Seniors attend a 'Medicare Monday' seminar
(John Moore/Getty)
It’s been 30 years since the Individual Retirement Account model, or the 401(k), became the standard way for Americans to save for retirement. And it has failed — or so says Teresa Ghilarducci, professor of economics at the New School for Social Research.
In a commentary in last weekend’s Sunday New York Times, Ghilarducci argued that the 401(k) savings account, which puts the onus for saving on the future retiree, no longer works. She says that most Americans don’t grasp the complexities of planning for retirement, and that’s to be expected.
The 401(k) model “expects individuals without investment expertise to reap the same results as professional investors or money managers,” she writes. “What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”
As it stands now, the current system requires ordinary people to not only accurately predict financial risk, but to anticipate unanticipated factors. For an IRA to be successful, retirees must accurately predict when they will stop working, and even when they and their spouses will pass away. For this reason, Ghilarducci argues, no amount of financial literacy courses will make people succeed in retiring comfortably.
American financial savings are meager, and with unpredictable factors like illness, the typical American couple is not prepared to retire on its IRA. "We have a system that practically guarantees that aging will be a gateway to poverty," Ghilarducci says. "I'm seeing the risk of poverty filtering up to the middle class." She writes in her editorial that 49 percent of middle-class workers will be poor or near poor when they enter retirement.
"It's 'magical thinking' only when you're 55 and you realize that these plans aren't working," Ghilarducci says. "We need an expanded social security system that expects people to be human beings." Her plan is to institute a new, mandatory retirement account that would be professionally managed to provide a guaranteed rate of return.
"You don’t like mandates?" Ghilarducci asks in her commentary. "Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster."
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Comments [7]
We tell my teenage and middle school children "invest in stock index funds early and often," using the power of compounding (albeit weaker now) to work for you. Waiting until you are 30 to start saving for retirement will take you 2-3 times longer to reach the same goal than if you started with your first summer job and stopped earlier...we also "matched" our 16 year-old's $700 in summer earnings last year as a camp counselor by setting up an IRA for her. Hopefully she won't touch it when she's 18 and legal to do so.
I discovered the 401(k) model is flawed after reading "The Smartest 401(k) Book You'll Ever Read" by Daniel R. Solin (only $6 at Barnes & Noble). You can learn how to get around most of the flaws with the advice in this book. Most people don't know how to do asset allocation correctly - this book will teach you how to find the lowest cost mutual funds that track broad indexes.
In my youth, I worked in Corporate America after graduation for 8 years till my department closed.
I took my 401 K and cashed it out in order to open a business which went well till the recession of 2008. I took my savings and sunk it back into the business, till the ship sunk.
I find myself a middle aged man looking for a job in Corporate America and a 401 K. I am not going to have any more divorces, or lattes... I look forward to retiring on my 401 K in 42 years. I might open a little business after that.
OK. You proved your point: Algebra is boring. I couldn't hang with your excerpt. I had to bail out after 3 minutes. What next? Five minutes on do we need geometry? Half an hour on what do philosophy majors do for a living?
I read the article last weekend and agree with the author's analysis for the most part. However, my question is this: Social Security was only supposed to be a minimal safety net and you were supposed to save for the rest. Social Security as it stands now as well as an expanded version, is fine with me as long as I get back what I put in. But if it becomes another progressive tax- ie a wealth transfer, then I would fight it. I pay a huge percent of my income in taxes ( wish my income was like Mitt's taxed at 15%!). As a 37 year old, I am not realistically expecting Social Security to be around for me in 30 years. But if it becomes like our income tax system, as opposed to an annuity plan, I would not want that. I am a thrifty person, despite our good income. I have never bought a new car. My wife has a 5 year flip cell phone. We don't have cable. Etc etc. Too many Americans spend their money frivolously and then complain they have no savings for retirement. I would pay I more as long as I got my money back.
While I'm not sure the 401k model has failed, it clearly has problems.
We were very lucky 30 years ago to work for a computer company. This company had a real 401k
expert in HR, so we got outstanding training on what to do/what not to do. When many Enron employees
lost everything due to having all of their eggs in one basket (and then Enron's management running away with
the basket), all I could do was be glad I didn't invest our retirement like that. We didn't panic in
2008/2009 and have a decent chunk of money in retirement plans, plus stocks
and a house that's not underwater. And minimal debt (mostly a car payment).
While I'm currently not working regularly, my husband's job is pretty good, and IF it lasts about another
10 years, we should retire pretty comfortably with a paid-off house.
But, these days, that's a big "if."
Demand higher wages. Wages in the US have not kept up with inflations since the early 1970s! At the same time wages are stagnant, worker productivity has continued to increase, only to see more job outsourcing.
While most Americans work on lower wages, Corporations are paying much less of their share: corporations used to pay $1.50 for each $1 a human would pay for income tax in the 1950s. Currently, corporations pays just 25¢ for each $1 that people pay in this country. How do people get ahead or save for the future if they are living from paycheck to paycheck? Certainly you can say people should get rid of cable television, people should not buy the restaurant food etc... but people are working so many hours and second jobs that a moment of relaxation between jobs is the vacation we get.
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