Retirement: Living on ‘Planet 401(k)’

“We live in a 401(k) world,” said Thomas Friedman in The New York Times. What you put into it now determines what you will get out of it later. If you’re a go-getter, that’s great. In the last decade, the Internet has become a global platform “on which people can start stuff, collaborate stuff, learn stuff, make stuff (and destroy stuff) with more other people than ever before.” But if you’ve been counting on governments, companies, and unions to help you out as they did previous generations, you’re in for a nasty surprise. In the world we’ve created, “your specific contribution will define your specific benefits much more. Just showing up will not cut it.” More than ever, there’s no one to rely on but yourself.

True enough, said Felix Salmon in Reuters.com. But you couldn’t pick a worse metaphor for self-determination than the 401(k) plan. On the contrary, the now ubiquitous deferred-tax savings plan amounts to a cruel instrument the government and corporations use “to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and invidious fees.” Old-fashioned pension funds do a much better job of generating returns for their beneficiaries, because they’re run by professionals who pool the resources of large numbers of workers and therefore “have a fair amount of negotiating leverage when they deal with Wall Street.” Not so for 401(k) investors, who also don’t save enough. The average account balance for a 60- to 64-year-old at Fidelity last year was $133,100—far less than the five to 10 times annual salary that experts say you’ll need if you live 20 or more years after retiring. If you’re merely middle class, “there’s almost no chance that your retirement savings will be enough.”

In other words, “Planet 401(k) is a pretty sucky planet,” said Matthew Yglesias in Slate.com. Giving people choices makes sense when they’re buying clothes or sandwiches. But retirement savings are different. “We have abundant evidence that, left to their own devices, a very large share of middle-class savers will make the wrong choices,” spending now rather than saving for old age. We need a “much more forceful, much more statist approach” to retirement savings, either by raising taxes to pay for higher Social Security benefits or creating a “system where ‘private’ savings are pooled into a state-run investment fund.” For now, though, it looks like Planet 401(k) is where we’re headed, so here’s some sober advice: “You’ve got to save a lot of money for retirement. More than you think. More than you want to.”

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