We constantly hear about how far behind Americans are in their 401(k) savings and how many don’t have any savings at all. But it’s not really our fault, thirty-four percent of Americans aren’t offered a 401(k) through their work and for younger workers it’s even worse. Forty-one percent of millennials aren’t offered a retirement savings plan through their work. These numbers are particularly alarming because the American population is aging, and millions of Americans could be without savings, putting the economy at risk as people can afford less. Retirement savings plans put the responsibility of financial planning onto the worker. If the stock market turns sour, retirees could be at risk of losing their savings. There are a few legislative proposals to take some of the weight off the shoulders of savers, but it’s not obvious if any of them will be adopted.
Why Are 401(k)s so Bad?
The whole group of tax advantaged saving vehicles, such as 401(k)s, have only caught on in the last 20–30 years. Prior to that, many people were offered pensions through their employer. These plans were not perfect, but they didn’t push the responsibility of managing saving onto the worker. The budgeting responsibility was on the company to make sure that it had enough resources to pay their retirees. However, when companies were hit by bad times they identified eliminating pension plans as an easy path to savings. The original intent of 401(k)s was a supplement to Social Security and pensions, but tax advantaged savings plans have become the main form of retirement saving for many Americans as companies began using plans for their workers and incentivizing them by matching contributions up to a certain point.
A big problem with savings plans is that, unlike companies, people aren’t very good at budgeting. Most of us don’t ever receive any financial literacy education and even fewer seek out classes to inform us how much savings are needed for retirement. Even more confusing than figuring out how much to save is figuring out what to invest your retirement savings in, specifically determining the right amount of risk for your portfolio. I think about this kind of thing quite a bit and even I have trouble knowing if I am saving the right amount and how much I will actually need in retirement. I wrote another Medium post here that discusses how much you should be saving each month in retirement savings, but there is always uncertainty.
Is there a Better Way?
For years there has been talk about creating an expanded Social Security for workers to pay into throughout their careers, receiving a guaranteed benefit in retirement. This would be advantageous because it would be managed by the government and be a guaranteed benefit that wasn’t tied to the whims of the stock market. Unlike pension plans that workers could lose if their employer goes bankrupt, the United States government has a minuscule chance of disappearing during our lifetime. This plan would mimic the pensions of old and, like current Social Security and 401(k) rules, the government could encourage companies to contribute to this new plan with tax savings.
The downside to this plan is that our current Social Security system has been poorly managed as of late. Without reform, Social Security won’t be able to meet its current responsibilities by 2034. However, research has shown that most people pay little to attention to their retirement saving. This is how it should be, workers shouldn’t be expected to be an expert in their craft and a financial expert that can manage savings for retirement. Our elected officials should look at creating a government run program for companies and workers to invest in that creates a comfortable retirement. This program would be different from current Social Security, which is only meant to be a safety net for people in their old age and not a sole form of retirement.
There are also several annuity plans offered by private companies that are becoming more popular among Americans as they want to convert their savings into a guaranteed yearly income in retirement. The downside to doing this is that inflation puts retirees at risk of not having enough yearly income if they live long into retirement. Additionally, the main goal of these private companies is to make a profit. Several European countries have created annuity plans for their baby boomer generation to ensure they have resources throughout their retirement, these plans should be considered in the United States as well.
What Can You Do?
As you have probably never taken a class on retirement, it’s good to learn what saving options are available to you and make sure you and your loved ones are using tax advantaged saving plans. It can be hard to know which of these options is best, but for those that do have time, learning about the advantages and disadvantages of the different plans can help prepare you for a comfortable future. To help people prepare, I have written several Medium articles on this subject. The first is called Rich People Don’t Keep Money in a Bank Account, You Shouldn’t Either and the second is Easy Steps to Becoming an Expert Investor. Hopefully these will help you better understand the importance of saving and understand why our current system benefits the rich over the poor. In the future, we can hope there will be a movement to create a plan that will create pension plans for all and provide certainty for people in retirement, but for now 401(k)s and their brethren are the best we have.