About that 401k
Some folks are going to be in trouble during their retirement years. More and more people are whittling away at their retirement savings.
With federal policymakers eyeing cuts to Social Security benefits and Medicare to rein in soaring federal deficits, and traditional pensions in a long decline, retirement savings experts say the drain from the accounts has dire implications for future retirees.
“We’re going from bad to worse,” said Diane Oakley, executive director of the National Institute on Retirement Security. “Already, fewer private-sector workers have access to stable pension plans. And the savings in individual retirement savings accounts like 401(k) plans — which already are severely underfunded — continue to leak out at a high rate.”
Fresh data from Vanguard, one of the nation’s largest 401(k) managers, show a 12 percent increase in the number of workers who took loans against their retirement accounts or withdrew money outright since 2008.
The most common way Americans tap their retirement funds is through loans, which must be repaid with interest. Those who withdraw money face hefty penalties. In most cases, they not only incur a 10 percent federal tax penalty but also pay income taxes. The costs are financially harmful to families even as money-management firms reap massive fees for handling retirement accounts that ultimately are not used for retirement.
In addition, employers often are subsidizing the accounts with matching contributions on the assumption that the money is helping to secure their employees’ retirements.
In 1980, four out of five private-sector workers were covered by traditional pensions that paid them a fixed benefit based on their salary and length of service once they retired. Now, just one in five workers has a pension, leaving 401(k)s and similar retirement savings accounts as the primary vehicles for retirees to supplement their Social Security benefits.
Let’s face it, unless you work for government or have been with your company for a long time, there isn’t a pension. Given the chance of a pension or a 401k plan, there is simply no comparison. No one should ever consider trading off a pension for a retirement plan, regardless of what some snake oil saleman says.
An ugly little side effect of 401k/403B is that all that money flashing before your eyes is not yours. In Virginia, 24% of that money is collected in taxes. Even though an IRA doesn’t snag the 24% right up front, you still owe federal and state taxes on it.
Many people claim harship (to keep from getting a stiff penalty for early withdrawl) if they lose their job. Its something to live off. That happened in a own house a time or two. The problem is, its very difficult to play catch -up. We never did.
Be mindful of the scams companies and governments play. Virginia is trying to do one on its new employees right now…in the General Assembly. Up until the crash, Virginia’s pension fund worked fine and was a national model. Unfortunately, the state started playing with funny money. They were short so they underfunded several of the jurisdictions. The General Assembly also needs to follow the recommendation of VRS. They have told the GA what is needed for full solvency. The GA goes cheap and refuses to do it. They have no one to blame but themselves when things get bad.