, and nice vacations.

But we young people can also underestimate the expense of medication and supplemental insurance as we get older that can be a significant add to retirement expense. And I know my mother spends too much on her grandchildren now that she has them.

 

[bettymae1121]

I've heard that "retirees will need 80% of their pre retirement income in retirement" rule for years, but based on the two retirees I'm most familure with, they live pretty well on far less than that.

My father "lives" just on his SS income, he only has to take out money from his IRA because of the draw down rule. He only needs money beyond SS for his vacations and home remodeling (not home maintenance, just doing things like upgrading a fuctional kitchen to keep up with his neighbors!). He'll likely pass away with more money in his investment accounts than he did when he retired over 10 years ago, unless the market tanks again.

Now, granted, his home and car are both paid off and he has 0 debt. He has nursing home/long term care insurance, so that's something he doesn't have to worry about either. But basicly, if his investments got wiped out tomorrow, he could still make it just on SS. He have to stop travling and he would have to downgrade from his Lexus, but he could do it.

The other person I know is my grandmother. Again, house and car paid for, no debt. She gets SS plus my late grandpa's pension, plus has a six figure nest egg (not sure how much it is, just that it's in the six figures). She banks the pension and lives on the SS, she hasn't touched the nest egg since she bought her current car 20 years ago (wont need to replace it as she no longer drives). She does not have LTC insurance though, so if she does need more than a few months care, she'd probably run out at some point.

For both my dad and my grandma, they are able to live pretty well on much less than 80% of their pre retirement income.

Now no one knows what health care costs will look like in 30 years, so figuring on 80% may not be a bad way to go (better too much money than not enough!!!) but I think if a person plans on owning their home and car and retire with no debt and don't have extravagant retirement plans, you won't actually need 80% in most cases.

 

[Nicolepa]

You're talking about how things should be. I'm talking about how they really are.

Accordling to the article, Vanguard only recently upped their recommendation. Previous numbers were 9%-12%. So someone who was doing things the right way all along would now have to trim their spending in other areas by 3% in order to put more money aside. That's not an easy thing to do when you're already living on a tight budget, which most Americans are doing right now.

I think that it's wonderful that so many people on this board are in such great shape for retirement. But the truth is that y'all are a bunch of ants in a world of grasshoppers.

People THINK they are on a tight budget, but I am pretty sure that the majority of people out there could find 3% to cut. For every $1000 you earn that is only $30. That is significantly less than most people's cell phone or cable bill.

I have people ask me for budgeting help all the time. I have yet to run into someone who couldn't make major cuts to their budget. Whether they are willing to or not is a different story.

 

[MrsPete]

I never understood the 85% of income in retirement. I currently pay a mortgage which I will not have when I retire (if everything goes to plan). I currently save money for retirement which I will not need to do. I currently pay college tuition for one DD and save for college for another DD. These expenses will go away in retirement. I figure I can live quite well on 70% or even less in retirement. Of course the biggest unknown is healthcare, and no matter how frugal you are, there is just no pinching pennies for that.

It's important for every individual to figure up what he might need in retirement -- not blindly accept a figure projected by a magazine. I agree with your thoughts: Mortgage, college, retirement savings -- those are whoppers in most people's budgets. Throw in the fact that you won't be paying for the kids' expenses anymore, you won't be commuting to work any more. If retirement will mean you'll be able to take up gardening (or shop sales more carefully), your food budget might decrease. Quite a number of things will go down.

On the other hand, some things may go up: Health care costs are probably the thing that worry most of us, but they're not the only item in the "could go up" column. If your kids move far away, will you spend more money on travel? Will you travel more in general? With more free time, will you spend more on entertainment and hobbies? Do you plan to make any major purchases when you retire? A time share or an RV, perhaps?

And other things I suspect will remain static. For example, right now I spend on work clothes. I'm probably going to buy more jeans and fewer dress shoes, but I figure my clothing'll still work out about the same.

In my state (which I do not believe gets up to 80%) the pension is in addition to social security. I assume that's how it would be all over, since a state program can't declare you ineligible for a federal program, can they? I know there are federal pensions (railroad) that are in lieu of social security, but I'd be surprised if any state pension worked that way.

This differs from state to state. I pay into BOTH the state teacher's pension AND Social Security; thus, I should be able to draw from both. Will this happen? We'll see.

Unattainable perhaps if they are only considering NOW to save.

Unfortunately, too many young people starting out think they have plenty of time to save for retirement and don't max out their 401(k) savings right out of the gate. Doing so means they never 'get used' to having that income in their checks...it disappears into their retirement fund before they even see it and therefore, don't miss it.

That's it exactly. The best advice is to start out living on 90% of your salary -- do it from your first "out of school" paycheck. If you become accustomed to living on 100%, then eventually you'll have to make the choice to cut back. And, of course, you also have to avoid debt -- saving and avoiding debt are two sides of the same coin.

 

[eliza61]

Honestly, how can anyone be surprised by this? I've been out of college just over 20 years, and this was "news" when I was just starting my professional life. Well, let me rephrase: This crisis was predicted -- pensions were disappearing, 401Ks were fairly new, shortages were a distinct possibility. Now what was predicted has come to pass.

I can understand saying, "I knew I should, but I just didn't do it." Or even, "I just never had enough to save" (although for the vast majority of us, someone lives just fine on 90% of what we make, so most of us could save). But the woman in red looks like someone's just told her the facts of life and she doesn't like them. How do you go through your whole life, knowing what housing costs, knowing what transportation costs, etc., etc., etc. . . . and figure that you're fine with $150,000 to retire and last you the rest of your life?
dvcgirl, you do find interesting articles!

Boy MrsPete, this doesn't surprise me at all. I think many people just say "we'll get by like we do now" simple as that.

So here is my funny story. this week we found out that we are getting an 8% bonus this year. company did exceedly well last year and we're averaging a 3% col raise. I can't tell you how many people came into my office asking me how to change their 401K designation so when they got their bonuses it would not have the deduction.

And let me tell you the average age of the employees in my division is 46. the usual excuses apply "I want to use the entire check for vacation, etc etc"

My company matches dollar for dollar up to the first 7%, I would say out of the 550 employees in my business unit, only 15% go the full 7% to get the max free money. I would say roughly 20% are not participating at all.

They simply choose not to acknowledge it. I have a 53 year old man who admits that he pampers his daughters, just dropped 52K on one's wedding (it was a nice wedding gotta tell you. we had lobster!!) He says he'll start particpating when his last daughter leaves the house. Now he's 53 so that leaves him roughly 10-15 years to try and make up that difference. When I tell him, that's not going to happen he pretty much just shrugs his shoulders.

I'd actually be more shocked if we as a country were better prepared. I really think that's why social security will never get fixed. Seniors population is growing, more seniors rely on social security and they vote.


Now let me admit, because I'm probably can't throw any stones in my glass house. I didn't start savings until after my kids were born. I'm over 50 so back in the glory days, people still thought you would work for 1 company all your life and get a pension. that was the big goal after college, get a job with a major company. but as soon as I returned to work and 401Ks started to become all the rage, I've been a fan of them.

 

[eliza61]

Unattainable perhaps if they are only considering NOW to save.

Unfortunately, too many young people starting out think they have plenty of time to save for retirement and don't max out their 401(k) savings right out of the gate. Doing so means they never 'get used' to having that income in their checks...it disappears into their retirement fund before they even see it and therefore, don't miss it.

If a young person has been saving like that all along they learn to live without that 'current income' and can sock away a significant sum by the time they are 40-45 and may need to cut back to help pay for college and other things.

My DH and I have been putting the max into retirement for nearly 30 years. Even through two significant down markets, we are already far, far ahead of the average - and with conservative gains will have close to four times what the "average american" will need.

But remember msmayor, until recently young people were not encourage to live frugally. Pretty much the last 30 years the message has been, spend now, spend more than you have and worry about it later.

Now we expect american psyche to do an about face? remember this is a small contained group here on the budget boards. I think I read an article that said most American young adults by the time they are 22 have at least 2 credit cards. Not exactly the group who is going to think about an event that's going to happen 60 years down the road.

 

[eliza61]

People CAN significantly cut their expenses. Its possible to retire on a lot less, you just have to be willing to live the life that goes with it. However, we've come to expect that we will get luxurious retirements. And, for most people, it IS possible to save, but you might have to forgo the kids having cell phones, having cable in the house, and taking vacations. For us, we are planning on downsizing sigificantly with retirement (actually, our kids have been given notice that its during their college years). We will move into the city and downsize to one, smaller car. I hate to drive and once I don't commute and drive kids around, probably won't do it much. Cable will go with the kids (again, its back and I hate it). Vacations for two are cheaper than vacations for four.

However, we do expect other expenses to go up. Medication and supplimentary insurance will increase for sure.

LOL really crisi, you do say the funniest things. Remember this is the place where people justify going in debt to go to wdw because "the kids will only be little once" and when you tell them it's absolutely possible to live without cell phones, you get a chorus of "well we need it, in case of emergencies".

Sorry as a country we have set a standard of living that is consumer based and I really don't see that changing any time soon.

 

[JaymeC]

To tell you the truth, this topic just kind of makes me sad. I work with a retirement aged woman who every morning obsessively checks to see how her 'stocks' (really mutual funds) did the day before because she wants them to go up so she can retire. She has about 65k in this mutual fund so enough for maybe 3 years if living very frugally?

My mother and stepfather are in the same boat, but with even less. They haven't saved at all and are now starting to 'save for retirement'... at 55.

Dh and I have always tried to save. I don't know that we will the next few years, but that's because dh is going back to school and so we're on a shoe string budget right now. Having said that, we've been putting a lot of dh's income into savings the last few years. Averaging about 20%/year. Not a lot, our income hasn't been much. But enough that it's starting to add up, and I still wonder if it'll be anywhere near enough.

 

[Jax1023]

This is so scary to me.

I am 28. I have close to 70k in 403b, roth IRAs after I make last years contributions. Admittedly, I have no kids, but I could and still same the same amount. According to all calculators, with conservative interest, I could retire at 65 and have enough money till I am 100 with 100% of my current income every month.

My DH only has bout 8k, but he spent the majority of the last decade as a pHD student, barely making living expenses. He just recieved a faculty appt at his university, and enrolled for 403b, full match up to 8%. So basically he is now saving 16% plus 5k roth IRA yearly.

I thinks it so much easier to start soon. When I started at my current job after we moved, I jusy had them take out my contributions starting with paycheck one. So I've never know the difference. Every year when I get a raise, my 403b contribution gets increased by the percentage of my raise. So I never see they money, I don't miss it.

I still live well. I have an i phone, go on multiple vacations every year, eat out. Its not like I'm starving in a box. But the money just goes, so I don't even think about it. Could I save more? Sure. But I also need to put aside money for a new car, a down payment for a mortgage, etc.

 

[dvcgirl]

To me, the really interesting thing is not *that* these funds have come up short, but *how* they have come up short. Let's be clear, there's nothing wrong with the 401K. Even with all of its "faults"....you know, you've heard them all. That people make poor choices within their 401K, that they have lousy funds to choose from in the first place, that the fees are too high.....the "big problem" with 401Ks is that people don't fund them.

I did a quick bit of math to sort of "reverse engineer" the numbers a bit. It's not perfect, but it should give all a good idea of just how "mediocre" of a saver you need to be in order to hit that "median number" of $636,000.

Let's go back 30 years. Our Boomer Couple is 32, and they're earning $30,000. After taking ten years to pay off school loans and come up with that downpayment for the first home, they're able to start saving for retirement. They feel the need to catch up, and so they start off strong....and save 13% of their income, or $4,000. $333 per month. The employer match brings to the total contribution up to $5,000. The Boomers have every intention of keeping that percentage steady as their income goes up.

But that doesn't happen. They have kids, they buy several homes.....and they go to Disney World....a lot. They even get into a little credit card debt from time to time and have to dig themselves back out. And so they're able to continue saving that 4k, with the 1K match....but they increase their contribution amount....ever.

By the time they hit 62, they're still saving 4K with the 1K match. Now they're earning a little over $87,000 and so they're only able to save a little less than 5% of their income. They've been saving less than 10% of their income for the last twenty years.

And let's say The Boomers haven't been awesome with their investment choices, but they didn't do too terribly. Through all the ups and downs of the markets, they did manage an 8% return. They started kind of late, at 32, but they started out strong, at 13% of their income...so that was good. But they never increased that contribution so ended up only saving around 4.5% of their income. Not so great.

They never invested more than $333 per month...and the employer match never exceeded $83 per month......but they did that together for 30 years. Month in and month out. By age 62, they had $612,000.

You don't have to be a super saver and invest extraordinary amounts of money. But you do need to save something....consistently and over a long period of time.

 

[eliza61]

But that doesn't happen. They have kids, they buy several homes.....and they go to Disney World....a lot. They even get into a little credit card debt from time to time and have to dig themselves back out. And so they're able to continue saving that 4k, with the 1K match....but they increase their contribution amount....ever.

By the time they hit 62, they're still saving 4K with the 1K match. Now they're earning a little over $87,000 and so they're only able to save a little less than 5% of their income. They've been saving less than 10% of their income for the last twenty years.



You don't have to be a super saver and invest extraordinary amounts of money. But you do need to save something....consistently and over a long period of time.

But the hard part is getting this message out. I think one of the problems is savings like dieting is viewed not as a good thing but as a "deprevation" or as a "punishment" and it's always put off "until" tomorrow. Retirement planning is still considered right next to getting the dogs teeth cleaned in it's importance.

Every 4th of july I go around to my coworkers who are not participating, in conjunction with my companies credit union. We call it "financial independance day" and basically we try and sell the spell of automatic deductions. pay yourself first and after a while you'll never know it's missing. And let me say, my coworkers are really great people, pretty average american, nice etc etc and it's always really hard to convince them.
I consider them intelligent people, just have no idea why they can't project 20 years down the road.

 

[dvcgirl]

This is so scary to me.

I am 28. I have close to 70k in 403b, roth IRAs after I make last years contributions. Admittedly, I have no kids, but I could and still same the same amount. According to all calculators, with conservative interest, I could retire at 65 and have enough money till I am 100 with 100% of my current income every month.

My DH only has bout 8k, but he spent the majority of the last decade as a pHD student, barely making living expenses. He just recieved a faculty appt at his university, and enrolled for 403b, full match up to 8%. So basically he is now saving 16% plus 5k roth IRA yearly.

I thinks it so much easier to start soon. When I started at my current job after we moved, I jusy had them take out my contributions starting with paycheck one. So I've never know the difference. Every year when I get a raise, my 403b contribution gets increased by the percentage of my raise. So I never see they money, I don't miss it.

I still live well. I have an i phone, go on multiple vacations every year, eat out. Its not like I'm starving in a box. But the money just goes, so I don't even think about it. Could I save more? Sure. But I also need to put aside money for a new car, a down payment for a mortgage, etc.

If you are 28 years old and have 78K in investments together....you are *lightyears* ahead of your peers. Whatever you're doing....keep doing it, and you'll be very, very wealthy when you retire.

 

[Jax1023]

If you are 28 years old and have 78K in investments together....you are *lightyears* ahead of your peers. Whatever you're doing....keep doing it, and you'll be very, very wealthy when you retire.

I'm not going to lie- a huge huge factor in this is that my parents opened a roth IRA for me when I got my first job at 16 scooping ice cream for minimum wage. If I put 1/2 my income in it, I could keep using there car for free, otherwise, I would have to buy it. Even I could figure out that was a decent deal. They also would deposit the savings bonds that I had been given as a baby when they hit maturity.

so I have 12 years of Roth IRA investements, that even with the crappiness of the stock mark its grown a lot over time.

 

[dvcgirl]

To tell you the truth, this topic just kind of makes me sad. I work with a retirement aged woman who every morning obsessively checks to see how her 'stocks' (really mutual funds) did the day before because she wants them to go up so she can retire. She has about 65k in this mutual fund so enough for maybe 3 years if living very frugally?

My mother and stepfather are in the same boat, but with even less. They haven't saved at all and are now starting to 'save for retirement'... at 55.

Wow, that's very sad. Well, a full 1/3 of people with access to 401Ks don't save a thing, so your Mom and Stepdad unfortunately have a lot of company.

I find the topic incredibly depressing. But I think it's helpful to post these kinds of articles, especially when they offer up real people and their financial situations. I hope that it motivates some people.

 

[MrsPete]

I can't tell you how many people came into my office asking me how to change their 401K designation so when they got their bonuses it would not have the deduction.

Yeah, I believe you -- years ago in college I worked part-time in an office that automatically put some money aside for each employee's retirement. The IRS (or something -- it was years ago) required the company to inform the employees how much they had, etc., etc. You wouldn't believe how many people came in AND QUIT THEIR JOBS because it was the only way they could get their hands on that money. Then 2-3 months later -- when the money was gone -- they'd come back asking for the job again.

But remember msmayor, until recently young people were not encourage to live frugally. Pretty much the last 30 years the message has been, spend now, spend more than you have and worry about it later.

Now we expect american psyche to do an about face? remember this is a small contained group here on the budget boards. I think I read an article that said most American young adults by the time they are 22 have at least 2 credit cards. Not exactly the group who is going to think about an event that's going to happen 60 years down the road.

That's absolutely true. I mean, I was a child of the 80s -- the decade of conspicuous consumption -- and it's only gone downhill since then. American youth has even been sold on the idea that college debt is "good debt".

They never invested more than $333 per month...and the employer match never exceeded $83 per month......but they did that together for 30 years. Month in and month out. By age 62, they had $612,000.

You don't have to be a super saver and invest extraordinary amounts of money. But you do need to save something....consistently and over a long period of time.

Good illustration, but the most important thing is to START EARLY and give compound interest time to work in your favor.