Helaine Olen over at Salon has a great description of the structural problems of the 401(k) system and quality of life issues. The 401(k) system has clearly failed, but in a different way than what Olen presents, which is mostly that Wall Street is greedy (they are, but that’s nothing new). Instead, the math has NEVER worked. Here’s some data (graphs).
There’s something to keep in mind about the personal savings over time chart: it’s not inflation adjusted. Personal savings are at 1990 levels now, but today’s dollar is only worth 56 cents in 1990 dollars. So today’s savings is almost sliced in half from 1990. And, as the graph shows, during recessions, people tend to horde money.
I knew 401(k)s were a sham in the 90s. When I was a Benefits Analyst in Human Resources, I asked a colleague who was pumping 401(k) plans if he ever knew anyone who actually retired on a 401(k). He said “SURE!” At the time, I forgot to ask him what their quality of life was. At that time, most companies were matching 100% to 6%. Then came the 2008 Apocalypse which only made 401(k)s crap-tacular as companies cut their match. The math, even in the good days have never added up.
According to the BLS, only 40% of workers are matched to 6%, and most of them (52%) get 50 cents on the dollar. Most match up to 3% on 50% contribution. So let’s look at the math of the median income ($42,000), adjusted for inflation over a 40 year career:
- Annual employee contribution (at 6%): 2520
- Annual Employer contribution (50% up to 3%): 630
- Total: 3150
- 40-years total: 126,000
- 40 year inflation adjustment (estimated on previous 40 years): 682,063
- With Capital Gains (7% average) 729,807
- 20 year withdraw average annual: 36,490
A person expecting to retire on a 401(k) alone can expect to be BELOW the median income from 40 years ago. 7% Capital Gain is based on a good century. Let’s not forget fees, and capital gain taxes. As 2008 has shown us, periods of unemployment force people used their 401(k)s like ATM machines because they have to. That withdraw (or loan) will cost 45% in tax penalties if not repaid, assuming no Capital Loss.
What about the “above average” people, or the fact that salaries increase with every promotion? Well, I’ll end with the chart that Sociologists know and love; the chart that shows salaries & wages have NOT kept up with inflation: