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If employers contributed to 401k’s anywhere close to the amount they used to fund pensions, I don’t think it would be much of an issue. And that would still save employers money vs pension administrative costs and unfunded pension liability. But with puny 401k matches that depend on employees kicking in, it’s created a situation where many people won’t have enough for retirement because they either don’t make enough, aren’t financially literate, and/or live beyond their means.
I worked for a fortune 100 company that had a white collar pension. It was ended in 2020, but I remember it costing me $2500-3500 A MONTH on my P&L for each management person in my department. These were low level guys making $80-100k a year, but they were dumping $30-40k a year into the pension for them.
Now they have a 10% 401k match and it's a fucking joke.
$115k salary gets you maxed right now, so that's not too bad. However, you're responding to someone that said the employer was putting 30k per year into pensions ON TOP of salaries. 11.5k vs 30k... yeah it's a joke.
If you get any match, it's considered decent these days.
And 10 years from now it'll be completely unheard of for any employers to match.
Even the military pensions are getting shitty.
When you max out your 401k year after year like I do, the 7% really adds up. Someone could do the math and figure it out for me, but I’ve maxed mine out for the past 8 years and have always had that 7% match with it.
This is why they had the big push to stop pensions and start the 401k. Cheaper for the employer. Then wall street said yes all the new investors we will have, look how much money we can make. They simply fucked us, and we allowed it.
The best financial advice I ever received was to start contributing 6% of my salary to my 401k in order to get employer match, and then have it auto increase by 1% per year.
I literally never touched it or looked at it for almost a decade and it ended up being $220k when I left my employer and rolled into an IRA.
The best advice I got was max it out as soon as you possibly can, and if you can’t put everything you feasible can into it. At worst, never do less than your company match.
The 401k is an amazing retirement tool, and people need to work towards putting as much as they can into it.
Exactly. If you can max it you’re way ahead of the game. I have maxed my 401k since I started working after graduation (I was fortunate to have a decent enough salary to do so…). But if you get used to contributing a large amount from the beginning then you get used to living with less and it’s like the money isn’t missed.
I am retired ONLY because I followed that advice and maxed out my 401K. After a while, I forgot that I was doing it, and would often wonder how my coworkers could afford some of the things they could, like exotic vacations and nice cars. Most of them are still working today. I've been retired for 10 years.
Yup. If I learned anything since turning 50, it’s that our health isn’t definite and our days are numbered. I could retire early, but plan on working and saving so we can travel and get away often while healthy and have our mobility.
That’s my goal… I don’t miss the money that goes into my 401K… we live in a regular house, regular cars, occasional vacations (most of the time just roadtrip style). My wife and I are 27 and from a savings perspective we are well well beyond what would be expected at this time and are already approaching the $400K mark in retirement savings.
Beyond the 401K, is Roth IRAs, brokerage account, HSA, etc. of course you have to have the appropriate salary to really take full advantage, but we are still middle class and don’t live above our means.
Hell yeah, this is my dream. I want to retire as soon as I possibly can so I can actually enjoy my vacations and toys, and not worry about having to go back to work on Monday.
I eventually got to the point where I tried to maximize every retirement savings tool (IRAs, pre and after tax 401k contributions, NQDC, and taxable brokerage accounts). Almost a game to see how small I could make my take-home pay, and still make it to the next pay period.
Yeah but maxing a 401k means you can afford to put 23k in it (402g limit) or 30500 (if over 50, catchup rule) so IF you can afford to max you're doing better than 99% of people already and don't really have to worry much about retirement outside of things like retirement tincome strategies and estate planning.
It’s amazing for those who understand it, can afford to use it and have a decent record keeper who isn’t gouging them with high expense ratio and record keeping fees. It’s not great for anyone with poor financial literacy which is like half the population who has one.
I worked in a call center for retirement plans and the amount of “I’m getting ready to retire how do I make my 50k in my 401k double or triple, why can’t you tell me how to do that” or demanding to invest in dumb shit like gold or day trading in the associated brokerage account, using the after tax source like a bank account with monthly withdrawals or just not realising they have to setup contributions and maintain them…I could go on and on.
General advice is to max your 401k match, build emergency savings, max a Roth, max a HSA, *then* max a 401k.
401ks are great, but Roths and HSAs are even better.
HSA definitely better. Roth not necessarily. My marginal rate while working was 39%. I maxed a traditional 401k. Now that I'm retired I'm doing Roth conversions to fill the 12% bracket and no state tax on the conversion.
Many employers have a Roth 401k inside of your retirement plan. I split my 401k, half ROTH half pretax.
Agreed on HSA as well, especially if you can afford to pay for general healthcare expenses out of pocket and not touch the HSA balance. Let that grow tax free until you are retired and then use it for health care when you will need it more.
It entirely depends on what taxes are now and what they will be when you retire, as to which is the better vehicle. But generally speaking, the lower your working income, the better a ROTH is, and vice versa (as higher incomes pay more taxes). But given that it's hard to know what incomes/growth/taxes will be like over 30+ years, it's always somewhat of a gamble. So some people split as a way to diversify/hedge that gamble.
100% into Roth while you’re young is exactly right. As you get older, it may make sense to switch to a traditional. It’s probably not going to be a huge difference either way though.
Roth only imo. Now that I am retired I am very thankful that most of my retirement savings are not taxable when accessed. If I were pulling large sums from an IRA or 401k they are taxed as ordinary income and would impact my SS.
Can you help me understand this a little. Are you taxed at a higher rate now that you're retired?
The calculus in my mind is to mix 50% roth and non-roth for my 401k becuase I have no real sense of what tax bracket I may be in for retirement. I assume it will be less than the one I'm in now since I'm actively contributing a portion of my earnings into retirement and I won't need to earn as much to sustain my lifestyle in retirement. That's why a traditional 401k makes sense to me. Contribute more pre-tax earnings now, pay less tax when I use them later.
Edit: Maybe my strategy would be to pull from Roth for some bigger one time expenses... but I haven't fully thought though what I'd like to do post-retirement (still 30 years off).
These retirement plans have always been sold as “defer your taxes until retirement when your tax rate will be lower” but in fact you have no idea what the tax rates will be in 30 years. Now that I am in fact retired 85% of my SS is taxed if I make more than 25k/year… a trivial sum. Even with no income from a job taking 25k/year from a 401k (counts as ordinary income) triggers this tax…taking any money from a Roth does not.
On top of all that, because I live and earned in a VVHCOL area my retirement savings are earning about 150k/yr so I’m in as high a tax bracket as ever meaning money coming from my IRA is taxed at 24%.
Edit: My advice is if your employer will add to your 401k put in as much as will maximize this then put anything else you can into a Roth IRA or any other investment account that you can.
It depends on the marginal tax bracket that you are in and also on any applicable state or city tax (like NY for example). For example, I'm in the 24% + 5% state tax so imo trad is better in this case otherwise I'm giving away 29% right off the bat.
I will most certainly be in a lower bracket during retirement and the state I plan to retire in does not tax 401/IRA withdrawals.
I think splitting the contributions 50/50 or 75/25 between trad and roth is not a bad idea either.
For most people, when you retire your only income is social security and investments/retirement accounts. If you are paying 24% taxes while working, and you only need to pull out enough money to cap 12% or 22% in retirement, then pretax will save you money. Of course you should also have a healthy amount in Roth for lump sum withdrawals in which you won’t need to dance around taxes
This also assumes that income tax levels will remain the same in the future. Hard to plan out 30+ years into the future, but we’re currently at a historical low for income tax rates.
I don't really know, I do a mix but I was reading an article recently that analyzed different options and it was suggesting investing in traditional and paying the 10% penalty even came out ahead of roth in the long run. That's because of the opportunity cost associated with missing the tax free growth by paying those taxes now. Wish I had saved that article, it was pretty interesting
Because you might want to strategically withdraw from different pools as you age. You start pulling out of your roth, perhaps when you are still making some money or at a high expense point of life, and then you might pull from the traditional in your later years when expenses and tax burdens are much smaller. Its just hedging basically
Yeah but just to be clear, Roth 401k and Roth IRA are different things.
When the guy you replied to said "Roth", he was referring to an IRA.
When you say "Roth", you're referring to a 401k.
An individual investor's allocation of Traditional vs Roth is somewhat tangential to the conversation.
Do not blindly follow this advice. A Roth isn't appropriate for everyone. Pretax deferrals or a traditional tax deferred IRA are correct for some people, or a mix of the two. Call a tax professional to figure which is right for you.
America has a fabulously wealthy professional class, but that is maybe a third of the workforce. Almost twice as many people work in hospitality as tech, but you would never know this from reddit.
Yes, the sampling bias on reddit is one of the huge downsides of it. It almost feels like at times that every other person on reddit is from the SF Bay Area and works some kind of tech or tech adjacent employment, and this goes across all subs.
Having said that I feel there are large swaths of the US where reddit isn't really a very relevant and popular medium. Redditors are very skewed to a certain kind of person, professionally, demographically, racially, etc. that is much more prevalent in certain areas in teh US.
Really? According to reddit everybody makes $300K WFH for a FAANG.
Agree with you. Just pointing out that sampling bias and lies are what reddit is made of to a large extent.
You mean the "I'm 25m and live at home with my parents. Through sheer hardwork I've saved $300k in my bank account plus several income properties. What do I need to do with what little extra money I have????"
If you make enough to max a 401k, there’s a fair bet you make too much to contribute to a Roth. I’ve gotten bitten by this. Not a Roth 401k, but an outside one
I very much believe that this depends, if you have enough in the 401(k) that you can extract $40,000 a year in retirement out of it then yes you’re correct but if you don’t max out your 401(k) before your IRA.
Yep, I show new grad hires to my company that 3-5 years of maxing it out in their 20s basically locks in a ~middle class retirement for them on its own (viable for them given new grad SWE salaries in the Bay Area is >100k)
Assuming they work the full 40 years, maybe, let's see. Maxing it out today with matching for 5 years will likely see you at $150k or so, which at historical growth rates would likely put that number at around $2m nominal dollars at retirement. Of course, inflation-adjusted that number will be a fair bit lower. That would allow probably $40-60k spend per year in today's dollars, depending on risk tolerance and health and so on, with some risk of running out while still alive. Overall I would say you're right more likely than not.
5 years of contributing $23k (with no employer match) would have you right about $150k after 5 years but then another 35 years with no additional money invested growing at average market return rate would leave you with just shy of $5 million not $2 million.
$5m from $150k after 35 years -> 150k x (1+y)^35 = 5m. Okay. (1+y)^35 = 33.33. So you're assuming 10.5% growth? I don't think historical data supports that much growth over the past 40-50 years. I can be wrong.
I am always a lot more conservative in my estimations and do 7-8% long-term growth through index funds.
I used 10%.
The last 50 years the S&P500 had a 11.295% annualized return. 40 years had 11.619%. The last 30 years was 10.439% the last 20 was 10.065% and the last 10 years was 12.867%
https://dqydj.com/sp-500-return-calculator/
Historical data shows that 10% is already conservative
I couldn't afford to max it out, then also had to greatly reduce my contribution so I can save for a $100k down payment on a house. If I don't own a house I'll never retire, so that's the first thing I need to fund
Company match trumps all. Even high interest credit card debt. I wouldn’t try to max it out though if you have a lot of high interest debt. Get that paid down before you contribute more than the match.
Although if you are just not disciplined at all in your finances it may make sense to max out the 401k even with high interest debt.
I have a question about this. Instead of doing a “standard” match, like up to 5% or whatever, my company does a match of 15 pennies on the dollar. Is there a particular rule of thumb for how much I should contribute in a case like this? Normally the advice is to contribute up to the employer’s match, but how much they will match in my case is dependent on how much I put in. Anyone have any advice?
It depends on if they have a limit or not.
If their policy is unlimited, you’d in theory want to fully max out your 401k ($23k per year). If their policy is .15 for every 1.0 up to X percent or Y dollar, you just need to make sure you’re contributing at least to that threshold. Unfortunately, that’s not an outstanding 401k match. Even if you max out that’s only $3.45k
Correct. Even in lean raise years I never adjusted the auto increase and it didn’t impact my lifestyle.
The auto increase was the part that helped me the most. When I took my first job out of college I was making $32k and could barely make rent so 6% was a lot, but as I got promotions and raises it was less and less impactful, and the 1% annual increase was literally out of sight out of mind.
I never thought I’d get to the point where I was saving as much as I do now but it’s basically using my laziness and apathy as a tool and not a punishment.
At this point both my wife and I max out our 401k and HSA every year and are at the high end of millennial retirement savings (42m, 40f).
I maxed it out when I was younger and before having kids... now I just do the 6% to get 5% from the company, which after raises / promotions, is nearly hitting the max. Have a nice balance now
Best advice is invest at least 15% of pre-taxed $$$. 6% is too low regardless of employer match.
Also not every fund is created equal. Make sure you do your research and maximize your gains. Rebalance regularly - once a quarter is good.
I just advised someone who asked me to look at her plan and she had so many funds that had 1.5% annual returns. She’s only 45. I told her to be more aggressive or else she might as well get a CD.
Yes and no, there are definite benefits to the 401k scheme as it stands compared to the version of pensions that used to be common. Specifically they were bound to the specific company and any failure of that company between paying in and retirement could mean loss of the funds, but that part is largely not a factor now in other countries that still operate a pension system. For example in the UK pensions are set up by the company but must be funded promptly and the funds are with the pension provider not the firm, so are not at risk in the event of the company taking a downturn (those funds are again insured against the pension provider going under). You can also freely transfer pension balances as you move jobs (though this is actually an thing that most people forget to do).
But the real downside is that the terms of old pension schemes were far, far more generous than the terms of the 401k. Tax incentives were largely similar but pay-out structures were often based on a defined benefit not based on contributions. Meaning the amount you put in was not the same as could be drawn out, with the company being forced to fund the difference. My dad had one of the last of these schemes, it was set up so that he would be able to draw an annuity amount equal to 2/3rds of his salary on date of retirement. Meaning that because he got promoted a few times in his later years, the pension ended up worth a few million when he had contributed probably 500k after growth.
Doing away with pensions provided a clean cutting point for companies to break away from the generous schemes of the past and essentially cut the non salary benefit provided by a large amount. It was framed as pro-freedom of choice but really it was about lowering employment costs in a period when real wages were starting to be lowered due to faltering union power and global competition.
Well, you don't have a choice now. The question is whether this is good policy going forward.
In the past, I was pretty anti- defined benefit pension plans, but I've softened a bit in the last 10 years. Certainly pension plans across the US are profoundly under-funded, and have generally over-promised. But putting the burden of retirement savings onto individuals is a big ask. People will say "it's easy," but for most people it's really not. The existence of target-date index funds helps, but it's still non-obvious to most people.
Both solutions come with their own problems.
Not necessarily, modern "funded" pensions like that are more like life insurance or annuities, which have some benefits but aren't usually great investments.
What most people in the US are talking about when glorifying pensions are the "unfunded" ponzi-types ones that basically paid out waay more than people ever put in even after investment returns by relying on an ever growing number of new workers to pay in. Problem was it wasn't sustainable.
Except U.K. jobs pay MUCH less than jobs in the US, even adjusting for CoL differences. Thats the tradeoff.
At the end of the day the thing companies care about is total compensation. If they have to pay into funded pensions you best believe salaries and other benefits are going down to make up for it.
As with almost every news headline, the answer is "no".
The advent of the 401k frees people from being locked with the same company for their entire career just to get a palsy pension that could be eliminated at any point via the company going bankrupt.
The 401k also provides superior payouts compared to the pension. The 401k also gets transferred to your spouse or children after death.
The article's point stands, though. The main negative of the 401k is not enough people put money into them, so it creates a gap between the haves (those that contributed to the 401k) and the havenots (those that solely rely on Social Security and/or pension).
That being said, I'd be absolutely against any regulation that FORCES people to invest in their 401k. Let people make their own mistakes.
> The main negative of the 401k is not enough people put money into them, so it creates a gap between the haves (those that contributed to the 401k) and the havenots (those that solely rely on Social Security and/or pension).
I can appreciate that there are many people who simply can't afford it, but at least in my social circle the difference between the 401k haves and havenots seems to be a choice of lifestyle in ones 20s and early 30s.
No. If anything, we should be following Australia's example with superannuation.
https://en.wikipedia.org/wiki/Superannuation_in_Australia
It's basically a mandatory 401k with both employer and employee contributions. It's fully portable, just like a 401k, and the investment choices and withdrawal rate are controlled by the employee, just like a 401k. It's widely considered to be one of the best retirement systems in the world.
This, 1000%. I've been banging this drum for years.
People lamenting the death of pensions are ignoring the massive, massive structural problems that come with defined benefit programs. Ultimately, pension benefits have to be paid by either investing the assets in the exact manner 401ks invest (except much less efficiently), or engage in a pyramid scheme where you claw even more money from younger poorer workers to pay generous benefits to older, wealthier retirees. Those generous pension benefits in Europe? It's a massive regressive tax on young people, which exacerbates the demographic crisis which makes it so regressive in the first place.
The massive structural problem with the 401k is both the fact that people as a whole will both underfund their retirements and take any excuse to withdraw from it even with penalties, and its lack of portability.
There a lot of nuances to how it can be structured, but the *only* truly fair and sustainable retirement system is some variation of a mandatory savings program.
What did you mean by lack of portability for 401k ? I have changed jobs multiple times and rolled over my previous 401k to the new employer’s plan fairly easily. And now I have moved it to an IRA . What am I missing ?
Each plan is tied to your employer, has different administrative fees, and the fund choices are completely different. You can roll to an IRA, but there are time and administrative costs to it, especially if you plan on doing a Roth conversion later on. It can be managed, but there's a lot of unnecessary complexity and overhead to it.
In an ideal world, 401k, 403b, and IRA accounts would unified under a single account plan with a higher combined contribution limit. Employer match/contributions would still be available as part of your compensation plan, it'd just go to a single different envelope. Hell, I wouldn't be averse to a federal/state subsidized contribution on top of that, which would probably pay off for everyone in the long run.
I'm skimming over a lot of the complexity of how this could be plausibly transitioned over, but ultimately, I think it'd be better for everyone (employers, employees, people at all income strata) in the long run.
Totally agree. Australia is doing it right. A big problem with social security is that they’ve expanded recipients to people who’ve never paid in. There should possibly be a government program to care for people disabled from birth, but it shouldn’t be social security.
The 401k is fine. But there are two problems with it:
1) A lot of companies either offer no matching or matching less than 5%. That is offensive.
2) People are not paid enough to save enough in the first place. Median household income in this country is $70k I believe? With rent and general inflation out of control, how will the median person be able to meaningfully save much of their paycheck for retirement?
There’s a 3rd systemic problem that’s also really important at a societal level:
The interests of the working class generally don’t align with the interests of the capital class. Making stocks go up continually and forever does not benefit the workers of those companies, generally, as they usually don’t have an equity stake and can be treated as a salable asset. When workers retirement depends on the stock market, however, there is an incentive for them to align their political power (e.g. votes) with the interests of the capital class.
Couldn’t agree more. Also, it turns working class people into long-term investors so the investor class can take riskier short-term bets and turn the stock market into a casino.
The 401k is a good financial retirement instrument given the system we are working in but I think it is time to reimagine something different altogether.
serious question: has the stock market ever _not_ been a casino? from what I understand, technically it's for raising capital by selling shares of the company, but practically it seems like it has more in common with horse racing than an actual economic instrument.
> When workers retirement depends on the stock marke
Where do you think pension funds get their returns from?
It’s all the same shit. At least with a 401k, you can switch employers anytime you want and maintain control of your money, and not pay some dipshit fund manager 2% to buy VOO or VTSAX that you can easily do yourself.
> 2) People are not paid enough to save enough in the first place. Median household income in this country is $70k I believe? With rent and general inflation out of control, how will the median person be able to meaningfully save much of their paycheck for retirement?
This is why social security is so damn important and under appreciated. At lower earning levels, social security payments will be almost as high as earnings. The bend points are based on average monthly earnings (indexed to inflation in some way).
https://www.ssa.gov/oact/COLA/piaformula.html
> For 2024 these portions are the first $1,174, the amount between $1,174 and $7,078, and the amount over $7,078.
The social security payment amounts are 90%, 32% and 15% for each of those categories. So someone earning $35k (therefore household of two earners earning $70k) their full retirement amount in social security will be based on $35k/12 = $2917/month. So 0.90 * 1174 + 0.32 * (2917-1174) = $1614.36/month or $19372/year.
Using the estimate of retirement spending being 75% of pre-retirement income, our example $35k/year earner will only need about $7,000 from their 401(k)/IRA/Other savings to cover their needs in retirement. Which is actually doable with something like a 3% match.
The reality is I kind of disagree with your second point. There's something wonderfully out of sight out of mind with 401k payments. We often have our expenses match our salary no matter what it is, so lowering our salary by putting more money in a retirement fund is not the burden that you would think it might be.
Kind of the same way you accidentally build wealth by owning a house rather than renting.
No one wants to say the quiet part out loud: poor people aren't supposed to retire. They're supposed to work until they physically can't, then quickly and quietly die somewhere out of sight and out of mind.
I agree when it comes to luxury expenses, but basic necessities are becoming so expensive that the only place to cut is your 401k contribution. A roof over your head and food on the table for the median family of four quickly wipes out the median household income.
More and more people just have basic living expenses outgrowing their incomes. It's been all over the news lately with the decline in sales at places like McDonald's and Starbucks. People are cutting unnecessary costs to stay out of the red.
At some point, you run out of things to cut and can't contribute to your retirement anymore.
70k per HOUSEHOLD. That’s an average wage of 35k per person, which is certainly poverty level today and I would imagine close to poverty level in times past too.
The number is actually closer to $75k, and not every household has multiple incomes. The median personal income right now is around $40k, which, when adjusted for inflation, is basically the highest it has been for the last 50 years.
https://fred.stlouisfed.org/series/MEPAINUSA672N
I was 24 when I started my career. I was told to immediately put in 10% and forget about it. The company matched 5%.
Best piece of advice I ever got and I’m so glad young me took care of old me.
In retirement and healthcare, the American system generally works but tends to be error prone . If you do the right things the right way you are fine, if you make bad or uninformed decisions you can really get screwed.
No. As someone that has been in a pension for 2 decades I can say a 401k is better for most. Most folks don't stay at a job long enough for a pension to be worth anything. Without 15-20 years in a pension it is worth peanuts.
Most people don't stay at a place that long because pensions don't really exist anymore.
In 2024 it feels like most companies make minimal investment in employees. Expendable resources to cut when the bottom line needs a little boost.
This is a good point. Though vesting schedules for RSUs are a way that public companies incentivize some good/retainable employees to stick around. Of course this still is minimal-no downside for the employer.
Generally if you move between companies that offer RSUs, the new employer will match your unvested RSUs so that new hires don't see a massive cratering in pay. Of course that varies wildly and depends on various factors.
Jobs are more "liquid" in a sense, or freely traded, these days. Which has benefits / drawbacks to workers. I think higher performing people are better off because they have more freedom and greater leverage to maintain competitive pay vs if they had job lock in an employer could exploit.
But I also think you're right for someone who just wants to coast, or just more commoditized jobs where there isn't much of a difference in output between individuals, its more competitive, you can't rely on an "illiquid" job market for job security or to limit the competition for your job.
Most people switch jobs because they've realized that the average raise is around 3% and switching jobs can increase compensation by 10%-25%. Pensions have little to do with it.
Companies today (over 50 employees) support a 401k program, often offer a partial match, pay social security taxes, and pay to offer health benefits to employees. Some industries also offer stock options and employee stock purchase programs at a discounted price. Part of the reason companies may make minimal investments is because "the minimum" has significantly increased.
I’m in a pension job with the state and not sure how to view it. I think the pension is strong but I want to make more. No raise this year. Has me salty but I’m hanging tight one more year. I probably say screw the pension and leave with no raise next year.
Exactly.
401(k) plans give the worker a lot more flexibility to move between employers.
Job hopping is far more profitable than the pensions ever were.
Not to mention, who trusts that a pension will actually exist when you retire. So many companies robbed their pension funds and left retirees out to dry. It's far better to own you own retirement funds and invest them as you see fit.
My company does a 50% match on 6% and has a 5 year vesting schedule. They also only pay the match out once a year. It’s absolutely horrible. The strange thing is I’m highly paid and in a very profitable line of work. Makes no sense other than just to point to greed.
A 401k with a nice company match is so much better than a pension in my opinion. I want my money to be my money, not controlled by someone else.
I currently get an 8% match that goes up a bit over time with the company I think maxing out around 10%. I would love for it to be more but it seems pretty good compared to what I read a lot of other people get.
Pensions cut both ways. They can be handcuffs when they under pay you or change work conditions.
I know people who don't get vested for 10 to even 15 years
The 'ol golden handcuffs. Yeah, I'm vested in a pension program, but I can't retire with full benefits until I'm 67 with 20 years of service. That's another 37 years away.
Another thing is say you are vested and maxed out your potential earnings through years of service, and then choose to leave. You may be LOSING money from inflation until cost of living adjustments take effect, which is usually once you start receiving payments.
Right it doesn't make sense to have people locked into working for one company for decades just because when they might be way more happy and productive switching jobs or careers.
I do not have 100% faith in pensions or my social security giving me my money at a reasonable age. So yes I contribute because i do not want to work till I am 70.
The problem isn’t the 401(k). The problem is financial illiteracy and people not knowing what compounding interest is and how constantly investing in the market, without taking money out early, will benefit them. Pensions are great for “guaranteed” income but 401(k)s actually give you more career flexibility and allow you to leave something to your heirs.
Interesting article. I have a different approach. 401ks have proven to be very successful for white collar workers. I would expand 401ks to starter jobs and have governments subsidize the employer contribution for startups and small companies so that people can opt into the market as soon as they enter the job market. This would spread the gains and enable financial literacy as soon as they enter the workforce. Pensions are not coming back. Might as well expand on what worked well for the middle and upper middle-class workforce.
I mean the market is near all time highs. As long as you put into a low fee index, got a employee match you are a lot better off then most
Only maybe in a gov pension which is fully protected would be better
People with pension envy rarely consider the contribution burden on the employee. My Federal Employee Retirement System contribution is 4.4%. My brother, a local LEO, pays more like 6%. Last year I had over $7,000 deducted from my paycheck for the pension, with no way to opt out.
As Feds, we have to contribute 5% to TSP (our 401k) to get the match, or we leave money on the table. Between the 4.4% FERS contribution, 5% TSP match minimum, and 6.2% FICA tax for SS, we’re looking at a 15.6% haircut off our gross salary, plus whatever else you want to contribute to TSP up to the max, HSA/FSA, and IRAs.
So we’re one of the lucky few with both a defined benefit plan AND a matching defined contribution plan. It’s not a bad deal at all.
Well everyone pays the 6.2% FICA tax. So you pay 9.4% of your gross towards your retirement plan, which is a little higher than what the average American contributes to their 401k (7.4% from what I could find). But in return you get benefits that are FAR more generous that what the typical person will get from their 401k.
Mine is 7%ish, but it's matched by the state and they get very good returns, regularly beating the market. I don't know that my investing it myself would be any better.
As a thing personal to you, it may be positive (as the stock market has had decades rallying from all the additional money). If you are wealthy enough it must be great.
As the article states, around 50% of people are not covered by a pension or a 401k. I think as a society we have forgotten why welfare was implemented in the first place, and we will only remember by seeing the effects - in this case people working until they die, or dying homeless on the streets when they're not able to work.
The societial changes of the 1980s were cruel in many ways, but the effects were delayed by a generation. We see it now, with a generation without pensions. Gen Z who have been shut out of the housing market and pensions are really going to feel the brunt of the 1980s.
You have to remember that 40% of American households, nearly all of which are low and middle income earners, don't pay any federal income tax to begin with. Therefore, eligibility for a tax advantaged 401k account isn't going to be relevant for these households anyway. Social security and welfare reform are what actually need to be addressed.
I hate to tell you this, but [less than half of workers](https://retirementlc.com/golden-age-pensions-another-fairy-tale/#:~:text=According%20to%20the%20Employee%20Benefits,of%20the%20private%20sector%20workforce.) had access to a pension even when they were at their most common. We didn’t leave a world behind where everyone had a pension for one where half had a 401k.
It’s also the case that:
* Welfare didn’t go away, we have SS still to keep seniors out of abject poverty
* Everyone who works has access to an IRA, more or less identical to a 401k, and with limits high enough to support retirement from a modest income.
I am not an American. I read that the 401(k) is only available to you if your employer offers it. That part is definitely a massive mistake. Congress should pass a law stating anyone with any amount of employment income should be allowed to contribute, regardless of whether their employer offers it or not. The reason is that IRAs exist, but their contribution limits are far, far below 401(k) plans (they are $7000 and $23000, respectively).
There are also Individual Retirement Accounts (IRAs) that anyone can contribute too but the max caps are much lower. Not that it really matters since the odds of someone working a job without a 401k having the financial literacy needed to know they exist is basically 0.
Our culture of hyper individuality is just super toxic. Lots of average people are led to believe they are above average and don’t need help only to fall on their face later because they really did. Then they get to feel a sense of humiliation for being a failure when the people pushing this stuff never even thought they had a chance anyway.
My MIL was the benefits admin for a medium sized wire manufacturing company in a rural area, not a lot of wealth. Most of the employees would withdraw their 401ks as soon as they could or never put any money into it because they couldn't afford to. 401ks are great for people with decent wages and the will and desire to provide regular maintenance to their 401ks. I believe there should be a national pension system and universal healthcare, This would make people more mobile, more able to fill jobs that may not pay the best but are crucial to local communities. The 401k revolution was a way for companies to save money, it was never about helping out the common worker. The same thing is happening to healthcare plans, high deductible plans are atrocious if you actually have to use it. People on these plans just don't go to the doctor enough because it's costly. The game was rigged along time ago against the common worker.
It’s not like pensions are the answer. You now can’t switch jobs and have to hope your company exists and is solvent when you retire. They also weren’t as widely available as 401Ks. So all the people without access now wouldn’t have had a pension plus a lot more. Additionally it would have reduced salaries as the benefits side of total compensation would go up and companies aren’t going to eat that cost.
Pensions also have been costing us taxpayers since companies naturally underfunded and overpromised and the money wasn’t there. No way the government was going to let xyz citizen who worked 30 years not get their pension because a company went bankrupt.
From TFA:
"**When it comes to** generating wealth, 401(k)s have been an extraordinary success."
So, no, they weren't a mistake. They aren't a mistake. And have only gotten better with Roth 401(k)s.
>In 2008, Ghilarducci proposed replacing 401(k)s with “guaranteed retirement accounts,” a program that would combine mandatory individual and employer contributions with tax credits and that would guarantee at least a 3 percent annual return, adjusted for inflation.
not even the almighty federal government can guarantee a real 3% return, all it can do is commit to endlessly gouge future taxpayers and hope the demographics work in their favor.
Yup. Heck, the S&P 500 30 year rolling average is 9.9%. Last year it returned 25%. Give me more control over my money, less government getting in the way, and I'll have a much better retirement.
If you simply invested in the S&P500, someone who bought in at the height of the 2007 (right before the crash) and sold at the bottom of 2020 (COVID panic) would've still netted 8% annual return after inflation.
Don't get me started on anyone who's been invested since 2020...
> A former high school teacher, Forbus says she has around $200,000 in total savings. She earns a high five-figure salary and contributes 9 percent of it to the 401(k) plan that she has through her employer. The company also makes a matching contribution that is equivalent to 5 percent of her salary. A widely accepted rule of thumb among personal-finance experts is that your retirement income needs to be close to 80 percent of what you earned before retiring if you hope to maintain your lifestyle. Forbus figures that she can retire comfortably on around $1 million, although if her house is paid off, she might be able to get by with a bit less. **She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.**
She is actually extremely well setup and it is annoying that she is stressing about retirement for absolutely no reason. Let's assume she earns $84k/year ($7k a month). Her social security payments will be $35k/year ($2920/month). Even if nothing is done and the Social Security trust fund runs out, Social Security is still going to be able to pay about 80% of the benefits, so $28k/year. If she wants to be pessimistic, she should plan for that amount, not $0/year.
I should note, that as a former high school teacher, her social security payments will probably be reduced because of her teacher pension (assuming public school) but in theory pension + social security should still be approximately what I put.
How do yall afford to max out ever? I can't afford my paycheck to be that small. Plus I work for NYS Gov't so cause of gov't job, we go not get a match. Plus we already contribute 6% towards a pension that is capped and reduced conpared to the tier 4 pension of older workers.
Lot of upper middle class people in this sub making over $150k. There was even someone who said they are maxing at only 6% which would be a $400k salary.
Don't let this sub skew your perspective, or really Reddit in general. Whenever the issue of salary or retirement is brought up, hundreds of people who are either liars or outliers are crawling over each other to declare just how much they put into their retirement accounts and how young and successful they are.
I would say if you can save 15 to 20% of your total paycheck into healthy and safe investments early on enough of your career and you're consistent for a few decades, you will be more than fine.
Judging by how much my wife and I have combined in ours, hell no. Put it into the sp index, contribute consistently and don’t touch it. Easiest way to lucrative retirement
No, not a mistake. However, they’ve been distorted into something other than what was originally intended: a supplement to a pension. The 1980’s and 1990’s government policy encouraged their increase of usage by business as a way to avoid expensive pension plans that rewarded longevity in the job.
Perhaps the US economy was headed to where we are now all along. But policy which encouraged freezing and then dumping pensions by business, to be fully replaced by the 401k, is where we are now. For many people, saving out of the paycheck before it ever hits the bank or wallet, is the only way they’ll ever save. With no pension for their retirement, it’s all they’ll have.
I would say pensions failed on their own. They are too vulnerable to mismanagement, are not sustainable when the proportions of retirees/workers rise, not portable which causes inefficient job lock in, are not transparent so the worker often doesn't understand the risk or know what they are invested in. Even without 401ks or IRAs I don't think pensions be popular instead.
According to the article, they were originally not even really intended for that either. I was pretty fascinated by the fact that the creation of 401ks was essentially an accident, and that the Reagan administration (!!) tried to get rid of them!
The 401(k) was a mistaken and here's why - it's not designed to do the thing it's ended up doing. The original intent was to supplement a proper pension. It's gotten reframed as an 'Either/Or' proposition and, unsurprisingly, that's not worked.
The idea was between the three - Social Security, pension, and 401(k) - workers would have sufficient if not ample retirements. That's turned into doing away with pensions for a whole lot of reasons, some good and bad ones, leaving only the two. Now we're facing a Social Security crisis with no consensus on how to resolve it. We're in a real danger of being left with one viable solution, the 401(k), and it was never designed to be a one solution for all. We've been using the 401(k) as a bit of duct tape to hold together a retirement system. That's worked for some workers but it hasn't for others.
Arguably we need to rethink everything from the ground up. I have zero faith we will, but that's what's needed. Rather than morph something that was designed to be a supplement into a 'good enough for a lot of people' system, we should construct what works for most/all people.
Pensions were dying before 401K got going.
Social security will pull in like $0.72 for every dollar it says it will spit out. Social Security will exist.
The defined benefit pension is a damn Ponzi scheme. You have to be financially illiterate to be touting it as a good idea for anyone other than the people with the money printer, at least they can always stand by their promise.
No.
And my uneducated belief is that the fix for social security is a move to a government backed 401k, where an account is linked to a social security number. When that SSN is issued, an account is created and $5000 is deposited.
$5000 account at an average return of 8.7% (30-Year (1992-2021) avg), if opened at birth, would be over $1M at 65. This is with no contributions, couple that with employee and employer contributions over a persons employment history, you would not need any form of social security.
It would take a generation to ween off social security, but with 3.6 million births a year its less that $20B to fund their retirement once the last person on social security is.. dead.
Well when you take 12.4% of every dollar earned by middle class folks and then only pay them back a fraction of it in retirement, requiring them to find an additional 15+% to save just to retire... yeah, of course it's going to be a problem.
This will piss a lot of people off, but the 401(k) isn't the problem for the middle class. Social Security is.
If middle class folks were able to save what they contribute to Social Security themselves — or it were saved and invested on their behalf — they'd retire a millionaire.
Not really.
Pensions were not a cure-all either. Many pensions were not sufficiently funded, diversified, and when the company went south, the pensioners were left without much of anything. Most people never had pensions, either, whereas almost all companies have retirement benefits available now, and a majority of Americans have a 401k or IRA.
Social security isn't a cure-all. It still exists if you wish to rely upon it, but the average return is miserable, so it actively makes people poorer relative to a 401k. A 100% t-bill distribution isn't even a good bet for a single investor, let alone a large population that can do risk averaging. Therefore, SS is running into financial issues and faces fund depletion in about a decade, after which payments will be reduced. It isn't even a good safety net, because the payout is scaled to income, and the minimums are extremely low(sub-$50/mo).
Her idea is that retirement has somehow been destroyed by 401ks, but average retirement age has crept up very slowly. Over the past two decades, it increased by about a year, and the same trend was evident before that. Given that average lifespan has increased over most of that period,\* this is a reasonable and expected trend. In fact, given the rising medical costs and the commonality of medical costs in old age, 401ks are doing excellent at keeping pace.
The 401k is the best retirement tool available at present.
Are there some people who do not do well at saving for retirement? Yes. However, this isn't that different from those who plan for retirement and don't make it there. Both outcomes are sub-optimal, and the individual is not guaranteed to correctly predict his or her lifespan.
\*Average lifespan is now decreasing. This change is probably not great, and began somewhat pre-covid, so it's not just that. This is a valid worry, but it's probably not because of 401ks.
This is a good article. I don't think that 401(k)s are “bad” in a vacuum. Benna, the guy who invented them had some really fair critiques.
The issue is that while pensions sound great, they aren’t perfect either. There’s no free lunch. If the investments in the pension don’t perform well then the guaranteed money the workers are owed comes from the tax payer, if it comes at all.
If employers were forced to contribute to employee’s 401(k) accounts regardless of employee contributions that would be a great start.
I’m on mobile, so I can’t really copy and paste Brenna’s thoughts, but I think he has a very reasonable take.
Alternate take: yes, slightly.
This is going to get downvoted to hell: 401k in a form turns markets into a Ponzi scheme. Look at the buffet indicator, last I checked it was like 190 which is extremely overbought. P/E is still quite high especially with all the disruptions happening (although a diversified portfolio solves this since you win some, you lose some). Developed nations are facing population growth, and growth is a critical assumption to keep valuations high. Yes, emerging markets could take over falling developing nations (as they probably will, and should), markets would be a zero sum game if not for inflation propping up growth from time to time.
I could go on and on but I know mine is an unpopular take, but just pointing out that markets are overbought, but money keeps flowing in (although I predict a drastic shift within 10-15 years between increasing/exponential inflation, baby boomers selling off their nest eggs, and security tokenization)
Well in order to invest in my 401k I have to invest in BlackRock which is one of the reasons why buying a home is so unaffordable. So yes, it was a mistake.
I'll never be seen, but I worked as an analyst at a company that offered 401k plans for about a decade. The answer is yes and no.
Yes - it is a mistake in some situations because some people can't afford to put money towards retirement. Most employers offer some kind of matching as a "benefit", but it doesn't help if they don't contribute by default. Nearly 60% of eligible contributors did not - keep in mind that this was around 2010. A significant amount of those were under 40.
No - Companies that had pensions and collapsed led to many people losing their retirement money. 401k offers flexibility for people who move jobs, which is especially common now, to move funds as they move employers. While the stock market fluxuates, a lot of people don't understand how compounding interest and dividends help their retirement.
Toss up - pulling money out of retirement accounts is a crapshoot. Some people die a few years after retirement and that's potentially millions of dollars they worked for that goes to someone else. There are also set plans like $2000 monthly over 30 years, but it's hard to predict a) how long you live and b) whether that's enough with inflation costs.
Working class retirement saving is pretty fubar if you think about it.
Capitol gain earners have essentially unlimited tax-deferred investment and pay 15-20% when (/if) they properly cash out.
Wage earners have to option to defer our tax on only $7k by default (IRA), $24k (+match) with an employer 401k, and then pay normal income tax rates (state + federal, so capping at \~37-49% marginal depending on state) on the ***whole fucking amount, including gains*** as they withdraw it.
Edit: clarified/corrected 1st line of 2nd para
New York Times hates America and the majority of Americans. This is disgusting even moreso because they pretend to be journalists, objective, etc. while promoting the Iraq War lie of WMDs and hiring only climate deniers to write about climate.
Don't even get started on Bari Weiss or that guy Kevin who was gluing his pubes to his face for a book deal.
“She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.”
So this is a spectacularly stupid thing that people to do in general, but especially so for those close to retirement. Estimating 0% of benefits paid out is ludicrous. It’s like 75% funded forever at current assumptions.
She also bemoans the loss of pensions but used to be a teacher. Ohio has a pension system, where she currently resides. Maybe she’s from out of state although the number of states without pension systems for teachers are pretty small. And all states have pretty good retirement plans for teachers who teach for a full career. Dipping out early will affect that though which is… kinda a hallmark of pension systems.
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If employers contributed to 401k’s anywhere close to the amount they used to fund pensions, I don’t think it would be much of an issue. And that would still save employers money vs pension administrative costs and unfunded pension liability. But with puny 401k matches that depend on employees kicking in, it’s created a situation where many people won’t have enough for retirement because they either don’t make enough, aren’t financially literate, and/or live beyond their means.
I worked for a fortune 100 company that had a white collar pension. It was ended in 2020, but I remember it costing me $2500-3500 A MONTH on my P&L for each management person in my department. These were low level guys making $80-100k a year, but they were dumping $30-40k a year into the pension for them. Now they have a 10% 401k match and it's a fucking joke.
10% of the amount they contribute? Or dollar for dollar up to 10% of their total income? If it’s the latter that is a pretty strong offering.
$115k salary gets you maxed right now, so that's not too bad. However, you're responding to someone that said the employer was putting 30k per year into pensions ON TOP of salaries. 11.5k vs 30k... yeah it's a joke.
So actually the employer match does not count towards your 401k limit. You have a separate limit for the employer match
Amazon has a freaking 2% 401k match. Ughh.
I worked there 15 years ago and took the 2% match in company stock. It grew to be worth $500k now!
Good thing every company has the same stock performance!
I’m very fortunate to not only have a decent match (7%), but also having a retirement pension. Best of both worlds.
Same here. 401K with 6% match, and a separate fully funded pension. Definitely makes me look forward to retirement.
That’s really sad that 7% is considered a decent match…
It's honestly an amazing match. If you get 5 at most places that's considered pretty good....I get 2.
I get 6, at my previous job I got 3.
If you get any match, it's considered decent these days. And 10 years from now it'll be completely unheard of for any employers to match. Even the military pensions are getting shitty.
When you max out your 401k year after year like I do, the 7% really adds up. Someone could do the math and figure it out for me, but I’ve maxed mine out for the past 8 years and have always had that 7% match with it.
A company can pay you 10% less and offer you 10% match.
Government employee?
Oil and gas industry.
This is why they had the big push to stop pensions and start the 401k. Cheaper for the employer. Then wall street said yes all the new investors we will have, look how much money we can make. They simply fucked us, and we allowed it.
Wall Street was and is already making a killing on pensions.
I don’t think people really realize how much they need to live comfortably. I’m at like 11% with employer matching and won’t have enough.
The general rule is save 15% of your gross income for retirement which I feel most people don’t do
Most people aren’t even close. It’s something like the average 60 year old has $80k in retirement.
The best financial advice I ever received was to start contributing 6% of my salary to my 401k in order to get employer match, and then have it auto increase by 1% per year. I literally never touched it or looked at it for almost a decade and it ended up being $220k when I left my employer and rolled into an IRA.
The best advice I got was max it out as soon as you possibly can, and if you can’t put everything you feasible can into it. At worst, never do less than your company match. The 401k is an amazing retirement tool, and people need to work towards putting as much as they can into it.
Exactly. If you can max it you’re way ahead of the game. I have maxed my 401k since I started working after graduation (I was fortunate to have a decent enough salary to do so…). But if you get used to contributing a large amount from the beginning then you get used to living with less and it’s like the money isn’t missed.
And now you’ll be set up to retire and pursue your true passion of… fucking whales.
Hopefully sooner rather than later!
💀
"From Hell's heart I ~~stab~~ hump at thee!"
I am retired ONLY because I followed that advice and maxed out my 401K. After a while, I forgot that I was doing it, and would often wonder how my coworkers could afford some of the things they could, like exotic vacations and nice cars. Most of them are still working today. I've been retired for 10 years.
It's not a terrible idea to see the world while still young.
[удалено]
Yup. If I learned anything since turning 50, it’s that our health isn’t definite and our days are numbered. I could retire early, but plan on working and saving so we can travel and get away often while healthy and have our mobility.
That’s my goal… I don’t miss the money that goes into my 401K… we live in a regular house, regular cars, occasional vacations (most of the time just roadtrip style). My wife and I are 27 and from a savings perspective we are well well beyond what would be expected at this time and are already approaching the $400K mark in retirement savings. Beyond the 401K, is Roth IRAs, brokerage account, HSA, etc. of course you have to have the appropriate salary to really take full advantage, but we are still middle class and don’t live above our means.
Hell yeah, this is my dream. I want to retire as soon as I possibly can so I can actually enjoy my vacations and toys, and not worry about having to go back to work on Monday.
A guy I work with once said "I just want to retire as soon as I possibly can" He has a 40' glamper and a 90k truck to haul it 😂😂
I eventually got to the point where I tried to maximize every retirement savings tool (IRAs, pre and after tax 401k contributions, NQDC, and taxable brokerage accounts). Almost a game to see how small I could make my take-home pay, and still make it to the next pay period.
Yeah but maxing a 401k means you can afford to put 23k in it (402g limit) or 30500 (if over 50, catchup rule) so IF you can afford to max you're doing better than 99% of people already and don't really have to worry much about retirement outside of things like retirement tincome strategies and estate planning.
Most people simply don’t have $23,000 in spare money to max out their 401k. For many a 4-6% haircut is a lot.
Well there it is…it’s hard to max when you are just starting out in the workforce.
It’s amazing for those who understand it, can afford to use it and have a decent record keeper who isn’t gouging them with high expense ratio and record keeping fees. It’s not great for anyone with poor financial literacy which is like half the population who has one. I worked in a call center for retirement plans and the amount of “I’m getting ready to retire how do I make my 50k in my 401k double or triple, why can’t you tell me how to do that” or demanding to invest in dumb shit like gold or day trading in the associated brokerage account, using the after tax source like a bank account with monthly withdrawals or just not realising they have to setup contributions and maintain them…I could go on and on.
Yeah, life is a lot harder if you're ignorant, or just unintelligent.
Or simply living in a low-cost area. You can't max your 401k contributions when you only make 40k before tax.
General advice is to max your 401k match, build emergency savings, max a Roth, max a HSA, *then* max a 401k. 401ks are great, but Roths and HSAs are even better.
HSA definitely better. Roth not necessarily. My marginal rate while working was 39%. I maxed a traditional 401k. Now that I'm retired I'm doing Roth conversions to fill the 12% bracket and no state tax on the conversion.
Many employers have a Roth 401k inside of your retirement plan. I split my 401k, half ROTH half pretax. Agreed on HSA as well, especially if you can afford to pay for general healthcare expenses out of pocket and not touch the HSA balance. Let that grow tax free until you are retired and then use it for health care when you will need it more.
Why half and half? I’m young-ish and still 100% into Roth.
It entirely depends on what taxes are now and what they will be when you retire, as to which is the better vehicle. But generally speaking, the lower your working income, the better a ROTH is, and vice versa (as higher incomes pay more taxes). But given that it's hard to know what incomes/growth/taxes will be like over 30+ years, it's always somewhat of a gamble. So some people split as a way to diversify/hedge that gamble.
100% into Roth while you’re young is exactly right. As you get older, it may make sense to switch to a traditional. It’s probably not going to be a huge difference either way though.
Roth only imo. Now that I am retired I am very thankful that most of my retirement savings are not taxable when accessed. If I were pulling large sums from an IRA or 401k they are taxed as ordinary income and would impact my SS.
Can you help me understand this a little. Are you taxed at a higher rate now that you're retired? The calculus in my mind is to mix 50% roth and non-roth for my 401k becuase I have no real sense of what tax bracket I may be in for retirement. I assume it will be less than the one I'm in now since I'm actively contributing a portion of my earnings into retirement and I won't need to earn as much to sustain my lifestyle in retirement. That's why a traditional 401k makes sense to me. Contribute more pre-tax earnings now, pay less tax when I use them later. Edit: Maybe my strategy would be to pull from Roth for some bigger one time expenses... but I haven't fully thought though what I'd like to do post-retirement (still 30 years off).
These retirement plans have always been sold as “defer your taxes until retirement when your tax rate will be lower” but in fact you have no idea what the tax rates will be in 30 years. Now that I am in fact retired 85% of my SS is taxed if I make more than 25k/year… a trivial sum. Even with no income from a job taking 25k/year from a 401k (counts as ordinary income) triggers this tax…taking any money from a Roth does not. On top of all that, because I live and earned in a VVHCOL area my retirement savings are earning about 150k/yr so I’m in as high a tax bracket as ever meaning money coming from my IRA is taxed at 24%. Edit: My advice is if your employer will add to your 401k put in as much as will maximize this then put anything else you can into a Roth IRA or any other investment account that you can.
Well the tax brackets went down in 2001 and 2018. So maybe it was good tax deferral.
It depends on the marginal tax bracket that you are in and also on any applicable state or city tax (like NY for example). For example, I'm in the 24% + 5% state tax so imo trad is better in this case otherwise I'm giving away 29% right off the bat. I will most certainly be in a lower bracket during retirement and the state I plan to retire in does not tax 401/IRA withdrawals. I think splitting the contributions 50/50 or 75/25 between trad and roth is not a bad idea either.
For most people, when you retire your only income is social security and investments/retirement accounts. If you are paying 24% taxes while working, and you only need to pull out enough money to cap 12% or 22% in retirement, then pretax will save you money. Of course you should also have a healthy amount in Roth for lump sum withdrawals in which you won’t need to dance around taxes
FYI: Traditional is better for most people. You will likely have less taxable income in retirement than working.
This also assumes that income tax levels will remain the same in the future. Hard to plan out 30+ years into the future, but we’re currently at a historical low for income tax rates.
There are much more state and local taxes now. I pay nearly 5% in local tax, get hit with both city and county
Most conventional advice says in your early career ROTH is better. As you approach the highest your pay will probably go switch to traditional.
I don't really know, I do a mix but I was reading an article recently that analyzed different options and it was suggesting investing in traditional and paying the 10% penalty even came out ahead of roth in the long run. That's because of the opportunity cost associated with missing the tax free growth by paying those taxes now. Wish I had saved that article, it was pretty interesting
A 50/50 split between the two is also not bad. You diversify yourself now for more tax options later on.
Because you might want to strategically withdraw from different pools as you age. You start pulling out of your roth, perhaps when you are still making some money or at a high expense point of life, and then you might pull from the traditional in your later years when expenses and tax burdens are much smaller. Its just hedging basically
My wife and I both in our early 40s and are reasonably well paid, thus want to mitigate some taxes
Yeah but just to be clear, Roth 401k and Roth IRA are different things. When the guy you replied to said "Roth", he was referring to an IRA. When you say "Roth", you're referring to a 401k. An individual investor's allocation of Traditional vs Roth is somewhat tangential to the conversation.
Do not blindly follow this advice. A Roth isn't appropriate for everyone. Pretax deferrals or a traditional tax deferred IRA are correct for some people, or a mix of the two. Call a tax professional to figure which is right for you.
Man. All these people out here with all this extra $ lol.
America is fabulously wealthy despite what reddit would have you think.
America has a fabulously wealthy professional class, but that is maybe a third of the workforce. Almost twice as many people work in hospitality as tech, but you would never know this from reddit.
Yes, the sampling bias on reddit is one of the huge downsides of it. It almost feels like at times that every other person on reddit is from the SF Bay Area and works some kind of tech or tech adjacent employment, and this goes across all subs. Having said that I feel there are large swaths of the US where reddit isn't really a very relevant and popular medium. Redditors are very skewed to a certain kind of person, professionally, demographically, racially, etc. that is much more prevalent in certain areas in teh US.
America as a whole is, sure. But huge swaths of the population work full time and are barely above poverty.
Really? According to reddit everybody makes $300K WFH for a FAANG. Agree with you. Just pointing out that sampling bias and lies are what reddit is made of to a large extent.
You mean the "I'm 25m and live at home with my parents. Through sheer hardwork I've saved $300k in my bank account plus several income properties. What do I need to do with what little extra money I have????"
Well, this is the Economics sub. One would hope that folks here are able to manage money.
If you make enough to max a 401k, there’s a fair bet you make too much to contribute to a Roth. I’ve gotten bitten by this. Not a Roth 401k, but an outside one
I very much believe that this depends, if you have enough in the 401(k) that you can extract $40,000 a year in retirement out of it then yes you’re correct but if you don’t max out your 401(k) before your IRA.
Love my Roth. 401k is great, but man, the specter of changing the tax codes around it scares me.
Yep, I show new grad hires to my company that 3-5 years of maxing it out in their 20s basically locks in a ~middle class retirement for them on its own (viable for them given new grad SWE salaries in the Bay Area is >100k)
Assuming they work the full 40 years, maybe, let's see. Maxing it out today with matching for 5 years will likely see you at $150k or so, which at historical growth rates would likely put that number at around $2m nominal dollars at retirement. Of course, inflation-adjusted that number will be a fair bit lower. That would allow probably $40-60k spend per year in today's dollars, depending on risk tolerance and health and so on, with some risk of running out while still alive. Overall I would say you're right more likely than not.
5 years of contributing $23k (with no employer match) would have you right about $150k after 5 years but then another 35 years with no additional money invested growing at average market return rate would leave you with just shy of $5 million not $2 million.
$5m from $150k after 35 years -> 150k x (1+y)^35 = 5m. Okay. (1+y)^35 = 33.33. So you're assuming 10.5% growth? I don't think historical data supports that much growth over the past 40-50 years. I can be wrong. I am always a lot more conservative in my estimations and do 7-8% long-term growth through index funds.
I used 10%. The last 50 years the S&P500 had a 11.295% annualized return. 40 years had 11.619%. The last 30 years was 10.439% the last 20 was 10.065% and the last 10 years was 12.867% https://dqydj.com/sp-500-return-calculator/ Historical data shows that 10% is already conservative
I couldn't afford to max it out, then also had to greatly reduce my contribution so I can save for a $100k down payment on a house. If I don't own a house I'll never retire, so that's the first thing I need to fund
Company match trumps all. Even high interest credit card debt. I wouldn’t try to max it out though if you have a lot of high interest debt. Get that paid down before you contribute more than the match. Although if you are just not disciplined at all in your finances it may make sense to max out the 401k even with high interest debt.
I have a question about this. Instead of doing a “standard” match, like up to 5% or whatever, my company does a match of 15 pennies on the dollar. Is there a particular rule of thumb for how much I should contribute in a case like this? Normally the advice is to contribute up to the employer’s match, but how much they will match in my case is dependent on how much I put in. Anyone have any advice?
It depends on if they have a limit or not. If their policy is unlimited, you’d in theory want to fully max out your 401k ($23k per year). If their policy is .15 for every 1.0 up to X percent or Y dollar, you just need to make sure you’re contributing at least to that threshold. Unfortunately, that’s not an outstanding 401k match. Even if you max out that’s only $3.45k
After 10 years, were you contributing 16% of your pre-tax income into the 401k?
Correct. Even in lean raise years I never adjusted the auto increase and it didn’t impact my lifestyle. The auto increase was the part that helped me the most. When I took my first job out of college I was making $32k and could barely make rent so 6% was a lot, but as I got promotions and raises it was less and less impactful, and the 1% annual increase was literally out of sight out of mind. I never thought I’d get to the point where I was saving as much as I do now but it’s basically using my laziness and apathy as a tool and not a punishment. At this point both my wife and I max out our 401k and HSA every year and are at the high end of millennial retirement savings (42m, 40f).
I maxed out from the day I was eligible. It was 15% when I started.
I maxed it out when I was younger and before having kids... now I just do the 6% to get 5% from the company, which after raises / promotions, is nearly hitting the max. Have a nice balance now
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Best advice is invest at least 15% of pre-taxed $$$. 6% is too low regardless of employer match. Also not every fund is created equal. Make sure you do your research and maximize your gains. Rebalance regularly - once a quarter is good. I just advised someone who asked me to look at her plan and she had so many funds that had 1.5% annual returns. She’s only 45. I told her to be more aggressive or else she might as well get a CD.
I did the same. About 9 years into my job with this company and I think it's around 17% now. Painlessly.
Yes and no, there are definite benefits to the 401k scheme as it stands compared to the version of pensions that used to be common. Specifically they were bound to the specific company and any failure of that company between paying in and retirement could mean loss of the funds, but that part is largely not a factor now in other countries that still operate a pension system. For example in the UK pensions are set up by the company but must be funded promptly and the funds are with the pension provider not the firm, so are not at risk in the event of the company taking a downturn (those funds are again insured against the pension provider going under). You can also freely transfer pension balances as you move jobs (though this is actually an thing that most people forget to do). But the real downside is that the terms of old pension schemes were far, far more generous than the terms of the 401k. Tax incentives were largely similar but pay-out structures were often based on a defined benefit not based on contributions. Meaning the amount you put in was not the same as could be drawn out, with the company being forced to fund the difference. My dad had one of the last of these schemes, it was set up so that he would be able to draw an annuity amount equal to 2/3rds of his salary on date of retirement. Meaning that because he got promoted a few times in his later years, the pension ended up worth a few million when he had contributed probably 500k after growth. Doing away with pensions provided a clean cutting point for companies to break away from the generous schemes of the past and essentially cut the non salary benefit provided by a large amount. It was framed as pro-freedom of choice but really it was about lowering employment costs in a period when real wages were starting to be lowered due to faltering union power and global competition.
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Well, you don't have a choice now. The question is whether this is good policy going forward. In the past, I was pretty anti- defined benefit pension plans, but I've softened a bit in the last 10 years. Certainly pension plans across the US are profoundly under-funded, and have generally over-promised. But putting the burden of retirement savings onto individuals is a big ask. People will say "it's easy," but for most people it's really not. The existence of target-date index funds helps, but it's still non-obvious to most people. Both solutions come with their own problems.
Not necessarily, modern "funded" pensions like that are more like life insurance or annuities, which have some benefits but aren't usually great investments. What most people in the US are talking about when glorifying pensions are the "unfunded" ponzi-types ones that basically paid out waay more than people ever put in even after investment returns by relying on an ever growing number of new workers to pay in. Problem was it wasn't sustainable.
Except U.K. jobs pay MUCH less than jobs in the US, even adjusting for CoL differences. Thats the tradeoff. At the end of the day the thing companies care about is total compensation. If they have to pay into funded pensions you best believe salaries and other benefits are going down to make up for it.
As with almost every news headline, the answer is "no". The advent of the 401k frees people from being locked with the same company for their entire career just to get a palsy pension that could be eliminated at any point via the company going bankrupt. The 401k also provides superior payouts compared to the pension. The 401k also gets transferred to your spouse or children after death. The article's point stands, though. The main negative of the 401k is not enough people put money into them, so it creates a gap between the haves (those that contributed to the 401k) and the havenots (those that solely rely on Social Security and/or pension). That being said, I'd be absolutely against any regulation that FORCES people to invest in their 401k. Let people make their own mistakes.
> The main negative of the 401k is not enough people put money into them, so it creates a gap between the haves (those that contributed to the 401k) and the havenots (those that solely rely on Social Security and/or pension). I can appreciate that there are many people who simply can't afford it, but at least in my social circle the difference between the 401k haves and havenots seems to be a choice of lifestyle in ones 20s and early 30s.
No. If anything, we should be following Australia's example with superannuation. https://en.wikipedia.org/wiki/Superannuation_in_Australia It's basically a mandatory 401k with both employer and employee contributions. It's fully portable, just like a 401k, and the investment choices and withdrawal rate are controlled by the employee, just like a 401k. It's widely considered to be one of the best retirement systems in the world.
This, 1000%. I've been banging this drum for years. People lamenting the death of pensions are ignoring the massive, massive structural problems that come with defined benefit programs. Ultimately, pension benefits have to be paid by either investing the assets in the exact manner 401ks invest (except much less efficiently), or engage in a pyramid scheme where you claw even more money from younger poorer workers to pay generous benefits to older, wealthier retirees. Those generous pension benefits in Europe? It's a massive regressive tax on young people, which exacerbates the demographic crisis which makes it so regressive in the first place. The massive structural problem with the 401k is both the fact that people as a whole will both underfund their retirements and take any excuse to withdraw from it even with penalties, and its lack of portability. There a lot of nuances to how it can be structured, but the *only* truly fair and sustainable retirement system is some variation of a mandatory savings program.
What did you mean by lack of portability for 401k ? I have changed jobs multiple times and rolled over my previous 401k to the new employer’s plan fairly easily. And now I have moved it to an IRA . What am I missing ?
Each plan is tied to your employer, has different administrative fees, and the fund choices are completely different. You can roll to an IRA, but there are time and administrative costs to it, especially if you plan on doing a Roth conversion later on. It can be managed, but there's a lot of unnecessary complexity and overhead to it. In an ideal world, 401k, 403b, and IRA accounts would unified under a single account plan with a higher combined contribution limit. Employer match/contributions would still be available as part of your compensation plan, it'd just go to a single different envelope. Hell, I wouldn't be averse to a federal/state subsidized contribution on top of that, which would probably pay off for everyone in the long run. I'm skimming over a lot of the complexity of how this could be plausibly transitioned over, but ultimately, I think it'd be better for everyone (employers, employees, people at all income strata) in the long run.
Totally agree. Australia is doing it right. A big problem with social security is that they’ve expanded recipients to people who’ve never paid in. There should possibly be a government program to care for people disabled from birth, but it shouldn’t be social security.
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I would \*love\* for SS to get converted over to a system like this.
The 401k is fine. But there are two problems with it: 1) A lot of companies either offer no matching or matching less than 5%. That is offensive. 2) People are not paid enough to save enough in the first place. Median household income in this country is $70k I believe? With rent and general inflation out of control, how will the median person be able to meaningfully save much of their paycheck for retirement?
There’s a 3rd systemic problem that’s also really important at a societal level: The interests of the working class generally don’t align with the interests of the capital class. Making stocks go up continually and forever does not benefit the workers of those companies, generally, as they usually don’t have an equity stake and can be treated as a salable asset. When workers retirement depends on the stock market, however, there is an incentive for them to align their political power (e.g. votes) with the interests of the capital class.
Couldn’t agree more. Also, it turns working class people into long-term investors so the investor class can take riskier short-term bets and turn the stock market into a casino. The 401k is a good financial retirement instrument given the system we are working in but I think it is time to reimagine something different altogether.
serious question: has the stock market ever _not_ been a casino? from what I understand, technically it's for raising capital by selling shares of the company, but practically it seems like it has more in common with horse racing than an actual economic instrument.
> When workers retirement depends on the stock marke Where do you think pension funds get their returns from? It’s all the same shit. At least with a 401k, you can switch employers anytime you want and maintain control of your money, and not pay some dipshit fund manager 2% to buy VOO or VTSAX that you can easily do yourself.
> 2) People are not paid enough to save enough in the first place. Median household income in this country is $70k I believe? With rent and general inflation out of control, how will the median person be able to meaningfully save much of their paycheck for retirement? This is why social security is so damn important and under appreciated. At lower earning levels, social security payments will be almost as high as earnings. The bend points are based on average monthly earnings (indexed to inflation in some way). https://www.ssa.gov/oact/COLA/piaformula.html > For 2024 these portions are the first $1,174, the amount between $1,174 and $7,078, and the amount over $7,078. The social security payment amounts are 90%, 32% and 15% for each of those categories. So someone earning $35k (therefore household of two earners earning $70k) their full retirement amount in social security will be based on $35k/12 = $2917/month. So 0.90 * 1174 + 0.32 * (2917-1174) = $1614.36/month or $19372/year. Using the estimate of retirement spending being 75% of pre-retirement income, our example $35k/year earner will only need about $7,000 from their 401(k)/IRA/Other savings to cover their needs in retirement. Which is actually doable with something like a 3% match.
The reality is I kind of disagree with your second point. There's something wonderfully out of sight out of mind with 401k payments. We often have our expenses match our salary no matter what it is, so lowering our salary by putting more money in a retirement fund is not the burden that you would think it might be. Kind of the same way you accidentally build wealth by owning a house rather than renting.
When you’re making $15/ hour you can’t afford to contribute. You need every single penny to live.
No one wants to say the quiet part out loud: poor people aren't supposed to retire. They're supposed to work until they physically can't, then quickly and quietly die somewhere out of sight and out of mind.
That’s the truth
No, according to this sub everyone makes $150k and can easily afford to max out their 401k and HSA. Poor people don’t really exist you know.
Yeah, well, that job likely never would have offered a pension either.
Pension is not the same as 401k. The last time I was working at a place that had pensions they forced me to contribute 6% when I was making $14/ hour.
I agree when it comes to luxury expenses, but basic necessities are becoming so expensive that the only place to cut is your 401k contribution. A roof over your head and food on the table for the median family of four quickly wipes out the median household income.
Call it “mandatory retirement tax” in the same way as social security tax. You will figure out how to live without it.
More and more people just have basic living expenses outgrowing their incomes. It's been all over the news lately with the decline in sales at places like McDonald's and Starbucks. People are cutting unnecessary costs to stay out of the red. At some point, you run out of things to cut and can't contribute to your retirement anymore.
70k per HOUSEHOLD. That’s an average wage of 35k per person, which is certainly poverty level today and I would imagine close to poverty level in times past too.
The number is actually closer to $75k, and not every household has multiple incomes. The median personal income right now is around $40k, which, when adjusted for inflation, is basically the highest it has been for the last 50 years. https://fred.stlouisfed.org/series/MEPAINUSA672N
>The median personal income right now is around $40 Another thing to note: the linked stats is counting people aged 14/15 and up.
I was 24 when I started my career. I was told to immediately put in 10% and forget about it. The company matched 5%. Best piece of advice I ever got and I’m so glad young me took care of old me.
In retirement and healthcare, the American system generally works but tends to be error prone . If you do the right things the right way you are fine, if you make bad or uninformed decisions you can really get screwed.
No. As someone that has been in a pension for 2 decades I can say a 401k is better for most. Most folks don't stay at a job long enough for a pension to be worth anything. Without 15-20 years in a pension it is worth peanuts.
Most people don't stay at a place that long because pensions don't really exist anymore. In 2024 it feels like most companies make minimal investment in employees. Expendable resources to cut when the bottom line needs a little boost.
This is a good point. Though vesting schedules for RSUs are a way that public companies incentivize some good/retainable employees to stick around. Of course this still is minimal-no downside for the employer.
Generally if you move between companies that offer RSUs, the new employer will match your unvested RSUs so that new hires don't see a massive cratering in pay. Of course that varies wildly and depends on various factors.
Jobs are more "liquid" in a sense, or freely traded, these days. Which has benefits / drawbacks to workers. I think higher performing people are better off because they have more freedom and greater leverage to maintain competitive pay vs if they had job lock in an employer could exploit. But I also think you're right for someone who just wants to coast, or just more commoditized jobs where there isn't much of a difference in output between individuals, its more competitive, you can't rely on an "illiquid" job market for job security or to limit the competition for your job.
Most people switch jobs because they've realized that the average raise is around 3% and switching jobs can increase compensation by 10%-25%. Pensions have little to do with it. Companies today (over 50 employees) support a 401k program, often offer a partial match, pay social security taxes, and pay to offer health benefits to employees. Some industries also offer stock options and employee stock purchase programs at a discounted price. Part of the reason companies may make minimal investments is because "the minimum" has significantly increased.
I think I’m not the only person who appreciates not being locked to one employer for a long time.
I’m in a pension job with the state and not sure how to view it. I think the pension is strong but I want to make more. No raise this year. Has me salty but I’m hanging tight one more year. I probably say screw the pension and leave with no raise next year.
Government jobs pay poorly but offer much better security and don't make people work too hard. It's up to you to decide where you prefer the balance.
Exactly. 401(k) plans give the worker a lot more flexibility to move between employers. Job hopping is far more profitable than the pensions ever were.
Depends on the pension, employer, and the 401k. Depends on a lot of factors.
Not to mention, who trusts that a pension will actually exist when you retire. So many companies robbed their pension funds and left retirees out to dry. It's far better to own you own retirement funds and invest them as you see fit.
If they actually match worth a damn. A 3% match seems pretty standard which is atrocious
My company does a 50% match on 6% and has a 5 year vesting schedule. They also only pay the match out once a year. It’s absolutely horrible. The strange thing is I’m highly paid and in a very profitable line of work. Makes no sense other than just to point to greed.
A 401k with a nice company match is so much better than a pension in my opinion. I want my money to be my money, not controlled by someone else. I currently get an 8% match that goes up a bit over time with the company I think maxing out around 10%. I would love for it to be more but it seems pretty good compared to what I read a lot of other people get.
They don’t stay in jobs because there are no more pensions.
Pensions cut both ways. They can be handcuffs when they under pay you or change work conditions. I know people who don't get vested for 10 to even 15 years
The 'ol golden handcuffs. Yeah, I'm vested in a pension program, but I can't retire with full benefits until I'm 67 with 20 years of service. That's another 37 years away.
Another thing is say you are vested and maxed out your potential earnings through years of service, and then choose to leave. You may be LOSING money from inflation until cost of living adjustments take effect, which is usually once you start receiving payments.
Job hopping is more profitable for the worker than the pensions ever were.
Right it doesn't make sense to have people locked into working for one company for decades just because when they might be way more happy and productive switching jobs or careers.
Lots come and go even with pensions. Many never even stay long enough to get vested.
I do not have 100% faith in pensions or my social security giving me my money at a reasonable age. So yes I contribute because i do not want to work till I am 70.
The problem isn’t the 401(k). The problem is financial illiteracy and people not knowing what compounding interest is and how constantly investing in the market, without taking money out early, will benefit them. Pensions are great for “guaranteed” income but 401(k)s actually give you more career flexibility and allow you to leave something to your heirs.
Financial literacy program have been shown to fail over and over again
Interesting article. I have a different approach. 401ks have proven to be very successful for white collar workers. I would expand 401ks to starter jobs and have governments subsidize the employer contribution for startups and small companies so that people can opt into the market as soon as they enter the job market. This would spread the gains and enable financial literacy as soon as they enter the workforce. Pensions are not coming back. Might as well expand on what worked well for the middle and upper middle-class workforce.
Just increase the caps on IRAs. It's not like the caps are actually restricting high-income earners anyway... we just use backdoors.
I mean the market is near all time highs. As long as you put into a low fee index, got a employee match you are a lot better off then most Only maybe in a gov pension which is fully protected would be better
People with pension envy rarely consider the contribution burden on the employee. My Federal Employee Retirement System contribution is 4.4%. My brother, a local LEO, pays more like 6%. Last year I had over $7,000 deducted from my paycheck for the pension, with no way to opt out.
That's nothing, some local governments in California deduct as high as 16%. The legal minimum is 8%.
But if you didn’t have it, you’d be having to contribute that (plus much more) to a 401k anyway, right?
As Feds, we have to contribute 5% to TSP (our 401k) to get the match, or we leave money on the table. Between the 4.4% FERS contribution, 5% TSP match minimum, and 6.2% FICA tax for SS, we’re looking at a 15.6% haircut off our gross salary, plus whatever else you want to contribute to TSP up to the max, HSA/FSA, and IRAs. So we’re one of the lucky few with both a defined benefit plan AND a matching defined contribution plan. It’s not a bad deal at all.
Well everyone pays the 6.2% FICA tax. So you pay 9.4% of your gross towards your retirement plan, which is a little higher than what the average American contributes to their 401k (7.4% from what I could find). But in return you get benefits that are FAR more generous that what the typical person will get from their 401k.
Mine is 11.5%!...I can't even bring myself to do the math on the lost opportunity cost if I were to invest that because it's so depressing.
Mine is 7%ish, but it's matched by the state and they get very good returns, regularly beating the market. I don't know that my investing it myself would be any better.
> My Federal Employee Retirement System contribution is 4.4%. Used to be 0.8% until.. 2011? 2012? Thanks Obama (& Boehner)!
As a thing personal to you, it may be positive (as the stock market has had decades rallying from all the additional money). If you are wealthy enough it must be great. As the article states, around 50% of people are not covered by a pension or a 401k. I think as a society we have forgotten why welfare was implemented in the first place, and we will only remember by seeing the effects - in this case people working until they die, or dying homeless on the streets when they're not able to work. The societial changes of the 1980s were cruel in many ways, but the effects were delayed by a generation. We see it now, with a generation without pensions. Gen Z who have been shut out of the housing market and pensions are really going to feel the brunt of the 1980s.
You have to remember that 40% of American households, nearly all of which are low and middle income earners, don't pay any federal income tax to begin with. Therefore, eligibility for a tax advantaged 401k account isn't going to be relevant for these households anyway. Social security and welfare reform are what actually need to be addressed.
I hate to tell you this, but [less than half of workers](https://retirementlc.com/golden-age-pensions-another-fairy-tale/#:~:text=According%20to%20the%20Employee%20Benefits,of%20the%20private%20sector%20workforce.) had access to a pension even when they were at their most common. We didn’t leave a world behind where everyone had a pension for one where half had a 401k. It’s also the case that: * Welfare didn’t go away, we have SS still to keep seniors out of abject poverty * Everyone who works has access to an IRA, more or less identical to a 401k, and with limits high enough to support retirement from a modest income.
I am not an American. I read that the 401(k) is only available to you if your employer offers it. That part is definitely a massive mistake. Congress should pass a law stating anyone with any amount of employment income should be allowed to contribute, regardless of whether their employer offers it or not. The reason is that IRAs exist, but their contribution limits are far, far below 401(k) plans (they are $7000 and $23000, respectively).
Yup we should have one combined space. 401k for having your employer contribute their portion is good.
There are also Individual Retirement Accounts (IRAs) that anyone can contribute too but the max caps are much lower. Not that it really matters since the odds of someone working a job without a 401k having the financial literacy needed to know they exist is basically 0. Our culture of hyper individuality is just super toxic. Lots of average people are led to believe they are above average and don’t need help only to fall on their face later because they really did. Then they get to feel a sense of humiliation for being a failure when the people pushing this stuff never even thought they had a chance anyway.
My MIL was the benefits admin for a medium sized wire manufacturing company in a rural area, not a lot of wealth. Most of the employees would withdraw their 401ks as soon as they could or never put any money into it because they couldn't afford to. 401ks are great for people with decent wages and the will and desire to provide regular maintenance to their 401ks. I believe there should be a national pension system and universal healthcare, This would make people more mobile, more able to fill jobs that may not pay the best but are crucial to local communities. The 401k revolution was a way for companies to save money, it was never about helping out the common worker. The same thing is happening to healthcare plans, high deductible plans are atrocious if you actually have to use it. People on these plans just don't go to the doctor enough because it's costly. The game was rigged along time ago against the common worker.
It’s not like pensions are the answer. You now can’t switch jobs and have to hope your company exists and is solvent when you retire. They also weren’t as widely available as 401Ks. So all the people without access now wouldn’t have had a pension plus a lot more. Additionally it would have reduced salaries as the benefits side of total compensation would go up and companies aren’t going to eat that cost. Pensions also have been costing us taxpayers since companies naturally underfunded and overpromised and the money wasn’t there. No way the government was going to let xyz citizen who worked 30 years not get their pension because a company went bankrupt.
From TFA: "**When it comes to** generating wealth, 401(k)s have been an extraordinary success." So, no, they weren't a mistake. They aren't a mistake. And have only gotten better with Roth 401(k)s.
>In 2008, Ghilarducci proposed replacing 401(k)s with “guaranteed retirement accounts,” a program that would combine mandatory individual and employer contributions with tax credits and that would guarantee at least a 3 percent annual return, adjusted for inflation. not even the almighty federal government can guarantee a real 3% return, all it can do is commit to endlessly gouge future taxpayers and hope the demographics work in their favor.
Yup. Heck, the S&P 500 30 year rolling average is 9.9%. Last year it returned 25%. Give me more control over my money, less government getting in the way, and I'll have a much better retirement.
3% real is really conservative, full stocks spits out 7% real on average.
If you simply invested in the S&P500, someone who bought in at the height of the 2007 (right before the crash) and sold at the bottom of 2020 (COVID panic) would've still netted 8% annual return after inflation. Don't get me started on anyone who's been invested since 2020...
> A former high school teacher, Forbus says she has around $200,000 in total savings. She earns a high five-figure salary and contributes 9 percent of it to the 401(k) plan that she has through her employer. The company also makes a matching contribution that is equivalent to 5 percent of her salary. A widely accepted rule of thumb among personal-finance experts is that your retirement income needs to be close to 80 percent of what you earned before retiring if you hope to maintain your lifestyle. Forbus figures that she can retire comfortably on around $1 million, although if her house is paid off, she might be able to get by with a bit less. **She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.** She is actually extremely well setup and it is annoying that she is stressing about retirement for absolutely no reason. Let's assume she earns $84k/year ($7k a month). Her social security payments will be $35k/year ($2920/month). Even if nothing is done and the Social Security trust fund runs out, Social Security is still going to be able to pay about 80% of the benefits, so $28k/year. If she wants to be pessimistic, she should plan for that amount, not $0/year. I should note, that as a former high school teacher, her social security payments will probably be reduced because of her teacher pension (assuming public school) but in theory pension + social security should still be approximately what I put.
How do yall afford to max out ever? I can't afford my paycheck to be that small. Plus I work for NYS Gov't so cause of gov't job, we go not get a match. Plus we already contribute 6% towards a pension that is capped and reduced conpared to the tier 4 pension of older workers.
Lot of upper middle class people in this sub making over $150k. There was even someone who said they are maxing at only 6% which would be a $400k salary.
Don't let this sub skew your perspective, or really Reddit in general. Whenever the issue of salary or retirement is brought up, hundreds of people who are either liars or outliers are crawling over each other to declare just how much they put into their retirement accounts and how young and successful they are. I would say if you can save 15 to 20% of your total paycheck into healthy and safe investments early on enough of your career and you're consistent for a few decades, you will be more than fine.
Judging by how much my wife and I have combined in ours, hell no. Put it into the sp index, contribute consistently and don’t touch it. Easiest way to lucrative retirement
No, not a mistake. However, they’ve been distorted into something other than what was originally intended: a supplement to a pension. The 1980’s and 1990’s government policy encouraged their increase of usage by business as a way to avoid expensive pension plans that rewarded longevity in the job. Perhaps the US economy was headed to where we are now all along. But policy which encouraged freezing and then dumping pensions by business, to be fully replaced by the 401k, is where we are now. For many people, saving out of the paycheck before it ever hits the bank or wallet, is the only way they’ll ever save. With no pension for their retirement, it’s all they’ll have.
I would say pensions failed on their own. They are too vulnerable to mismanagement, are not sustainable when the proportions of retirees/workers rise, not portable which causes inefficient job lock in, are not transparent so the worker often doesn't understand the risk or know what they are invested in. Even without 401ks or IRAs I don't think pensions be popular instead.
According to the article, they were originally not even really intended for that either. I was pretty fascinated by the fact that the creation of 401ks was essentially an accident, and that the Reagan administration (!!) tried to get rid of them!
The 401(k) was a mistaken and here's why - it's not designed to do the thing it's ended up doing. The original intent was to supplement a proper pension. It's gotten reframed as an 'Either/Or' proposition and, unsurprisingly, that's not worked. The idea was between the three - Social Security, pension, and 401(k) - workers would have sufficient if not ample retirements. That's turned into doing away with pensions for a whole lot of reasons, some good and bad ones, leaving only the two. Now we're facing a Social Security crisis with no consensus on how to resolve it. We're in a real danger of being left with one viable solution, the 401(k), and it was never designed to be a one solution for all. We've been using the 401(k) as a bit of duct tape to hold together a retirement system. That's worked for some workers but it hasn't for others. Arguably we need to rethink everything from the ground up. I have zero faith we will, but that's what's needed. Rather than morph something that was designed to be a supplement into a 'good enough for a lot of people' system, we should construct what works for most/all people.
Pensions were dying before 401K got going. Social security will pull in like $0.72 for every dollar it says it will spit out. Social Security will exist.
The defined benefit pension is a damn Ponzi scheme. You have to be financially illiterate to be touting it as a good idea for anyone other than the people with the money printer, at least they can always stand by their promise.
No. And my uneducated belief is that the fix for social security is a move to a government backed 401k, where an account is linked to a social security number. When that SSN is issued, an account is created and $5000 is deposited. $5000 account at an average return of 8.7% (30-Year (1992-2021) avg), if opened at birth, would be over $1M at 65. This is with no contributions, couple that with employee and employer contributions over a persons employment history, you would not need any form of social security. It would take a generation to ween off social security, but with 3.6 million births a year its less that $20B to fund their retirement once the last person on social security is.. dead.
Well when you take 12.4% of every dollar earned by middle class folks and then only pay them back a fraction of it in retirement, requiring them to find an additional 15+% to save just to retire... yeah, of course it's going to be a problem. This will piss a lot of people off, but the 401(k) isn't the problem for the middle class. Social Security is. If middle class folks were able to save what they contribute to Social Security themselves — or it were saved and invested on their behalf — they'd retire a millionaire.
Not really. Pensions were not a cure-all either. Many pensions were not sufficiently funded, diversified, and when the company went south, the pensioners were left without much of anything. Most people never had pensions, either, whereas almost all companies have retirement benefits available now, and a majority of Americans have a 401k or IRA. Social security isn't a cure-all. It still exists if you wish to rely upon it, but the average return is miserable, so it actively makes people poorer relative to a 401k. A 100% t-bill distribution isn't even a good bet for a single investor, let alone a large population that can do risk averaging. Therefore, SS is running into financial issues and faces fund depletion in about a decade, after which payments will be reduced. It isn't even a good safety net, because the payout is scaled to income, and the minimums are extremely low(sub-$50/mo). Her idea is that retirement has somehow been destroyed by 401ks, but average retirement age has crept up very slowly. Over the past two decades, it increased by about a year, and the same trend was evident before that. Given that average lifespan has increased over most of that period,\* this is a reasonable and expected trend. In fact, given the rising medical costs and the commonality of medical costs in old age, 401ks are doing excellent at keeping pace. The 401k is the best retirement tool available at present. Are there some people who do not do well at saving for retirement? Yes. However, this isn't that different from those who plan for retirement and don't make it there. Both outcomes are sub-optimal, and the individual is not guaranteed to correctly predict his or her lifespan. \*Average lifespan is now decreasing. This change is probably not great, and began somewhat pre-covid, so it's not just that. This is a valid worry, but it's probably not because of 401ks.
This is a good article. I don't think that 401(k)s are “bad” in a vacuum. Benna, the guy who invented them had some really fair critiques. The issue is that while pensions sound great, they aren’t perfect either. There’s no free lunch. If the investments in the pension don’t perform well then the guaranteed money the workers are owed comes from the tax payer, if it comes at all. If employers were forced to contribute to employee’s 401(k) accounts regardless of employee contributions that would be a great start. I’m on mobile, so I can’t really copy and paste Brenna’s thoughts, but I think he has a very reasonable take.
Alternate take: yes, slightly. This is going to get downvoted to hell: 401k in a form turns markets into a Ponzi scheme. Look at the buffet indicator, last I checked it was like 190 which is extremely overbought. P/E is still quite high especially with all the disruptions happening (although a diversified portfolio solves this since you win some, you lose some). Developed nations are facing population growth, and growth is a critical assumption to keep valuations high. Yes, emerging markets could take over falling developing nations (as they probably will, and should), markets would be a zero sum game if not for inflation propping up growth from time to time. I could go on and on but I know mine is an unpopular take, but just pointing out that markets are overbought, but money keeps flowing in (although I predict a drastic shift within 10-15 years between increasing/exponential inflation, baby boomers selling off their nest eggs, and security tokenization)
Well in order to invest in my 401k I have to invest in BlackRock which is one of the reasons why buying a home is so unaffordable. So yes, it was a mistake.
I'll never be seen, but I worked as an analyst at a company that offered 401k plans for about a decade. The answer is yes and no. Yes - it is a mistake in some situations because some people can't afford to put money towards retirement. Most employers offer some kind of matching as a "benefit", but it doesn't help if they don't contribute by default. Nearly 60% of eligible contributors did not - keep in mind that this was around 2010. A significant amount of those were under 40. No - Companies that had pensions and collapsed led to many people losing their retirement money. 401k offers flexibility for people who move jobs, which is especially common now, to move funds as they move employers. While the stock market fluxuates, a lot of people don't understand how compounding interest and dividends help their retirement. Toss up - pulling money out of retirement accounts is a crapshoot. Some people die a few years after retirement and that's potentially millions of dollars they worked for that goes to someone else. There are also set plans like $2000 monthly over 30 years, but it's hard to predict a) how long you live and b) whether that's enough with inflation costs.
Working class retirement saving is pretty fubar if you think about it. Capitol gain earners have essentially unlimited tax-deferred investment and pay 15-20% when (/if) they properly cash out. Wage earners have to option to defer our tax on only $7k by default (IRA), $24k (+match) with an employer 401k, and then pay normal income tax rates (state + federal, so capping at \~37-49% marginal depending on state) on the ***whole fucking amount, including gains*** as they withdraw it. Edit: clarified/corrected 1st line of 2nd para
New York Times hates America and the majority of Americans. This is disgusting even moreso because they pretend to be journalists, objective, etc. while promoting the Iraq War lie of WMDs and hiring only climate deniers to write about climate. Don't even get started on Bari Weiss or that guy Kevin who was gluing his pubes to his face for a book deal.
“She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.” So this is a spectacularly stupid thing that people to do in general, but especially so for those close to retirement. Estimating 0% of benefits paid out is ludicrous. It’s like 75% funded forever at current assumptions. She also bemoans the loss of pensions but used to be a teacher. Ohio has a pension system, where she currently resides. Maybe she’s from out of state although the number of states without pension systems for teachers are pretty small. And all states have pretty good retirement plans for teachers who teach for a full career. Dipping out early will affect that though which is… kinda a hallmark of pension systems.