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

[HHSTigerFan]

We wish we could put 8% of our income in an investment vehicle that would guarantee 85% of our income would be paid to us upon retirement. That's a main reason states like NJ are now insolvent.

In Illinois, teachers have 9.2% of their salary go to the TRS system, if a teacher makes an average of $50K a year and if their TRS contribution is instead invested at 8%, would be about $850K.. benefit pays 75%, so if teachers high earning years average out to $70K, would receive a benefit of $52K annually..

Whats better, having $850K or $52K annually?

 

[Julia M]

You've described my parents as well. They had three children in their early 20s, we went to school, all out of the house in our early 20s, and then my sisters didn't have children until their late 30s and early 40s.

The thing with my parents though....they never *upsized*. They were always frugal. I grew up in a 1,000 sq ft house with three bedrooms and one bath. With *three* daughters. We didn't have AC until I was in college. Really.

So, I think that was huge for them. And it instilled something in my sisters and I. We're all big savers and investors.

And my parents are still in that same house, in 2014 they will be there for 50 years.

That's kind of my parents. They did add on to the house I grew up in and have remodeled it over the years (a new kitchen about 20 years ago, a new backyard about 15 years ago, repainting this year) but have owned the same home since 1968. We didn't have "big" vacations when I was little, but did vacation

They lent us some money for our first houses (which we all paid back).

They both long term care insurance in their 50's.

They tell us that our inheritance was our college educations.......jokingly, but some truth to it. The focus of their money is to provide for themselves, not hand it down.

They've been a good example to me, although I admit I am not as frugal as they are.

Julia

 

[Julia M]

I look at all the information and advice and I will admit I get overwhelmed, and I tend to think dh and I are doing well!

We both have pensions, which is unusual in this day and age. I have a job where I can likely do some consulting after I retire, for a least a few years, to bring in some cash. I've seen a lot of people in my similar situation do that.......consult for a few years after they retire, as kind of "easing" into retirement. More for the social and something to do aspect than a huge money factor.

We do have 401k money as well.

I'm one of those who assumes they won't need as much to retire on.....we will have our house paid off before we can retire and have already purchased long term care for both of us. (I'm almost 49 and dh is 52). My big reason for assuming this, however, is that my kids have been in Catholic schools all these years, plus one who does an expensive competitive sport. Right now that's a HUGE drain on our take home income and I truly believe I wouldn't come near to paying the same amount on anything in retirement (travel, hobbies, etc)

I expect dh will become a marshal at a local golf course when he retires.....minimum wage pay essentially, but the perk is for working a shift a week, you get free golf. My dad does this and then golfs three mornings a week.

I'd like to be able to volunteer somewhere a morning or two.

Of course we'll want to travel and I expect we'll really maximize our timeshares! If my kids relocate (which I am sure they will), I also expect to travel and see them.

I have friends whose goal is to move out of the area....they are not big travelers or into eating out.....so I imagine they don't fit the mold either.

Despite the fact I think we have things together, just reading everything is overwhelming. So I think that's why people ignore it........if they start to really examine what they are doing, it will be yucky. So they bury their head in the sand.

Julia

 

[crisi]

Well, for the flip side:

My parents and their siblings lived largely on Social Security in their retirements, with some help from their kids. It can be done. I've watched it.

It's not a glamorous life by ANY stretch of the imagination, but it's not living on the streets, either.

They got small condos or mobile homes. With their medical covered and cars paid for, they were basically just buying food and utilities.

And the other flip side....

I have a friend who has never saved. His father and both his grandfathers dropped dead of heart attacks in their 50s. He's never married or had kids, so its just him and he isn't planning on living to have to worry about it. In his case, he really feels like saving for a future he doesn't believe he'll have to be a waste.

(And he is now 48, in great health, and will probably live to be 80....cause that's the way those bets work).

 

[Pigeon]

I used to think that no way would I need 80-85% of my income once I retired, until I watched my ILs age. They were Depression Era savers, for sure, and FIL earned an excellent income and a physician.

But if you are a relatively healthy young person, you have no idea how much medical expenses are going to be. They are relatively healthy people in their 80s. They have a constant round of doctors appointment aimed at keeping them that way. They have minor conditions, which I think most people will have by the time they get that old.

Things like property taxes continue to climb, even though their mortgage is all paid off. There are things they now pay for that they always did for themselves before--cleaning service, snow removal, yard work, etc. You may plan to do these things yourself forever, but when you get to a certain age, even if you are healthy, you may not be able to do so. The general COL goes up. This eats into your income quickly. We help with what we can, but we have our own home to maintain and our own kids who keep us busy.

I also think that younger people have it much harder starting out than I did. I know so many kids who come out of school with large college loans that eat up all their income and they have a hard time getting started, let alone saving 15% of their income.

I'm lucky in that our parents paid for our college educations, something I'm planning we can do for our kids (4 years at a public institution), but it is very tough to do along with saving 15% of our income for retirement.

 

[jmpellet]

Answering the question about state pensions and whether they reduce your SS -- at least in MA they do. If you have worked 40 quarters (or ten years) outside state service, you will queslify for a highly reduced amount -- something like 10%. There is always talk of legislation to change that but I'm not sure we will ever see that.

Also, regarding pensions and the 80% that many people throw about, very, very few individuals actually hit that amount. The chart in front of me shows that you would have to be 61 yo with 38 years of service, so about 23 years old.

I am fortunate in that I COULD contribute the maximum to both a 403B and a 457 becuase I work in education. This would be all my contributions since I'm in a pension plan.

 

[dvcgirl]

OK, I live in NJ (like you) and we don't all live in McMansions. I have three girls, I live in a 3 bedroom 1 1/2 bath house. No central ac (we do have window units). You make it sound like it's unheard of to live in a house like that these days. I'm sure you are aware that there are many houses in NJ like that (since your parents live in one) with, you know, actual families living in them. And yes, some people only have one bathroom.

We are quite happy we never "upgraded" to a McMansion. However, you yourself, while lauding your parents for living there, seem to think it's unusual or remarkable to live in smaller house, one bathroom, no ac. Isn't that the attitude of "bigger and better" that got many people into trouble? (Not you, dvc girl, I know you save a lot, etc.)

Oh, I didn't mean it to sound elitist or anything. I do think it is a bit unusual for people to buy a 1,000 sq ft home and never move....for almost 50 years. Later in their marriage, they certainly had enough money to upgrade, or put an addition on....and they never did. I grew up in a shore community, and every single home on the street has had an addition put on for years. Several new buyers knocked the small ranches down altogether and built ridiculously big homes on very small lots.

Bigger and Better, keeping up with the Joneses is absolutely a part of "the American problem". I'm proud of my parents....that they never felt the need to do that. And while DH and I "did our time" in a McMansion neighborhood, we didn't stay long...just four years as we didn't feel comfortable there, even though we could absolutely afford it. We came into a substantial amount of money in our late 20s/early 30s. We didn't know how to "be"....with that kind of money. And so we bought a McMansion....because we could. We figured out that it wasn't for us....and our next home suited our personalities much better.

 

[dvcgirl]

I think it's easy for people to want to ignore the savings and calculators/etc just because they can be so discouraging!

I'm 34 years old and only started saving for retirement 4 years ago after I graduated college. I don't want to know how far I'm in the whole already! lol

Again...if you started at 30, you are far ahead of your peers! The more you can sock away in your 30s....the easier it will be for you down the road. You should be proud of yourself!

 

[The Pluto People]

In Illinois, teachers have 9.2% of their salary go to the TRS system, if a teacher makes an average of $50K a year and if their TRS contribution is instead invested at 8%, would be about $850K.. benefit pays 75%, so if teachers high earning years average out to $70K, would receive a benefit of $52K annually..

Whats better, having $850K or $52K annually?

That math is fuzzy. First, 9.2% of $50K is a yearly contribution of $4,600. At 8% earnings per year (A pie in the sky amount -PLEASE tell me where to get an 8% guaranteed return on my $$) the teacher would have approx. $563K. At a 4% withdrawal rate (absolute maximum withdrawal in insure $$ lasts for retirement lifetime and should be more like 2-3% these days) that teacher could expect to withdraw $23K per year. A far cry from $52K. My Dad is a retired teacher and both my siblings are on the public payroll. Public pensions and healthcare benefits are out of control. Thank goodness New Jersey finally woke up and voted in Christie.

 

[dvcgirl]

We wish we could put 8% of our income in an investment vehicle that would guarantee 85% of our income would be paid to us upon retirement. That's a main reason states like NJ are now insolvent.

Oh, well....I get your drift, but the NJ problem is far more complicated than that. I'm not a union employee, and so I have irons in the fire. I know we can't discuss politics, but I do just want to point out that both sides have made serious mistakes with respect to the NJ State pension fund.

The NJ pension system was in fair shape until Florio came in and his administration changed the accounting rules, making the fund look far better off than it was....and adjusted the contribution amount *down* as a result of that funny business. After Florio, Christie Todd Whitman came in and used pension funds to pay for tax cuts. So, that's a politician from each side of the aisle....each damaged the fund in a different way. And it has never recovered.

Think of how the teachers must feel....they pay in that 8% a year, and then you read in the paper that the governor has decided that those funds are needed elsewhere in the state budget that year. That happened under Corzine and Chris Christie. Again...democrat and republican.

My father worked for UPS for 30 years, and he receives about 70% of his last year's salary. Of course, the pension has to be funded. There should be laws against states being able to use those pension funds for other line items.

Having said all of that, I'm a bottom line kind of person. And now we are where we are....the damage has been done. And there's just no way that the promises made can be kept without major tax increases down the road.

 

[MrsPete]

Well, for the flip side:

My parents and their siblings lived largely on Social Security in their retirements, with some help from their kids. It can be done. I've watched it.

It's not a glamorous life by ANY stretch of the imagination, but it's not living on the streets, either.

They got small condos or mobile homes. With their medical covered and cars paid for, they were basically just buying food and utilities.

But some people CAN'T do it -- especially if they're in debt, if their houses/cars aren't paid off, or if their kids can't/won't help.

Also, that's closer to the edge than I'd like to live -- I'd find it stressful. Eventually the house is going to need a new roof, the car will need to be replaced, and I'd like a few luxuries here and there!

I suspect that you're right though: This will be retirement reality for people who haven't saved and are no longer able to work.

It's not so much that we think "bigger is better", it's more of a problem that our "normal" has changed.

Absolutely. We can see it in many ways, not just housing. Thing is, our wallets haven't been able to support our "new normal", and we as a society have turned to debt. Few people seem to make living debt-free a goal anymore.

 

[MrsPete]

In Illinois, teachers have 9.2% of their salary go to the TRS system, if a teacher makes an average of $50K a year and if their TRS contribution is instead invested at 8%, would be about $850K.. benefit pays 75%, so if teachers high earning years average out to $70K, would receive a benefit of $52K annually..

Whats better, having $850K or $52K annually?

I have a traditional pension, and I am glad to have it . . . but if I could choose between the two options you present, I'd choose to keep the $850K and manage it myself (I am assuming that my figures are somewhat similiar -- they aren't because I make less than 50K, but that's neither here nor there while we're talking about the principle of the thing). Here's why I'd choose the lump sum:

- I don't know how long I'll live. I will reach 30 years of service at age 57. If I live to be 100 (not out of the question with my genes), I could collect my pension for 43 years. Using your figures, 52K x 43 years = $2,236,000 -- obvious, if that happened, I'd "win" the pension game. However, I might be hit by a bus a year after retiring. If that happened, I'd never collect the majority of what I invested, AND I wouldn't have the lump sum to leave to my husband and children.

- Add to the above, yes, at retirement I'll have the option to take a smaller pension and give my husband (or other designee) portion of my retirement benefit, but that'd lower my benefit -- and it isn't 'specially generous. Again, this requires a guess. Who do I think'll live longer?

- There's always the fear that the pension holder will change the rules or go bankrupt. Until recently, the idea of the state going bankrupt was not realistic, but now . . . who knows? Personally, I think my pension is as safe as anything these days, but it's not impossible that it'd disappear.

- Being a state employee, my pension has tied me to my state -- and it's tied my husband down. He's had good job offers elsewhere, but we've always determined together that the extra money he'd receive wouldn't balance out the loss of me continuing in the pension plan.


Don't get me wrong: I'm not complaining about having a traditional pension. But if I had the choice, I'd invest my money myself. I'd have more control over it.

 

[HHSTigerFan]

That math is fuzzy. First, 9.2% of $50K is a yearly contribution of $4,600. At 8% earnings per year (A pie in the sky amount -PLEASE tell me where to get an 8% guaranteed return on my $$) the teacher would have approx. $563K. At a 4% withdrawal rate (absolute maximum withdrawal in insure $$ lasts for retirement lifetime and should be more like 2-3% these days) that teacher could expect to withdraw $23K per year. A far cry from $52K. My Dad is a retired teacher and both my siblings are on the public payroll. Public pensions and healthcare benefits are out of control. Thank goodness New Jersey finally woke up and voted in Christie.

Every calculator I found kicked out a number around $860K...

In my view, we make far less than we could in the private sector, a pension and a secure retirement is one benefit we saw that sort of leveled the playing field.. Now we have people that make far more than we do, teaching and babysitting their kids, and they are complaining about our pensions?

 

[MrsPete]

And so we bought a McMansion....because we could. We figured out that it wasn't for us....and our next home suited our personalities much better.

I've only owned two houses, but my idea of what I want has downsized over the years: When I was just out of college, I couldn't wait 'til we could buy a nicer house with a formal dining room and a rec room. Now we're working on plans for our retirement house (and we can afford to have what we want), and neither of those things is included. It's going to be a very modest house.

 

[nunzia]

In the case of my wife and I, we have to put in 35 years for a full pension, though can be done in 34 if we have enough unused sick days, we would both be 57 at that point..

We see there are big problems ahead and changes need to be made, our hope is that the full benefit is still there and we will just need to work a few more years to get there..

OK...35..still..my BIL was able to retire with his pension at 50...my Dad was a lifer Ma Bell man and he retired with pension at 50..He passed away before he could draw SS, so I'm glad he had this time away from the job. Even at 35 years..retire at 57...that is still upwards of 30 years to draw..hard to sustain..I think we are all in a for a rocky road..no matter what. Really..all these formulas have us investing in the market in one form or another..and 'historically' it has worked..will it continue? another very shaky assumption...

 

[Colleen27]

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.

The employer match is a big factor in that, though, and many don't offer it. I've never worked in a place that did, nor has my husband.

Also, how many people can really find room to save on 30K? That's welfare territory if they have kids, at least in terms of medical assistance and EIC if not food stamps or other living expenses assistance. A big part of the retirement savings problem is very basic math - the median American income is 50K, the median housing price is down to 174K after flirting with 200K at the peak of the market, and double-digit percentage increases in health insurance costs have been the norm for almost a decade. Yes, some of the problem is people living beyond their means but the fact that so many people's means won't even cover the basic essentials right now has a lot to do with it too.

That's the problem with the shift to 401k plans - wages didn't go up to compensate for the loss of traditional pensions, so it is one more rising expense to squeeze into a more or less stagnant income and it is one that is easily deferred in favor of more immediate concerns.

 

[dvcgirl]

The employer match is a big factor in that, though, and many don't offer it. I've never worked in a place that did, nor has my husband.

Also, how many people can really find room to save on 30K? That's welfare territory if they have kids, at least in terms of medical assistance and EIC if not food stamps or other living expenses assistance. A big part of the retirement savings problem is very basic math - the median American income is 50K, the median housing price is down to 174K after flirting with 200K at the peak of the market, and double-digit percentage increases in health insurance costs have been the norm for almost a decade. Yes, some of the problem is people living beyond their means but the fact that so many people's means won't even cover the basic essentials right now has a lot to do with it too.

That's the problem with the shift to 401k plans - wages didn't go up to compensate for the loss of traditional pensions, so it is one more rising expense to squeeze into a more or less stagnant income and it is one that is easily deferred in favor of more immediate concerns.

Well, I was talking about $30,000 in 1981....and that was quite a bit of money then. I was a bit off, as I just plugged the numbers into an inflation calculator. 30,000 in 1981 is the same as 72,000 now.

I plugged the numbers into an inflation calculator and in 1981, my Boomer couple made closer to 36,000. But again, that's 87,000 in 2011.


And for the record, I do agree with your comments on housing and health care....they have way outpaced inflation. Education as well.

 

[brymolmom]

My grandmother did something simliar for us when our first child was born. She kept her for free while I worked, with the agreement that we'd deposit into a college account what we would've spent on day care. Her health didn't allow her to do this with the second child, but we did appreciate the jump-start that she provided for us/our child. My grandmother values very few things above education, so it made her very happy too.

My husband and I have talked about offering a similar deal to our daughters when they have children. If they have children at the same age we did and stay in the area, it'll work out.

Gotta say - I LOVE this idea!!! Love, Love LOVE it! And if you don't mind, I'm stealing it for any future grandchildren. Assuming I'm in a position to do so. Of course, my own kids are only 7 and 8 right now, so I'll have a long time to consider it.

I like these threads....It doesn't depress me. It motivates me. I just told dh today that we are going to put a bit more into our company stock this year AND I am upping my % of 401K in July (when we get our raises) from 15% to 18%. I only work P/T so it's not a huge increase dollars-wise, but I think we can squeak out some more - and I want to do it. We just raised the amt into the 529's about 6 months ago. So it's time to 'up' our retirement funds with this year's increases.

Of course, dh and I fall into the 'well above the average' category - likely BECAUSE threads like this motivate me and I am able to see past today. Our one area of 'grey' is that dh is 12 years older than I am - so if we both want to retire when HE reaches a reasonable age to do so (62 -67), it means I will still be in my low 50's - so it means needing more to begin with.

Thanks for motivating me!

 

[Marionnette]

Well, I was talking about $30,000 in 1981....and that was quite a bit of money then. I was a bit off, as I just plugged the numbers into an inflation calculator. 30,000 in 1981 is the same as 72,000 now.

I plugged the numbers into an inflation calculator and in 1981, my Boomer couple made closer to 36,000. But again, that's 87,000 in 2011.


And for the record, I do agree with your comments on housing and health care....they have way outpaced inflation. Education as well.

How many employers offered 401k's in 1981? To the average worker? They weren't even introduced until 1978 and were not really widely adopted until years later.

Everywhere I worked at that time had pensions. You had to work a definite number of years to become vested. It could be anywhere from 5 to 10 years before you became vested. You could also put $2000 before-tax dollars per year into an IRA. On your own. With no matching funds from your employer. The ability to reduce your taxable income was the incentive. The concept of saving for retirement was still a rather new one to most people.

 

[dvcgirl]

How many employers offered 401k's in 1981? To the average worker? They weren't even introduced until 1978 and were not really widely adopted until years later.

Everywhere I worked at that time had pensions. You had to work a definite number of years to become vested. It could be anywhere from 5 to 10 years before you became vested. You could also put $2000 before-tax dollars per year into an IRA. On your own. With no matching funds from your employer. The ability to reduce your taxable income was the incentive. The concept of saving for retirement was still a rather new one to most people.

The article is about baby boomers...who have 401K accounts. So, we're just seeing what the results are after 30 years of investing in those types of accounts.

Thirty years ago was the beginning of "The Big Risk Shift"........where the shift of responsibility for retirement and healthcare moved from the employer to the employee. And so far, the results aren't good.

But, what I wanted to point out is that the fault is not with the 401K plan. The fault is with the employees not funding their accounts.