Posts Tagged "401k"

People of various occupations

Retirement Saving is Focus of Popular Blogs

U.S. retirement preparedness can best be described as mediocre: about half of workers are not saving enough money to continue their current standard of living once they retire.

Judging by a dozen blogs that attracted the most web traffic in the third quarter, our readers understand the importance of the issue. Some felt strongly that workers need to take responsibility for their retirement finances. Workers “disregard the notion of saving for the future,” one reader said in a comment posted to “Onus of Retirement Planning is on Us.” “They have lived their lives like there is no tomorrow and spend money on any and everything they want.”

To boost savings, growing numbers of state officials and employers are taking charge. The article, “State Auto-IRAs are Building Momentum,” was a roundup of states that are either implementing or weighing a requirement that employers automatically enroll their employees in an IRA. The workers can always opt out if they want to, but they often remain in the plans.

And automatic enrollment in 401(k)s and 403(b)s is gaining traction in the private sector. The plans, which were virtually nonexistent in 2003, now make up a significant minority of corporate and non-profit plans, according to a unique database that tracked the changes in plan design. A summary of this research appears in “401(k) Plans Evolve to Boost Workers’ Savings.”

Baby boomers never seem to get enough information about the nuts and bolts of retirement. In “Enrollment Trends in Medicare Options,” readers had a vigorous debate about the advantages and disadvantages of supplemental Medigap plans versus Medicare Advantage insurance policies. The article revealed a major shift away from Medigap and into Medicare Advantage, which has the benefit of relatively low premiums, with the tradeoff being that Advantage plans tend to provide less protection from large medical bills than Medigap.

Our readers are also interested in the difficult decisions boomers are making about when to retire. The article, “Not Everyone Can Delay their Retirement,” highlighted the racial and educational disparities driving these decisions. And “Disability Discrimination and Aging Workers” dealt with the choice facing aging workers whose bodies are breaking down but who can’t afford to retire.

Here are a few more articles that attracted readers’ attention – some about retirement and some not: …Learn More

401k Plans Evolve to Boost Workers’ Savings

Many employees in the private sector, when left to their own devices, either save very little in the company retirement savings plan or don’t even sign up for it.

But a growing number of companies have revamped their 401(k)-style plans over the past two decades to strengthen the incentives for employees to save. While progress has been gradual and uneven, the companies are moving in the right direction.

In a new study, researchers have compiled a unique nationally representative data set that tracks the changes employers have made to their 401(k)s and 403(b)s. The findings describe three important areas in which they are making progress:

  • About 41 percent of the largest 4,200 U.S. employers in this study automatically enrolled workers in a savings plan in 2017 – up sharply from 2 percent in 2003. Workers can still opt out but the vast majority remain in the plans.
  • Similar improvements were also evident in the study’s broader sample of employers of all sizes. In 2017, about a third of all companies had auto-enrollment, compared to virtually none in 2003.
  •  Among companies with auto-enrollment, about 44 percent of the large employers and half of the overall sample are automatically increasing their workers’ contributions.
  • Contributions to the plans are generally rising too.

The researchers credited some of the improvements to the Pension Protection Act. The 2006 law explicitly allowed companies to automatically enroll employees in savings plans and also established a minimum standard for the level of employer contributions made by companies that adopt auto-enrollment. …Learn More

Be prepared

Onus of Retirement Planning is on Us

Many workers are poorly prepared for retirement. Inadequate savings is a primary culprit.

But the question of why workers don’t save enough was debated by our readers in comments posted to a recent article. The article pertained to a new study showing that life gets in the way of saving, which is derailed by major disruptions such as unemployment or a large, unexpected medical bill.

“This confirms my thinking that the major reason for not saving is spotty employment and a lack of money,” Chuck Miller wrote in his comment posted to “Here’s Why People Don’t Save.” Debi Street agreed: “It is also the quotidian reality of too many people in low-wage, precarious jobs with no surplus to save.”

The research study also tested an alternative explanation for insufficient savings: procrastination. The procrastination theory was not supported by the analysis.

Readers, however, would not let people off the hook so easily. “What’s that old saying? ‘Failing to plan is planning to fail,’ ” said Brian Jarvis. “That planning is certainly impacted by procrastination, which then leads to being … unprepared for life’s disruptions.”

A reader who calls herself Retirement Coffee Shop knows “more than a few people who just disregard the notion of saving for the future. They have lived their lives like there is no tomorrow and spend money on any and everything they want.”

On another matter central to retirement planning – Social Security – readers didn’t criticize. They just offered practical advice.

The article, “Workers Overestimate their Social Security,” described research showing that workers of all ages have a poor grasp of how much they’ll receive in their monthly Social Security checks when they retire.

Specifically, the workers’ estimates were higher than the more precise benefit projections made by the researchers, based on each individual’s earnings history. Not surprisingly, young adults, who have more pressing matters on their minds than retirement, were farthest off the mark.

Several readers made the same suggestion: get the facts. “Go online and look at your SSA statement,” said Lynn. “It lists your FRA [monthly benefit] amount” – at the full retirement age – “as well as estimated amounts at 62 and 70.” …Learn More

State Auto-IRAs are Building Momentum

About half of the nation’s private-sector employees do not have a retirement savings plan at work, and that hasn’t changed in at least 40 years.

Some states are trying to fix this coverage gap in the absence of substantial progress by the federal government in solving the problem.  And the state reforms are gaining momentum.

Auto-IRA mapIn the past year alone, Maine, Virginia, and Colorado have passed bills requiring private employers without a retirement plan to automatically enroll their workers in IRAs, with workers allowed to opt out. New York City, which is more populous than most states, approved its program in May. And other states are either starting to implement programs or looking at their options.

Auto-IRAs are already up and running in California, Illinois, and Oregon, where a total of nearly 360,000 workers have saved more than $270 million so far. The programs are run by a private sector administrator and investment manager.

These mandatory programs are the only practical way to close the coverage gap, because voluntary retirement saving initiatives have never done the trick. Numerous voluntary plans created by the federal government – such as the Simplified Employee Pension (SEP) – have failed to measurably increase coverage.

Large corporations usually offer a 401(k) plan and match some of their workers’ savings. But millions of restaurants, shops, and other small businesses either can’t afford to set up their own 401(k)s or don’t see it as a priority. Without additional saving, half of U.S. workers are at risk of a drop in their standard of living when they retire.

State auto-IRA programs eliminate the administrative burden and expense to employers of a private plan and provide an easy way for workers to save. The money is taken out of their paychecks before they can spend it and is deposited in an account that grows over time. The state programs also permit workers  to withdraw their contributions without a tax penalty for emergencies, like a medical problem or broken-down car, if they need the money they’ve saved. …Learn More

Think of Saver’s Tax Credit as Free Money

Life’s unpleasant surprises – a new set of tires or a big vet bill – can get in the way of saving money for retirement. This is especially true for low-income workers.

But if they are able to save a little here and there, the federal government provides a very big assist through its Saver’s Credit. Unfortunately, low-income workers are also the least likely to be aware the tax credit exists.

Savers credit tableHere’s how the Saver’s Credit works. The IRS returns half of the amount saved over the year – up to certain limits – by a head of household earning less than $29,626 or a couple earning less than $39,501.

So, the head of household with earnings under the income limit who saves $2,000 in a tax-exempt retirement plan like an IRA or an employer 401(k) would get back the IRS’ maximum credit of $1,000. And the couple that saves $4,000 would get back the $2,000 maximum.

Piggy bankGranted, these are very large sums for low-income workers. But if they can manage to save a little bit every week, the Saver’s Credit is effectively free money from the federal government.

Smaller tax credits are available to people with slightly higher incomes. Individuals and couples do not qualify if they earn more than $49,500 and $66,000, respectively.

Unfortunately, only about a third of households earning under $50,000 are aware of the credit, according to a Transamerica Institute survey.

Now that you know, start saving. You’ll get a big chunk of it back. …Learn More

Printed Social Security statement

Workers Overestimate their Social Security

The U.S. Social Security Administration reported a few years ago that half of retirees get at least half of their income from their monthly checks. For lower-income retirees, the benefits constitute almost all of their income.

Yet Americans have only a vague understanding of how this crucial program works – one of many obstacles on the road to retirement. A new study by the University of Southern California’s Center for Economic and Social Research finds that workers are overly optimistic about their future benefits, which is one reason so many people don’t save enough for retirement.

Workers “would probably have fewer regrets after retirement” if they were better informed, the study concluded. And many retirees in the study have regrets. Roughly half wished they’d done a better job of planning.

The researchers’ focus was on working people ages 30 and over. In a survey, the workers were asked to pick the age they plan to start Social Security and to estimate their future monthly benefits. To get as good a number as possible, they were instructed to predict a range of benefits in today’s dollars and then assign subjective probabilities to the amounts within that range.

Their guesses were compared with more precise estimates, made by the researchers, who predicted each workers’ future earnings paths – based on characteristics like their age, gender, education, and past and current earnings – and put them into Social Security’s formula to calculate the expected benefits.

The subjective estimates made by every group analyzed – men, women, young, old, college degree or not – on average exceeded the researchers’ more accurate estimates, though to different degrees. For example, women were more likely than men to overshoot the reliable estimates. Interestingly, people who said they had “no idea” what their benefits would be came closer to the mark than anyone – having less confidence apparently offset the tendency toward overestimation.

Young adults, who aren’t naturally focused on retirement, overshot their benefits the most. This is not surprising but still unfortunate, because good decisions made early in a career – namely, how much to save in a 401(k) – will greatly improve financial security in retirement.

One explanation for workers’ widespread inaccuracy, the researchers found, is that they aren’t clear on how much their benefit would be reduced if they claim it before reaching Social Security’s full retirement age. …Learn More

Photo of the board game Life

Here’s Why People Don’t Save Enough

In the United States and Singapore – places that emphasize self-reliance – many older workers and retirees admit that, if given a do-over, they would have saved more money over the past 20 or 30 years.

Regret was more common in the United States – 54 percent of older Americans had it versus 46 percent in Singapore, according to comparable surveys in each place. Perhaps the reason Singapore has less is because the government requires that employees set aside more than a third of their income in three government-run savings accounts for retirement, healthcare, and home purchases and other investments. On the other hand, Singapore doesn’t have Social Security or unemployment insurance, and private pensions are rare.

Whatever the differences, regret is a common sentiment in Singapore and the United States. What researchers wanted to know is: what is the source of that regret?

They tested two hypotheses. One is the human tendency to procrastinate and never get around to tasks that should be a priority. The other reason is largely outside of workers’ control: financial disruptions earlier in life that sabotage efforts to save, such as a layoff or large medical bill.

Employment problems, the researchers found, were a major source of saving regrets for 60- to 74-year-olds in both places but the impact was especially strong in the United States, which historically has had a more volatile labor market than Singapore. Disruptions that interfered with workers’ ability to save included bouts of unemployment and earning less than they were expecting. Early retirements and disabilities also led to saving regrets, as did unanticipated health problems and bad investments.

But procrastination as a reason for regret did not stand up to scrutiny. In this part of the survey, individuals agreed or disagreed with various statements designed to indicate whether they were procrastinators, including whether they work best under pressure or put off things they’re not good at. …Learn More