Tim Shaw Insurance Blog

The 2008 market wipeout showed the vulnerability of the popular retirement savings accounts (401(k). But the data is telling us that even in the long run, consumers need better options. If you have even peeked at your account statements in the past year, it’s painfully obvious that something is wrong with the way we save. The 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation’s retirement system. The ugly truth is that the 401(k) is a lousy idea, a financial flop. In the past two years that has become all too clear. From the end of 2007 to the end of March 2009 the average 401(k) balance fell 31% according to Fidelity. In a system where one year’s gains builds on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

The accounts that proved the most dangerous were for those closest to retirement. During the market downturn the 401(k)’s of 55 to 65 year olds lost a quarter more than those of their 35 to 45 year old colleagues. That’s because in your early years your 401(k)’s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market exposed it becomes. It’s a twist that breaks the most basic rule of financial planning. Nearly 73 million Americans or just under 50% of our working population now have a 401(k). And collectively we pour more than $200 billion into these accounts each year. But retire rich? Don’t bet on it. The average 401(k) has a balance of $45,519. That’s not retirement. That’s two years of college. Even worse, 46% of all 401(k) accounts have less than $10,000. “They should not be the thing we rely on for retirement security,” says the Center for Retirement Research at Boston College. And the government seems to agree. “If no action is taken a considerable number of Americans face the prospect of a reduced standard of living in retirement,” says the Government Accountability Office. That is what is known as an understatement. With mortality increasing and people living longer, it is likely that you may outlive your retirement savings and run out of money!

No portfolio is 100% safe from disaster. Trying to boost returns by adding stocks can make matters worse. Even if you withdraw a mere 4% a year from your 401(k) and have an ultra conservative portfolio of 80% bonds and 20% stocks, you still have a chance of outliving your retirement account. Swap the bonds for stocks, and the chance of outliving your money actually rises. In reality, most of us don’t have nearly enough in our 401(k) to live off just 4%.

First of all, given the market carnage, people need to become more financially aware. There is anger and disappointment among retirees who can’t really retire. Recent opinion polls show that people would be willing to give up their 401(k) for a guaranteed return.

Whether the 401(k) plan is a perfect plan or even the right plan is something that is being questioned in Congress, says Congressman George Miller of California, Chairman of the House Education on Labor Committee. “When you have seen the market’s ability to create bubbles, you’ve got to ask whether the people trying to save for retirement should have to ride that risk.

Remember, tax-deferred growth equals a taxed retirement income. When is it best to pay income tax? Clearly it is most difficult after you retire as this is when you want the most from your saved dollars. Are taxes going down or up? Will inflation go away?

How about this: retirement income that is “tax-free.” Imagine. No income tax.

How about this: saving for retirement that is guaranteed to never lose account value.

How about this: retirement income for life that you can never outlive (tax-free).

Are there solutions and alternatives? Yes. The biggest change you have to make is to become committed to “Financial Awareness.” Defeating the two most destructive enemies, taxes and inflation, and at the same time grow your money with no risk is not impossible. You simply just need to become “Financially Aware” of your options.

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