I've distilled this interesting article's most important points below. These statistics on Americans' retirement savings are scary.
I'm especially intrigued by the idea of retirement insurance, whether it is a public system, or run privately run with government regulation. The question that comes to mind is what the issuer of that insurance will do with savers' contributions? Invest them in the market, presumably – the same market which is exposed to the bubbles and unpredictable fluctuations that can wipe out retirees' life savings in no time. But I guess the beauty of this idea is that it avoids the problem of timing: by making retirement savings a collective endeavor, the ones who are unlucky enough to retire in a bad market year are covered by everybody else. By pooling everyone's risk, it should all even out. (Hmmm... kinda reminds me of another big current issue!)
Why It's Time to Retire the 401(k)
By Stephen Gandel
[I]n 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.
The Society of Professional Asset-Managers and Record Keepers says nearly 73 million Americans, or just under 50% of our working population, now have a 401(k). The average 401(k) has a balance of $45,519. Even worse, 46% of all 401(k) accounts have less than $10,000.
In order for 401(k) plans to succeed, workers have to stash savings regularly for about 30 years. Most accounts haven't been around that long.
[T]he past year has shown that even with our added savings, we are at much greater risk today of our bank accounts running empty than when employer-guaranteed pensions were the norm. … 44% of all Americans are in danger of going broke in their postwork years.
A 2007 study from the National Bureau of Economic Research (NBER) estimated that, on the basis of historical returns, by 2040 the average 401(k) of a near retiree would grow to an inflation-adjusted $451,944. That money, spread over 30 years, could replace at least 50% of the average retiree's income. Add Social Security and even highly paid workers will probably earn more than 80% of their preretirement income. "The only reason these accounts haven't lived up to their potential is that they haven't gotten enough time," says James Poterba, president of the NBER, who co-authored the study.
The average 55-to-64-year-old should have a 401(k) balance of $320,000. In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown.
Remember, the biggest factor in whether the 401(k) works as designed has to do with when you retire. If the market rises that year, you're fine. If you retired last year, you're toast. And the chances of your becoming a victim of this huge flaw in the 401(k) plan are pretty high. The market fell in four of the nine years since the beginning of the decade. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market. In fact, your chances of retiring into a down market are even greater than that: forced retirements spike in recessions just as the stock market is tanking.
What the ERIC plan and others like it are essentially proposing is a form of retirement insurance. So instead of putting 6% of your salary into a 401(k) or some other investment account, each pay period you would send 6% of your check to a retirement-insurance provider. The policy would work similarly to a traditional pension in that it would provide a guaranteed monthly check equal to about a quarter of your final pay, from when you quit working until you die. Some employers might even be willing to pay the annual premium as a perk. If not, employees would pay for it much as they currently fund their own 401(k)s. But the policy would be portable. Contribute for 30 years and you would be guaranteed income in retirement, no matter how many employers you worked for. Combine your retirement-insurance check with the money you get from Social Security, which can equal as much as 50% of final pay, and presto: you have something approaching retirement security.
But many policy experts say some type of change to our retirement-savings system is coming. First of all, given the market carnage, there is some backing for the idea — not to mention anger and disappointment among retirees who can't really retire. Recent opinion polls show that people would be willing to give up the flexibility of a 401(k) for a guaranteed return. What's more, the fact that ERIC supports a guaranteed plan is encouraging. "Whether the 401(k) is a perfect plan or even the right plan is something that is being questioned in Congress," says Democratic Representative George Miller of California, chairman of the House Education and 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."
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