Why The 401(k) Needs To Be Replaced
You would think because I’ve been doing financial planning for 21 years that I would be a flat out 100% advocate for 401(k) plans. With the ability today to put away money on a pre-tax basis in your 401(k) or now the use of a Roth 401(k) there are many different ways to save for your future. Many employers even offer a ‘match’ of some of the funds that you put away into your plan as an incentive and some companies even give a year end profit sharing contribution if the company has done well. The 401(k) has now become the Gibraltar Rock for most people in the 30′s and 40′s as the main driving force for their future retirement. In most 401(k) plans there are even more options including a multitude of mutual funds and in some cases a self directed brokerage account if you are savvy enough to manage the 401(k) on your own. With all of this great news, here is the real problem. They just won’t work to help people in Generation X and Y be able to make work optional some day.
Teresa Ghilarducci, an economics professor at the New School and a leading critic of 401(k)’s said, “Every good retirement system needs to have adequate retirement accumulation for individuals, the money needs to be invested appropriately, and the payout needs to meet the need of retirees for life. Unfortunately, the 401(k) fails in all three of these categories.” (source: www.nytimes.com) The key statements within this quote that I wanted to explore are around money being invested appropriately and most importantly the focus on the payout upon making work optional so you can recreate your paycheck down the road.
401(k)’s by nature are called defined contribution plans. This means you get to define your contribution into the plan and you have the ‘freedom’ to allocate your resources in any manner you choose within the options provided in the 401(k) plan. Defined Benefit plans are retirement instruments designed to give you a set amount of income each (define your benefit) when you make work optional, and you have very little option on how to allocate your resources. Most of think that we would enjoy the control of having the money in our own hands. However, I am noticing more and more with the age group of people in their 30′s and 40′s a growing frustration of wondering whether the 401(k) will actually get them to enough money down the road to make their retirement goals.
This is particularly troubling because when there is hope, people by nature will work hard to get to the desired goal. However, when there is no hope, it begins to create desperation. Psychologically, more and more people in their 30′s and 40′s are succumbing to the fact that they may never be able to retire and are saving less in their 401(k) plans for the choice to enjoy their money today by taking family vacations, fixing up their homes, and treating themselves to elegant dinners. They have witnessed that their parents may still be working because the lump sum monies that they sacrificed to save for over the years simply wasn’t enough. Thus, the thought process is ‘why bother’ worrying too much about the future and enjoy having fun today.
If you spend time talking to people who are retired now in their late 60′s or 70′s, the happiest people tend to be the ones who have a pension. The people who worked hard for a company for many years and are now getting a guaranteed paycheck in the mail each month during retirement. They don’t worry about the stock market. They don’t worry about the bond market. They simply worry most about their health and how to enjoy the next day ahead of them. Those that are retired and managing a lump sum of 1 million dollars or more tend be much more restless day to day, and many of those retirees check the balances of their brokerage accounts and IRA’s day to day. When they notice a decline in those accounts, it actually makes them even more nervous to spend their money because they worry about running out of money. Having these lump sums actually work very negatively psychologically because they worry more about going broke than they do enjoying the fruits of their labor.
For Generation X, we need to rethink the 401(k) to create a vehicle that will force monies to be put in some sort of instrument that will guarantee them a paycheck in retirement no matter what happens in the stock market. Even if for a portion of their money, it will actually provide this generation with a blanket of security that will be necessary for their retirement success with a potential future decade or two of stock market and economic uncertainty. They say that money can’t buy you happiness and there just may be something to this age old adage. If money can’t buy you happiness, perhaps a pension plan just might be the cure for the ills of Generation X. Experience tells me that if the 401(k) doesn’t get replaced or altered, even the successful Gen X’ers will spend their retirement worrying about not going broke versus the excitement of pursuing their dreams.
Visit www.oXYGenFinancial.net to request a consultation on how to make smart money moves for your future.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
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