'The 401k generation is beginning to retire.'

[SirNitram]

Link

The 401(k) generation is beginning to retire, and it isn't a pretty sight.

The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

This analysis uses estimates of 401(k) balances from the end of 2010 and of salaries from 2009. It assumes people need 85% of their working income after they retire in order to maintain their standard of living, a common yardstick.

Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined.

"Inevitably, we find that, for the average person, there is not enough there," says financial adviser Paul Merritt of NTrust Wealth Management in Virginia Beach, Va., who has found himself advising many retirement-age people with too little savings. "The discussion turns out to be: What kind of part-time work do you want to do after you retire?"

He has clients contemplating part-time work into their 70s, he says.

Tax-deferred 401(k) retirement accounts came into wide use in the 1980s, making baby boomers trying to retire now among the first to rely heavily on them.

The problems are widespread, especially among middle-income earners. About 60% of households nearing retirement age have 401(k)-type accounts, according to government data, and those represent the majority of most people's savings. The situation is less dire for those in a higher income bracket, who tend to save more outside their 401(k) accounts and who have more margin for error if their retirement returns fall below the recommended 85% figure.

Steven Rutschmann, 60 years old, manages the buildings and grounds at a Midwest research facility. His employer recently offered him a bonus if he retired early.

Mr. Rutschmann's 401(k) is well into six figures. His wife has a 401(k) and expects a small pension from her nursing job. An outdoorsman, he dreams of spending time hunting, fishing and hiking.

So he consulted a financial planner at Ernst & Young and learned that even with the bonus, his savings could run out before he turns 85. Now he expects to work for several more years.

"I was disappointed," says Mr. Rutschmann, whose 401(k) balance was damaged by the financial crisis and who still has a large mortgage.

In general, people facing problems today got too little advice, or bad advice. They didn't realize that a 6% annual contribution, with a 3% company match, might not be enough.

Some started saving too late or suspended contributions when they or their spouses lost jobs. Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their planned retirement dates.

In the stock-market collapses of 2000-2002 and 2007-2009, many people were over-invested in stocks. Some bailed out after the market collapse, suffering on the way down and then missing the rebound.

Initially envisioned as a way for management-level people to put aside extra retirement money, the 401(k) was embraced by big companies in the 1980s as a replacement for costly pension funds. Suddenly, they were able to transfer the burden of funding employees' retirement to the employees themselves. Employees had control over their savings, and were able carry them to new jobs.

They were a gold mine for money-management firms. In 30 years, the 401(k) went from a small program to a multi-trillion-dollar industry supporting thousands of financial planners and money managers.

But a 401(k) also requires steady, significant savings. And unlike corporate pension plans, which are guaranteed by the U.S. government, 401(k) plans have no such backstop.

The government and employers aren't going to pay more for people's retirements. Unless people begin saving earlier and contributing more to their 401(k) plans, advisers say, they are destined to hit retirement age with too little money.

Vanguard Group, one of the biggest providers of 401 (k) plans, has changed its advice on how much people should save. Vanguard long advised people to put 9% to 12% of their salaries—including the employer contribution—in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.

Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution, because of the stock market's weak returns and uncertainty about the future of Social Security and Medicare.

Plans of younger people have been affected too. Of those 45 to 59 who had substantial retirement assets prior to the downturn, 40% planned to work longer, according to a study by the Center for Retirement Research.

Gloria Moss has been contributing to a 401(k) since 1985, when she went back to work after having children. Especially after divorcing, she wasn't able to contribute as much as she wished and when her children finished college, she focused on repaying college loans. She says she lost more than half her savings in the recent financial crisis, then shifted heavily to bonds and missed the stock rebound.

"I thought I was doing the right thing, and found out otherwise," she says. When she consulted a financial adviser, "I got a report that said, 'You have a 5% chance of reaching your retirement goal'."

In her early 60s, she is ready to retire, but if she does that now, "I will have $25,000 to $30,000 a year less than I anticipated having," she says.

To retire at her current standard of living, she figures, she needs nearly twice the savings she has now.

Dr. Moss, who has a Ph.D. in education, also made good decisions along the way. She saw trouble coming at the educational software company where she worked and found a new job a week after losing hers.

Now she has sold the condominium she loved, near the Atlantic Ocean, and moved to a cheaper house. She cut back on vacations and meals out. She adores the theater but hasn't been to a play in at least a year.

She works extra hours each week and contributes to her employer's version of a 401(k), but doesn't feel financially able to contribute the maximum amount.

"I am going to probably have to work considerably longer than I anticipated," she says. "It is a nice job but I had not planned to be working well into my sixties," she says. "A lot of people are doing that. They need the money."

It isn't possible to calculate precisely how many people are able to cover the recommended 85% of their pre-retirement income, but Federal Reserve data suggest that many people can't.

Consider households headed by people aged 60 to 62, nearing retirement, with a 401(k)-type account at their jobs.

Such households had a median income of $87,700 in 2009, according to data from the Center for Retirement Research at Boston College, which derived this and other numbers by updating Fed survey data, at The Journal's request. The 85% needed for retirement would be $74,545 a year.

Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don't come close to making up that gap.

The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity.

That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed.

Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year.

Some families do have other income. Just under half expect pension income of a median $26,500 a year. Added to the $9,073 in 401(k) income, that still falls short. Some families have other savings, but Federal Reserve and other data suggest that those don't fill the gap for most people.

These data don't even include people who are in the direst situations: Those who have lost their jobs, stopped contributing to 401(k) plans or shifted to jobs without 401(k) plans. The numbers also don't account for inflation, which would further eat into income from a 401(k).

Some researchers question the Fed numbers because they are based on surveys rather than on records of actual contributions.

Jack VanDerhei, head of research at the Employee Benefit Research Institute, a group supported by 401(k) providers, estimates the median person actually has about $158,754, based on data from 401(k) providers. That is based on individuals in their 60s who have been at the same company for more than 30 years, a somewhat different group than that measured by the Fed data.

Even that amount of 401(k) savings generates much less than what is needed.

The difficulties have been worsened by the 2007-2009 financial crisis. Since the housing and financial markets began to collapse, about 39% of all Americans have been foreclosed upon, unemployed, underwater on a mortgage or behind more than two months on a mortgage, says Michael Hurd, director of the Rand Corporation's Center for the Study of Aging.

In 2008, when he was 59, John Mastej figured he was on track to retire in his early 60s. He and his wife both were working, with 401(k) plans. Counting all their savings, they had close to $200,000. Mr. Mastej was putting 20% of his salary into his 401(k).

The financial collapse cut their savings in half and left Mr. Mastej out of work for two years, with no 401(k) contributions. He had to dip into other savings and use up an inheritance to pay the mortgage. He found a new job in a specialty food store, but it paid much less than his old one in a plastics factory.

Today, Mr. Mastej figures he has about $90,000 in savings left, including about $50,000 from the two 401(k)s, now mostly in a fixed annuity that isn't affected by the stock market. He and his wife have canceled their satellite television and drive 11-year-old cars to work.

They buy some food at discounted prices through their church, but are proud they have remained current on their mortgage, home-equity loan, insurance and property taxes.

"We don't go out to dinner. We don't do much entertaining," Mr. Mastej says. "I will probably end up having to work for another 10 years."

Carol Dailey is continuing to work at age 71. Ms. Dailey spent 10 years as an executive assistant at America Online and had stock options she figures were once worth $1.7 million. The options' value collapsed with the company's stock.

Now she relies on her 401(k), which took a hit in the 2008 market plunge. She has cut back spending for entertainment and organic food, and continues to work three days a week as an office manager for an Internet security company.

"At AOL, we were buying $60 bottles of wine and not blinking. Now I drink box wine," she says.

Eventually, she wants to retire completely. Then, to make ends meet, she plans to take bigger investment risks. Her financial adviser then will shift some of her savings out of an annuity and into high-yielding bonds and real-estate investment trusts, aiming to double the return on that money to 10% a year.

Some people were done in by the twin collapses of the housing and stock markets.

Patti and Bob Webster had accumulated a six-figure balance in their 401(k) accounts and were building a dream house in North Carolina in 2007. They planned to retire there in about a year. Then their builder went out of business and the stock collapse knocked 40% off their savings. They temporarily suspended 401(k) contributions.

"We thought we had the perfect plan," says Patti Webster. "When the bottom fell out of the market, it kind of fell out of our perfect plan as well."

Today in their mid-60s, they have completed the house but have worked two years longer than planned and expect to work two years more.

"We are having to spend another two years in just trying to catch up with what the market did to us," Ms. Webster says.

The 401k sounded like the perfect fit for those clunky old pensions. Then again, I shouldn't be surprised this happened when financial wizkids made it into a huge industry. They tend to fuck up what they touch.

[TheHammer]

Very scary... I know my own 401k contribution is probably lower than what it should be, but costs keep rising salarys aren't keeping up, makes it hard to contribute more. I'm sure many others here are in the same boat. Granted, at 32 retirement seems a "long way off", but I don't know how likely I am to catch up down the road. Maybe its time to explore my alternate retirement options:

- Marry into wealth. Just need to find that lonely little rich girl...
- Lotto Tickets
- Live an unhealthy lifestyle so that my life runs out before my funds do. Not neccessarily the worst option.
- Hope that in the future, robots are doing all the work as we live in the socialist paradise created by comrade Obama.

On a more serious note, I don't think its neccessarily a bad thing if I needed to work part time even in retirement. Depends on what the job is, but I would think that not having a job, and no money to do anything else anyway, would be extremely boring. Of course if I'm putting in 40 hours a week stil at age 70, I'll now that I've really fucked up.

[The Kernel]

The 401k sounded like the perfect fit for those clunky old pensions. Then again, I shouldn't be surprised this happened when financial wizkids made it into a huge industry. They tend to fuck up what they touch.

401k's are an excellent instrument but you need to use them properly. The trick with a 401k is to properly mix assets so that you are equity heavy early in your career while slowly shifting to bonds and money market investments as you age.

The problem with these people is threefold:

1) They started saving too late. For a 401k to be effective, you need to make steady contributions of over 10% or more for a solid three decades.

2) They went equity heavy too late in life. The problem with stocks is that they are volatile and they need to be phased out in favor of shorter term investments as you get closer to retirement age.

3) They compounded their mistake of #2 by getting out of the market at the bottom. Just take a look at how much the market has bounced back in the last two years...now realize that morons were bailing out back in 2008 when the market had 40% less value. That's a good way to destroy decades of investment returns.

[The Kernel]

A few other tips for people who don't understand investments:

1) For God's sake, check the damn expense ratio of the equity funds you invest in. Most 401ks have a mix of funds that look good on the surface, but have bad expense ratios. That means your profits are getting eaten up by the investment "analysts" who do pretty much nothing. Get a good index fund instead.

2) Do not trust financial advisors at your investment bank. There job is not to make financially sound decisions for you, their job is to sell you on the investments that best suit their bottom line. I have no idea why this concept is so hard for people to understand. Do your own research and make your own choices--it isn't that fucking hard of a concept to figure out. Get confused by finances? Too bad, get a good book and figure it out. It's the most important thing you could possibly learn given that your very survival can depend on understanding it.

3) Employer matches are important, make sure you take it into account when finding a job. Also make sure you understand the terms of the match and ask questions like:

- Is it in cash or stock?
- What's the vesting schedule?
- What is the required contribution to hit the match limit?

And so on.

[aerius]

In general, people facing problems today got too little advice, or bad advice. They didn't realize that a 6% annual contribution, with a 3% company match, might not be enough.

All I gotta say is "I'm sorry you can't do high school math". If you want to retire with the same standard of living you're looking at 1/4 to 1/3 of your annual gross income being stuffed away into your retirement savings depending on the interest & inflation rates. We even have 401k and other retirement savings calculators on the 'net these days so you don't even need to know math, you just need to punch in the numbers and see if they add up. 9% total contributions ain't gonna get you a retirement fund without massive compound annual growth and a shitload of risk.

[aerius]

3) They compounded their mistake of #2 by getting out of the market at the bottom. Just take a look at how much the market has bounced back in the last two years...now realize that morons were bailing out back in 2008 when the market had 40% less value. That's a good way to destroy decades of investment returns.

The worst part is those people are buying back in right about now when there's plenty of indications that we're nearing another top in the markets. They're going to get slaughtered again when the markets take another leg down. This is part of what made the Great Depression so bad, there were just enough relief rallies to suck people into the markets again & again and completely destroy their wealth.

[The Kernel]

All I gotta say is "I'm sorry you can't do high school math". If you want to retire with the same standard of living you're looking at 1/4 to 1/3 of your annual gross income being stuffed away into your retirement savings depending on the interest & inflation rates. We even have 401k and other retirement savings calculators on the 'net these days so you don't even need to know math, you just need to punch in the numbers and see if they add up. 9% total contributions ain't gonna get you a retirement fund without massive compound annual growth and a shitload of risk.

Keep in mind though that a 401k has limits into how much you can put into it. I'm already at the max yearly contributions right now with an 9% contribution, so I need to find alternate methods of investment to make up the difference.

Of course those alternate investments are not tax advantaged so saving more can get pretty expensive. It would be nice if they would raise the limit on ROTH-IRA contributions but I'm not holding my breath on that one.

[Akhlut]

For those of us stuck in part-time or minimum-wage/near-minimum wage jobs, do you have any advice on how to try to save for retirement? I'm only 25 and I'm hoping to get a Master's degree soon and get a better job, but I'd like to start on retirement savings account now so I can accrue something. Is there any way to do this while living paycheck to paycheck? Can even a simple savings account with $20 a paycheck be a good start?

[aerius]

Keep in mind though that a 401k has limits into how much you can put into it. I'm already at the max yearly contributions right now with an 9% contribution, so I need to find alternate methods of investment to make up the difference.

Of course those alternate investments are not tax advantaged so saving more can get pretty expensive. It would be nice if they would raise the limit on ROTH-IRA contributions but I'm not holding my breath on that one.

We have the RRSP in Canada which is similar except there's no employer match, all you get to work with is what you put into it. Contribution limit is capped at 18% of income or $21k/year, whichever is smaller. Course we also have Canada Pension Plan contributions which get deducted off every paycheque and if your employer has a pension plan then that gets taken off as well.

Add it all together and I'll have a pretty decent retirement, then again I'm stuffing well over 1/4 of my pay into retirement savings & plans so I damn well better have one.

[Broomstick]

Keep in mind, too, that even if you do everything right in your 20's and 30's you can still have your entire retirement wiped out in your 40's or 50's. That has happened to millions of Americans who lost their jobs an haven't found another - essentially, forced to "retire" in their 40's or 50's just to pay the bills and survive, which means taking enormous penalties. And, of course, we all know that the US "health care system" has refined ass-raping the ill and injured to an art form.

I used to have a nice nest egg. It's gone now. Given my family history and general health I actually do have time to recoup IF I'm a little lucky... I was planning to work until 70 anyway assuming I stayed healthy so, while scary, my current situation in regards to future lifestyle isn't terrifying.

Which is yet another argument for diversifying your holdings. The more baskets you have to keep your eggs in the more likely you are to get through a bad storm.

[The Kernel]

For those of us stuck in part-time or minimum-wage/near-minimum wage jobs, do you have any advice on how to try to save for retirement? I'm only 25 and I'm hoping to get a Master's degree soon and get a better job, but I'd like to start on retirement savings account now so I can accrue something. Is there any way to do this while living paycheck to paycheck? Can even a simple savings account with $20 a paycheck be a good start?

A few tips:

1) Retirement savings are long term affairs. Putting away money before you have a comfortable cushion of short term savings is a good way to set yourself up for having to raid your retirement account to pay your rent. This is bad. Don't start a retirement account until you have enough money in a savings account to cover two months worth of expenses.

2) Do not put away money into your retirement account unless you have paid down all of your high interest debt. There is no point to putting away money to earn 7% interest while you have credit card debt that has 25% interest accumulating.

3) Once you have your cushion built up, start with a ROTH-IRA. You can only contribute $5000 a year, but it's a wonderful retirement vehicle because unlike a 401k which is tax deferred (you invest the money pre-tax and don't have to pay taxes till you withdraw it) a ROTH-IRA is tax-free growth. That means that you pay the initial taxes on your income, and then when it is put into the ROTH-IRA account you never have to pay taxes on any of the earnings. Ever. It's awesome.

4) At your age you should be 100% invested in equities for your retirement account. This sounds high risk but it's actually not since you are investing for the long haul and don't plan to touch the money for decades.

A good index fund is a nice place to start (they have low expense ratios of .1% instead of ~1% or more for your typical mutual fund) but you may not have the money needed to buy into one of these as they have a typical initial investment of $2500. Not to worry though, there is something that can give you the equivalent of an index fund called an exchange traded fund or ETF. These are the same concept as mutual funds but they are sold on the equity markets instead so anyone can buy shares. The only downside though is that you have to deal with stock trading fees so don't just buy a single share, make sure you account for the upfront cost of making a trade.

I recommend index funds and ETFs that chart broad markets like one that is indexed to the Russel 2000 index. If you want to pick up some developing market indexes like Asia (a popular choice right now) that's also an option.

[The Kernel]

Keep in mind, too, that even if you do everything right in your 20's and 30's you can still have your entire retirement wiped out in your 40's or 50's. That has happened to millions of Americans who lost their jobs an haven't found another - essentially, forced to "retire" in their 40's or 50's just to pay the bills and survive, which means taking enormous penalties.

This is a common misconception. Your retirement should not be diversified so far from retirement age, but instead you need to have a decent cushion of savings in the event of the unforeseen. Two months of expenses all in should be the minimum, but twelve months should get you through almost anything.

If you have twelve months of savings put away in short term securities (money markets, CDs, etc) you should be able to stretch that out even further when you take into account severance, unemployment and belt tightening. And if you are a two income household it's even better--even six months of unemployment shouldn't seriously drain your savings.

And, of course, we all know that the US "health care system" has refined ass-raping the ill and injured to an art form.

Speak for yourself. Some of us have employers that actually give a shit about their employees and provide us with premium health plans. If you want a good health plan, make it part of the criteria of what you'll accept when you look for a job and don't take a job with an employer that doesn't offer great health benefits.

Not a single company I've worked for (and I've worked for a few) has given me anything but the very best healthcare plan options (both PPO and HMO). And it's the same for all employees from the CEO down to the customer service reps.

Which is yet another argument for diversifying your holdings. The more baskets you have to keep your eggs in the more likely you are to get through a bad storm.

No, it's a good argument for having more that just retirement with regards to savings. If your only savings is in a retirement account then you aren't being fiscally responsible.

[Simon_Jester]

Keep in mind, too, that even if you do everything right in your 20's and 30's you can still have your entire retirement wiped out in your 40's or 50's. That has happened to millions of Americans who lost their jobs an haven't found another - essentially, forced to "retire" in their 40's or 50's just to pay the bills and survive, which means taking enormous penalties.

This is a common misconception. Your retirement should not be diversified so far from retirement age, but instead you need to have a decent cushion of savings in the event of the unforeseen. Two months of expenses all in should be the minimum, but twelve months should get you through almost anything.

It wouldn't have worked for her...

Kernel, like it or not this is a fundamental problem with private retirement savings that isn't going to go away as long as we stick to the economic model of putting our retirement funds in the market- the market does crash from time to time. And once in a while (like the '30s, and possibly like the years we're going through right now) we get a sequence of multiple crashes that can have the effect of repeatedly trashing the investments of someone who mistimes things or trusts the wrong managers.

And moreover of trashing the finances of those same people- Depression-level financial crashes can in fact screw you over to the point where having been fiscally responsible in the past will not save you, or cannot be counted on to save you. It happens.

When you're planning to live for another forty or fifty years past young adulthood, the odds of such a crash occurring in your lifetime are not small. The odds of a crash happening when you've already spent the bulk of your lifetime accumulating those savings... well, as many people in their fifties and sixties are learning now, those odds are high enough to be quite frightening.

And, of course, we all know that the US "health care system" has refined ass-raping the ill and injured to an art form.

Speak for yourself. Some of us have employers that actually give a shit about their employees and provide us with premium health plans. If you want a good health plan, make it part of the criteria of what you'll accept when you look for a job and don't take a job with an employer that doesn't offer great health benefits.

At the moment, that is not an option for many Americans because unemployment is high. It will also depend wildly on what industry you're in, and on economic forces beyond your control (if, say, everyone else decides to enter the same industry you did and the need to retain skilled workers declines over the next ten years because so many experienced people are available).

[GrandMasterTerwynn]

And, of course, we all know that the US "health care system" has refined ass-raping the ill and injured to an art form.

Speak for yourself. Some of us have employers that actually give a shit about their employees and provide us with premium health plans. If you want a good health plan, make it part of the criteria of what you'll accept when you look for a job and don't take a job with an employer that doesn't offer great health benefits.

At the moment, that is not an option for many Americans because unemployment is high. It will also depend wildly on what industry you're in, and on economic forces beyond your control (if, say, everyone else decides to enter the same industry you did and the need to retain skilled workers declines over the next ten years because so many experienced people are available).

It's never really been an option for the majority of Americans, who aren't well-educated enough to compete for starched white-collar jobs, and who work where employment is "at-will." A person applying for the armed robbery shift at the local 7-11 is going to be laughed right out of the store when he or she dictates that 7-11 offer them great health benefits.

And those 'premium' Cadillac health care plans? When employers start looking for ways to cut cost to improve the bottom line . . . those Cadillacs have a way of slowly becoming Chevys.

[Broomstick]

Keep in mind, too, that even if you do everything right in your 20's and 30's you can still have your entire retirement wiped out in your 40's or 50's. That has happened to millions of Americans who lost their jobs an haven't found another - essentially, forced to "retire" in their 40's or 50's just to pay the bills and survive, which means taking enormous penalties.

This is a common misconception. Your retirement should not be diversified so far from retirement age, but instead you need to have a decent cushion of savings in the event of the unforeseen. Two months of expenses all in should be the minimum, but twelve months should get you through almost anything.

If you have twelve months of savings put away in short term securities (money markets, CDs, etc) you should be able to stretch that out even further when you take into account severance, unemployment and belt tightening. And if you are a two income household it's even better--even six months of unemployment shouldn't seriously drain your savings.

Unfortunately, my spouse is physically disabled. At the time we married he was able to hold down a full time job but since then his health and abilities have crashed.

Despite that, I walked out the door after my layoff with NO debt. NONE. And I had 12 months worth of money. Which I stretched for two years. In other words, I did everything right, and still got hurt. Which is my point. Yes, you can increase the odds in your favor but there are no guarantees. You CAN be wiped out.

And, of course, we all know that the US "health care system" has refined ass-raping the ill and injured to an art form.

Speak for yourself. Some of us have employers that actually give a shit about their employees and provide us with premium health plans. If you want a good health plan, make it part of the criteria of what you'll accept when you look for a job and don't take a job with an employer that doesn't offer great health benefits.

Not a single company I've worked for (and I've worked for a few) has given me anything but the very best healthcare plan options (both PPO and HMO). And it's the same for all employees from the CEO down to the customer service reps.

That's fine if you have a job - you get laid off you are fucked. When we lost our health coverage we were paying more out of pocket for medical costs than we were paying in rent, food, and fuel combined. That was the minimum to keep my spouse alive and out of the hospital. It took me 18 months to get us new insurance, and it wasn't because I got a job with benefits, it's because my state is enlightened enough to come up with a way for the working poor to get coverage.

Let me repeat - I was laid off four years ago, through no fault of my own. I walked out the door with no debt whatsoever. I have 12 months of cash on hand. Six times what you suggest (really, given today's work environment six months of living money should be the minimum). Despite a college degree and 30 years of work history I have not been able to secure steady employment since then because, frankly, being over 40 makes you undesirable to a lot of employers. Yes, it is that bad out there. Multiply by several million others in the same boat.

I've been through several recessions before this. Never had trouble getting another job of some sort, was never unemployed long enough to collect unemployment. This time is different.

Which is yet another argument for diversifying your holdings. The more baskets you have to keep your eggs in the more likely you are to get through a bad storm.

No, it's a good argument for having more that just retirement with regards to savings. If your only savings is in a retirement account then you aren't being fiscally responsible.

Please go back and re-read what I said - I said "diversifying your holdings", not "retirement". As you pointed out, you need other forms of savings/investing/whatever. You need cash, you need savings, you need retirement, $100 stashed in the sock drawer in case for some reason the ATM's are down (like in the tornado a couple years back, no ATM's in the neighborhood for two days)... And you need a plan for what basket you reach into first and which last.

I've known too many people who socked away into retirement while carrying debt and without a "rainy day fund". Then the crash came and they lost everything because debt will kill you quick if you have no income, you have to pay the bills, and drawing out of a 401(k) involves penalties. I admittedly didn't have much of a retirement fund but that's because I chose to live debt-free and keep a generous cash-on-hand fund, AND I was planning to work another 30 years. Was that the right decision? Well, I'm not bankrupt, I somehow manage to pay the bills each month, and I don't have debt collectors calling so it's "right" in that sense. Would a different strategy have been better? Maybe. But, you know, I'm not a financial expert, I do the best I can. I look at other people who used to live better than I did - and a couple of them I bumped into while doing Census work at soup kitchens and homeless shelters. I'm poor, but I'm surviving. There are people worse off than I am.

Maybe it comes down to you can live better on a small amount of money if you know how to budget and manage that money, and you can get in a world of hurt no matter how high your income if you're stupid about finances.

[Korvan]

What stuck out to me from that article was the couple in their 60's paying down a mortgage and a home equity loan. Approaching retirement with a mortgage is bad enough, but to compound that with taking out a loan on your (probably nonexistent now) home's equity? Seems like someone was trying to live beyond their means. I bet this couple is living in 5000+ sq feet. With the real estate crash, they can't even downsize to a smaller place without still owing a ton on their previous place. Talk about limiting your options.

There's just no way you can preserve at retirement a standard of living you couldn't really afford when you were working. This article also seems to aimed at middle class folks, so what is the situation for people who have been scraping by all their lives when it comes to retirement?

[The Kernel]

It wouldn't have worked for her...

Kernel, like it or not this is a fundamental problem with private retirement savings that isn't going to go away as long as we stick to the economic model of putting our retirement funds in the market- the market does crash from time to time. And once in a while (like the '30s, and possibly like the years we're going through right now) we get a sequence of multiple crashes that can have the effect of repeatedly trashing the investments of someone who mistimes things or trusts the wrong managers.

And moreover of trashing the finances of those same people- Depression-level financial crashes can in fact screw you over to the point where having been fiscally responsible in the past will not save you, or cannot be counted on to save you. It happens.

When you're planning to live for another forty or fifty years past young adulthood, the odds of such a crash occurring in your lifetime are not small. The odds of a crash happening when you've already spent the bulk of your lifetime accumulating those savings... well, as many people in their fifties and sixties are learning now, those odds are high enough to be quite frightening.

So what's your alternative then? More mandatory social security isn't going to help since it doesn't have the returns that equity provides. There's always going to be some risk unless people are willing to retire on a relative pittance.

[The Kernel]

Unfortunately, my spouse is physically disabled. At the time we married he was able to hold down a full time job but since then his health and abilities have crashed.

Despite that, I walked out the door after my layoff with NO debt. NONE. And I had 12 months worth of money. Which I stretched for two years. In other words, I did everything right, and still got hurt. Which is my point. Yes, you can increase the odds in your favor but there are no guarantees. You CAN be wiped out.

Of course you CAN but you know very well that most people get wiped out because they didn't take the steps that you did. The fact that taking said steps doesn't guarantee that you won't fall into a hole does not mean that it is not a proper way to balance risk.

That's fine if you have a job - you get laid off you are fucked. When we lost our health coverage we were paying more out of pocket for medical costs than we were paying in rent, food, and fuel combined. That was the minimum to keep my spouse alive and out of the hospital. It took me 18 months to get us new insurance, and it wasn't because I got a job with benefits, it's because my state is enlightened enough to come up with a way for the working poor to get coverage.

Fair enough, I suggest you make yourself more clear next time. You seemed to be attacking all medical care in the US, not just the conditions for those who rely on privately acquired insurance.

Let me repeat - I was laid off four years ago, through no fault of my own. I walked out the door with no debt whatsoever. I have 12 months of cash on hand. Six times what you suggest (really, given today's work environment six months of living money should be the minimum). Despite a college degree and 30 years of work history I have not been able to secure steady employment since then because, frankly, being over 40 makes you undesirable to a lot of employers. Yes, it is that bad out there. Multiply by several million others in the same boat.

I've been through several recessions before this. Never had trouble getting another job of some sort, was never unemployed long enough to collect unemployment. This time is different.

Perhaps my memory is bad but you were an executive assistant were you not? That particular job has been on the decline for decades, mainly because technology like email and electronic calendaring. It's probably not going to come back soon either.

However, for all the talk about the employment situation you do realize that those with college degrees are only seeing an unemployment rate of around 5%?



The lesson here is pretty clear: get an education.

[Broomstick]

There's just no way you can preserve at retirement a standard of living you couldn't really afford when you were working. This article also seems to aimed at middle class folks, so what is the situation for people who have been scraping by all their lives when it comes to retirement?

They're fucked.

So what's your alternative then? More mandatory social security isn't going to help since it doesn't have the returns that equity provides. There's always going to be some risk unless people are willing to retire on a relative pittance.

There isn't one. Life is unfair, the universe is a hostile place and you can do everything right and still not come out ahead. Memorize that.

Yes, there will always be risk no matter how carefully you plan, no matter how much you put away, no matter how carefully you invest. Always remember that - no matter what there is still a risk of losing everything.

And if that does happen the universe doesn't give a fuck if you're "willing" or not - if that happens you will be lucky if you have even so much as a pittance.

The purpose of social security was not to ensure a middle class old age, it was to ensure that the elderly had at least a a pittance. Enough to eke out comfortable poverty (i.e. enough to eat, sound shelter, sufficient clothing) though you might need a roommate to make ends meet. Which seems a fair enough floor in many ways, the idea citizens would have at least a pittance if the very worst happened to them.

[The Kernel]

There isn't one. Life is unfair, the universe is a hostile place and you can do everything right and still not come out ahead. Memorize that.

Yes, there will always be risk no matter how carefully you plan, no matter how much you put away, no matter how carefully you invest. Always remember that - no matter what there is still a risk of losing everything.

Of course, hedging risk can only do so much. Doesn't change that everything I laid out is exactly the right thing to do to plan your retirement. The fact that it bad things can happen doesn't change that.

The purpose of social security was not to ensure a middle class old age, it was to ensure that the elderly had at least a a pittance. Enough to eke out comfortable poverty (i.e. enough to eat, sound shelter, sufficient clothing) though you might need a roommate to make ends meet. Which seems a fair enough floor in many ways, the idea citizens would have at least a pittance if the very worst happened to them.

Exactly, no one wanted to see homeless elderly people. And that's why Social Security really is a great thing, but people need to understand what it is and what it is for. It's designed to provide a bare level of sustenance for the unfortunate among us and a BASE to build a retirement for the rest of us. The fact that some people don't understand this and don't plan their retirement properly is tragic but at some point personal responsibility needs to be involved. The government cannot do everything for you.

And yes, sometimes someone through no fault of their own will still get wiped out. It happens but people die of cancer or traffic accidents too, you can't protect people from everything.

[aerius]

So what's your alternative then? More mandatory social security isn't going to help since it doesn't have the returns that equity provides. There's always going to be some risk unless people are willing to retire on a relative pittance.

If I had my way I'd take 20-25% off every worker's paycheque and automatically dump it into a national pension plan that holds nothing except T-bills and McDonald's & Coca-Cola company bonds. Cap payouts at $150-200k per year or 75% of average pay whichever's less and use the surplus to bring low income workers' pensions up to an acceptable minimum level. If someone doesn't feel that's enough to retire on then he can do his own savings & investment on top of that.

[The Kernel]

If I had my way I'd take 20-25% off every worker's paycheque and automatically dump it into a national pension plan that holds nothing except T-bills and McDonald's & Coca-Cola company bonds. Cap payouts at $150-200k per year or 75% of average pay whichever's less and use the surplus to bring low income workers' pensions up to an acceptable minimum level. If someone doesn't feel that's enough to retire on then he can do his own savings & investment on top of that.

Not a bad idea, but probably politically untenable. People already complain about the burden of payroll taxes and people who make less than $50,000 a year are going to make a pretty convincing argument that a 25% haircut is simply too much burden to bear.

[Simon_Jester]

Honestly, at this point I think punitively progressive taxation might be in order for almost any set of reforms designed to salvage the American economy. We need national health care worse than we need more hectomillionaires.

[Broomstick]

Not to mention that for all the weeping and wailing about high tax rates in the US that is actually not the case - plenty of people pay more taxes than we do. A little more for the common good would benefit everyone.

[mr friendly guy]

Australia superannuation takes about 9%. Hell if I want them to take 20-25% of my paycheck, not because I want to spend my cash on the latest gadget or sci fi memorabilia, because I am using the excess cash responsibly in investments. My (pipe) dream is to do what Robert Kiyosaki claimed to have done. Have enough income producing assets so he could retire young and only worked because he (allegedly) loved his job.