January 17, 2013
401(k)s Bleeding Cash
HelloWallet’s survey landed with a thud in the media this week: one in four U.S. households with a 401k or IRA raided it to cover necessities.
The vast majority of raids are cash withdrawals, not loans – $60 billion in cash in 2010. These grim statistics throw weight behind those who argue we are watching a retirement crisis unfold in slow motion. The pressures on saving are aggravated by stubbornly high long-term unemployment: layoffs explain why 8 percent pulled out cash. But the Great Recession isn’t the only culprit.
Wages, adjusted for inflation, have declined over the past decade, health costs have soared, and consumers remain heavily dependent on their credit cards. In this environment, no wonder saving is often viewed as a luxury.
The 2010 data reveal behavior at a time individuals were still smarting from Wall Street’s financial crisis. But back in 2004, the average 401k balance for all boomers age 55 to 64 was only $45,000 – it was only slightly lower by 2010.
To put that $60 billion in perspective, it is about half the amount U.S. employers put into 401(k) plans on their employees’ behalf that year.
To read HelloWallet’s full report, click here. To read about loans from 401ks and IRAs, which were not discussed in this article, click here.
Maybe they find it pointless to save when Wall Street robs them in the stock market, and Bernanke robs them with 0% interest in their savings accounts. Might as well spend it.
The only way I see that someone could say that Wall Street robs them, is if they panic, sell low (when there’s a sell off) and buy high. With SS only replacing at most 42% of one’s income it is silly not to save whatever one can, even if it seems hopeless.
For myself the power of compound interest is making its presence known in all my retirement accounts.
Alan, having worked with several company plans over the years, I would say that the 90+% of the “advice” dispensed by Wall St. is all, or mostly, a self-serving claptrap; also, the fees charged by the financial industry in many, if not most, 401(k)s are excessive. BTW, compound interest is nil at 0%. You are probably referring to compounded returns on equities, which, unlike compound interest on a bond, are purely paper gains, which are not necessarily there when you retire, as many current retirees have discovered to their dismay. Unfortunately, most investors do sell low and buy high, which is a point that the article makes. The larger problem is that many people, yourself I think as well, think that the “high” is just a matter of holding on and being patient. Zvi Bodie’s work has shown that the range of outcomes with equities is very wide and potentially quite negative, and also, that reversion to mean is a myth with respect to equities. Don’t believe me, read Bodie’s book, Risk Less and Prosper. It is quite persuasive on these points. Read also, Bob Shiller’s many books on the subject. These are very mainstream guys, without an axe to grind. You may end up doing well, and I hope you do, but there is much more risk than you think. I think that many of the non-savers see this, intuitively, which is a major reason why savings are so low.
Thanks for the share. A lot of people have been hit hard by the downturn. Slowly recovering.
First of all you have to beat inflation. With inflation, poverty is created. Do some investing while working and I would recommend the stock market as the best way to invest money.