Retirement Reform Blog

It looks like hand-wringing over 401(k) accounts is the new trend for 2009.  On one hand, it is scary to look at those quarterly statements and see one-third of the balance virtually evaporated.  On the other hand, 401(k) accounts have become somewhat of the scapegoat for anything that goes wrong with retirement planning.  The way the media writes it and Congress talks about it, one would think that individual retirement accounts are a complete failure and that only government can effectively manage our retirement planning. 

A recent article in the Wall Street Journal seemed to echo such concerns and implied that 1) 401(k)s are not effective retirement vehicles and 2) The market is doomed and 3) Only government is qualified to deal with the arduous task of retirement planning.  Many other articles as well have popped up all over the Internet concluding that personal retirement planning is hitting the iceberg of doom and going the way of the Titanic, leaving only a few baby boomers and younger workers who will retire comfortably. 

Call me unrealistic, an idealist, but there are so many assumptions and perceptions that are behind the gloom that are questionable, and even…dare I say?…wrong:

First, the drop in 401(k) account balances is certainly a significant factor for those who are approaching retirement or are contemplating early retirement.  But there has never been a guarantee in life that everybody will be able to retire early.  Many news articles have quoted baby boomers in their late 50s who planned on retiring this year and will now have to work longer.  If the current market conditions require these boomers to work a few more years, that should be a wake-up call that they did not have enough retirement savings to begin with.  Early retirement is a new phenomenon and was something that  was practically unheard of in previous generations unless one became disabled or had a career in public service.  In fact, public policies do not favor early retirement; Social Security discourages it by paying smaller monthly benefits for 62-year olds and rewarding those working past their full retirement age.

Second, younger workers should be worrying little about the economy's effect on the stock market. The above WSJ article quoted a 38-year-old computer programmer lamenting the drop in his 401(k) account, saying, "In a recessionary time, you just can't do the buy-and-hold thing anymore."  Uh…this gentleman is 29 years away from his full retirement age.  He has plenty of time to recoop losses.  Sadly, however, many young workers are giving up, moving money from fund to fund, or cashing out, which essentially guarantees that they will incur losses.  If the "buy-and-hold thing " is good enough for Warren Buffet, it's good enough for anybody else.  Looking at the S&P 500 over the past 30 years, you will see negative annual returns as low as 39 percent, positive returns as high as 38 percent, and various numbers in between.  But the average nominal rate over that period was over 12 percent! 

Finally, while there are valid concerns about 401(k) accounts (yes, maybe the investment choices are hard to understand and yes, maybe there needs to be more fee disclosure), there are other ways to save for retirement.  So if the company 401(k) isn't your thing, find out what is - be it a tax-deferred or a Roth IRA, Certificates of Deposit, bonds, or individual stock purchases – and go with it.  (Although the 401(k) is very much worth staying with if your company offers matching funds.)  Diversify, save early, save often and don't overlook paying off debts.  Even the best perfoming stocks and mutual funds offer little retirement security if you're saddled with double-digit interest rates on your credit card balances.

To sum it up, look at the big picture.

Tags: 401(k), Early Retirement, investments, retirement accounts