The Wall Street Journal featured a very good article this weekend on how poorly the 401k is functioning as the primary retirement savings account for millions of Americans. Launched in the 1980s to allow management-level employees to put away more money for their retirements, companies embraced 401ks as alternatives to costly defined benefit pension plans. The first group of workers relying solely on 401ks for their retirement are just now approaching retirement age, and the numbers do not look good:
Consider households headed by people aged 60 to 62, nearing retirement, with a 401(k)-type account at their jobs.
Such households had a median income of $87,700 in 2009, according to data from the Center for Retirement Research at Boston College, which derived this and other numbers by updating Fed survey data, at The Journal’s request. The 85% needed for retirement would be $74,545 a year.
Experts estimate Social Security will provide as much as 40% of pre-retirement income, or $35,080 a year for that median family. That leaves $39,465 needed from other sources. Most 401(k) accounts don’t come close to making up that gap.
The median 401(k) plan held $149,400, including plans from previous jobs, according to the Center for Retirement Research. To figure the annual income from that, analysts typically look at what the family would get from a fixed annuity.
That $149,400 would generate just $9,073 a year for a couple, according to New York Life Insurance Co., the leading provider of such annuities— less than one-quarter of the $39,465 needed.
Just 8% of households approaching retirement have the $636,673 or more in their 401(k)s that would be needed to generate $39,465 a year.
In other words, the vast majority of workers are going to be working more years, trying to find part-time jobs, and relying more heavily on their Social Security benefits. This is important context for the debate over public-worker retirement benefits, and it should be a cautionary tale to anyone who thinks 401k-style investment plans are the solution to our country’s impending retirement crisis.
This blog entry first appeared on The Quick and the Ed.