Every now and again when I read through the headlines on my favorite money news sites, I see the same desperate-for-attention headlines proclaiming that “retirement is dead” and that we basically have no hope of ever saving enough money. How do they draw those conclusions? The usual suspects cited are the decline of pensions, the deflating of Social Security and the rise in costs as reasons why none of us can save and why we’ll all need to work until we are 80.
And then there is my personal favorite: The 401k. They talk about the 401k like it’s a James Bond villain. When they compare the pension vs 401k, they describe it as a horrible and inefficient means for retirement. Basically, their message is that the 401k killed retirement.
That is complete nonsense. The 401k didn’t destroy our chances at the American Dream … we did.
Our Problem of Dependency:
When we had a defined pension plan, you had someone forcing you to save and prepare for retirement. Saving for retirement wasn’t a choice, it was mandatory.
Now that pensions are nearly extinct, we’re on our own when it comes to saving our money and we’re having a hard time dealing with it. And how is that going? The personal savings rate in America is somewhere around 3%. For anyone saving that much (of less), I ask the cold hard question: What do you expect to do with that? Is that really going to accomplish your retirement goal?
We did ourselves a great disservice by getting too dependent on others to handle our finances for us. Our society had a great run when all you needed to do was work at a job for 30 years and you had money for life. But how long was that model really going to be sustainable?
The transition from “someone doing it for you” to “you handling it yourself” is a lot like when you first moved away to college or into your first apartment. You no longer had your mom around to clean up after you and cook your food. But within a few months you got with the program and adapted.
Yet, for some reason, that same transition from a pension to a 401k has been in the works for over 30 years and we’re still not ready to accept it yet. We’re still kicking and screaming as we get dragged through the door of change. And unfortunately, change is inevitable. The dinosaurs came and went. World economies rise and fall. The floppy disk has seen better days.
You don’t need me to tell you how to eat better. Or to get to work on time. Or to do the right thing. Why do we need someone to tell us (or force us) to save for retirement?
The Pension vs 401k:
I’m not against pensions. But I don’t think the 401k is such a bad guy either. He was just the next candidate in office waiting to take over when the pension was being phased out.
But the savvy among you will recognize that in many ways a 401k can have some superior benefits over the pension. Like any tool, you just have to know how to use it correctly if you want the maximum benefit from it.
Here is how a 401k can be better than an old fashioned pension plan:
- I decide how much I want to contribute. I can contribute as much as I want to. And I purposely hit the maximum every year so that I can 1) retire early and 2) adjust my lifestyle to something more modest than my income level (hence needing less to retire)
- I pick how I want to invest. I pick the funds based on aggressiveness, expenses, asset allocation, etc. I get to decide what my perfect personal asset mix is and how I want my money to go into it. I can make it as wild or conservative as I see fit.
- My employer contributes. I know exactly how much money my employer contributes to my 401k, and it is very generous. As with a pension, there is no ambiguous participation or pool of money where I have no idea how much the employer is actually kicking in.
- I can change jobs if I want to. There’s no worry about not ever having enough years to get a pension or anything like that. My 401k is mine and it will belong to me where ever I go.
And perhaps the biggest fault I point out about the old way of doing things with a pension:
- What happens when it’s not there?
What if you worked your whole life only to find out that the pension was mismanaged and there was NOTHING for you at the end? This may sound like a horror story, but pension failure and negligence is something that happens more often than you probably think.
Making the Best of What You’ve Got:
Fundamentally, when it comes to money here on My Money Design, I always advocate that no one is looking out for your money like you do. With that said, I ask:
- If your finances are so important to us and our well-being, then why don’t you take control of them?
Why do we want to continue to believe that it is so hard to handle our own money and set aside for what we know we should?
Regardless of where you weigh in on this debate, one thing is for sure: It’s unlikely that things are going to go back the way they were. Pensions will continue to die out, and the role of a 401k will continue to become commonplace in the workforce.
So going forward, the question is not “Who is to blame?” The question is “How am I going to make the best of what choices I have available to me?”
Handling your own money is as simple as:
- Having a savings rate of at least 16%.
- Picking the the best 401k funds available within your plan.
- Taking full advantage of your 401k employer contributions.
- Combining your 401k with other plans like a Roth IRA. You can even outsource the handling of these funds to a service like Betterment.
- Getting creative by coming up with your own passive income streams.
Don’t dwell on the past. Don’t pretend like you can’t do it. Use the tools that are available to you and defy those headlines. Make the American Dream and retirement a reality for yourself!
Readers – Where do you weigh in on the pension vs 401k debate? Do you feel that a 401k is an adequate substitute for a pension, or a poor one? How do you make the best of your options?
- Who is the Best IRA Provider When You Don’t Have Much Money to Open an Account?
- Wealth Creation Strategies That Are Within Your Reach
- How to Invest a Million Dollars and Why You’ll Need to Know How Someday
Image courtesy of FreeDigitalPhotos.net
John S @ Frugal Rules says
Good post MMD! My wife and I were just talking about this last night actually. When we were both employed we took advantage of the 401k offered and did reasonably well. That said, I can see it from both sides. The 401k is not all bad and some, like me, like the idea of being able to control – to a certain extent what we’re investing in vs. a pension. However, it’s also shifting the large part of retirement onto the individual. And, as we both know, many do not do what they should when it comes to that. I think it’s part of a larger part of many corporations today moving costs and responsibility from them to the individual. There may not be anything really wrong with that but it is definitely a shift that has been ongoing for some time.
I find it very sad how much costs, risks, and overall responsibility has been shifted onto the individual. I do agree with you that the vast majority of people are probably not ready to handle so much self-management. But there is also a little bit of the chicken and egg syndrome at play. It seems as though some people don’t want to know to do things themselves, and they still yearn for the days when a company took care of them. I’m afraid you can’t change the course of a river, and things aren’t going to go back the way they were. The sooner people realize it REALLY is all up to them, the sooner they can take control and make the best of what they’ve got to work with.
[email protected] says
Great insight. What systemic changes would you implement?
If there was anything I’d change, it would be that there is some kind of mandatory contribution into a 401k or IRA plan. Unfortunately, some people need that extra encouragement (or force) in order to save as they should.
[email protected] says
We all have to be responsible for ourselves, but it’s much easier to place blame on your employer, no pension, no health insurance, no dental. That’s why we can’t save and end up in credit card debt. I wish people could see the importance of saving for retirement in whatever vehicle is available. We’re good at monthly payments, but terrible at choosing to help ourselves out in the future. Even if you plan to work forever, often your body or employer don’t always see it that way. Great points, as usual.
People became dependent on their company and the government to provide a nice retirement for them. The one issue though is that they didn’t do a good job at educated people while they switched from a mandatory system to a voluntary one. So many people didn’t opt in or have the initiative to learn about it.
I’m kind of afraid to see what the 20-30 somethings will do when they reach retirement age.
Right now a lot of older people have pensions and we’re still seeing a problem with people unable to retire. Once our generation is gone, retirement will be an endangered lifestyle.
I’m afraid I have a lot of the same fears. A lot of people are blindly still expecting their company to help them, or keeping a “we’ll see what happens” kind of mentality going. Its a shame. I really want to be in the club of people that gets to enjoy a retired lifestyle someday, but I don’t want to be the only one in that club.
[email protected] says
Personally, I’ve never grown up in the world of pensions, so I’ve never expected to get one. However, I feel like I’m going to be able to retire just fine…hopefully with a nice 401k to boot. Also, I think it is important to note that diversifying your investments is also key. I’m not putting all of my eggs into the 401k. I’ve also got real estate and other investments that will help to fund my retirement.
A wise plan indeed. People will always need a place to live, so real estate will make a nice compliment to your 401k funds. I’m hoping I can have a few business propositions of my own going to supplement my retirement income.
William Cowie says
What an awesome post! I grew up in the era when pensions came standard with most respectable jobs our parents had.
That generation was fortunate to work in an era with little global competition from countries whose governments artificially depressed their currencies to take our jobs away to give to their people, who happened to be desperate enough for work that they worked for much lower wages… and no pensions.
Also, the former generation had the benefit of demographics: they were a smaller cohort, with a larger and younger cohort funding their retirement, directly and indirectly. Those baby boomers now are on the wrong end of both demographics and global competition.
The new reality is we have to take care of ourselves. Took us a while to figure that out. For better or for worse, those who figured it out the quickest are doing the best.
But there are no victims in this drama, only the group figuring it out, and the group complaining.
Well said William! I would love to be told that I’m going to work somewhere that is going to totally take of my retirement for life someday. But 1970 has came and went. The reality is that we compete in a global economy, and one of the causalities of war is that we are all on our own when it comes to taking car of ourselves. Like or not, that’s just the way it is. I’m very proud that I made this observation early on in my life and decided to do something about it. But I still hear people complain about “the way it should be” and other futile declarations. Those people need to wake up and realize that this is all we’ve got. So make the most of it.
The 401k is a far superior tool from my standpoint for wealth creation than the pension ever could be. Shielding yourself from current tax obligations while building up an investment nest egg with the aid of a generous employer contribution! There isn’t much to not like about this in my opinion.
I fully agree that there are a lot more benefits. Usually when I argue with people about the pros and cons of each, I find that the people who prefer the pension are those who don’t really understand a lot about investing. It’s a shame because a little bit of education could put them in such a better position than they realize.
Insurance Hunter says
People need to take control of their financial future. If you have a pension plan that is great, but it doesn’t mean that you should follow it blindly. Understand how the plan works and what you can do to maximize its impact.
Good logic! You should always know what you’re entitled to and have a backup plan in case you don’t get what you’re entitled to. I’ve read far too many horror stories about pensions that were frozen or cut. By the time you retire, that is not the time to start working on your Plan B.
Those two things you mentioned are absolutely true. If you don’t have a 401k and you already max out the IRAs, save in regular taxable accounts. If you had a late start, save more.
Definitely. The tax benefits of long term capital gains and dividends make them a great place to park your money when your other options are already exhausted.