The 401(k) a failure?
You may have seen any number of dozens of these articles over the last few years about how the 401(k) is not working. Moneywise just published another one with the same story about why they are failing most Americans.
People that know me know I believe they are a particular type of financial tool but they are not my favorite. On the podcast we did an episode called 401(nay!)
They don’t really work for retirement security unless full of millions of dollars (which few do, in fact most have less than $100k) so what continues to be the disconnect?
Ted Benna, the father of the 401(k), doesn’t even like them.
Can something fail that was never intended to succeed?
“I've got a 401(k) - I’m good”
Most of us have no idea what that account is going to do for us in the future. Take the Vanguard stat in the article that the median balance of those over 65 is $70k. Using the famous 4% rule you can turn that into $2800/year of income. Or $233/week. Maybe the guru you listen to says 10% withdrawal rate (scary but ok) that’s $7000/year. What are you going to do with that?!
I have long told people that you are the fourth and last person to benefit from these types of accounts because they are a tax transfer and tax growing account.
Employer - they get to transfer their tax liability to you. That is what the match is.
The government - they are happy to let you defer your taxes because they know you will end up giving them more dollars in the long run than you deferred (even if you’re in a lower tax bracket)
The financial firm - $40 trillion in accounts with even an all fees included at 0.5% that’s a passive $2B coming in and no one stops
You - an investment account where they get the benefits and you bear all the risk
I know that may seem like a negative version of what these accounts are. It does not make them good or bad, it is just a tool and one you need to pay close attention to.
How much data and how many articles need to be written about these for us to begin to do things differently.
Here is a link to the recent article telling the same 401(k) story.
Here is a link to The 401(nay!) episode of our podcast What’s Up With Money?!
As always, if you come across a financially related article you’d like to send my way please do!
Best place to send them is to me.
More next time!
Jonathan
PS - a matching contribution is not and should not be seen as immediately doubling your money.