The Business section of the Sunday Post-Dispatch featured You may be your retirement fund’s worst enemy Did you know?
The typical working household close to retirement age had only $111,000 at the end of 2013 in their 401(k) savings plan at work and individual retirement accounts outside of work, according to Alicia Munnell, the center’s director. That $111,000 would provide only $500 a month for living expenses if converted to an annuity. Despite a stock market that’s soared the past five years, households have less stashed away for retirement now than they had in 2010. Then, the typical household had $120,000. Her report raises questions about whether the 401(k) system of preparing for retirement is failing Americans. In the early 1980s, most employers offered workers pensions known as defined-benefit plans. With those plans, employees who stayed on the job long enough to qualify for a pension didn’t have to think about saving or investing. Employers promised to invest and then provided guaranteed monthly payments to former employees throughout their retirement. Munnell says only about 17 percent of private employers still provide pensions.
What are the main problems with 401(k)’s
The mistakes of not saving, saving too little, borrowing from a 401(K) and paying expensive fees have a huge effect. Munnell calculates that a 60-year-old in 2013 who had saved since the age of 29 would end up with only $100,000 versus $373,000 if they hadn’t been sidetracked by the common mistakes. It breaks down like this: Fees reduce the balance to $314,000; withdrawals during job changes or loans cut it to $236,000; inconsistent contributions further reduce it to $165,000; and a failure to contribute at times can lower the balance to $100,000.
So if folks can’t save enough with a 401(k) what will they depend on in retirement?
With too little in savings, the typical household is going to be highly dependent on Social Security. But Munnell notes that Social Security is going to provide less to future retirees. The retirement age is moving from 65 to 67, so people who retire at 62 to 65 will see their monthly benefits cut more than now. In addition, people will need to pay more for Medicare. Medicare payments are taken out of Social Security before the government sends checks to retirees. In addition, higher taxes will reduce their Social Security because benefits are not indexed to account for inflation.
The average monthly Social Security benefit in 2013 was $1,294.
If we combine the Social Security benefit of $1,294 with the average $500 annuity that the average savings would provide the typical American will have a monthly retirement income of $1,794. Will you be able to live on that?
If you can live on that or less vote Republican and support the party that has opposed Social Security and Medicare since their inception and are still aggressively trying to reduce your entitlements. If you can’t live on that vote Democratic as they are the party fighting to maintain and expand Social Security and Medicare.
To be sure, some Democrats have already signed onto the idea, including Senators Tom Harkin, Sherrod Brown, Mark Begich, and Elizabeth Warren