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Opinion: Even 75% of Americans in the best 401(k) plans won't have enough to retire

MarketWatch logo MarketWatch 4/18/2019 Howard Gold
a close up of a person holding a sign: Many workers don’t save enough for retirement or undermine themselves — still, there are a few fixes. © Getty Many workers don’t save enough for retirement or undermine themselves — still, there are a few fixes.

We all know how woefully unprepared Americans are for retirement. But a new study tells an even more sobering tale: Three of every four participants in the best corporate 401(k) retirement plans won’t have enough to cover their post-retirement living expenses.

The study tracked millions of retirement accounts overseen by Edelman Financial Engines (EFE) for almost 300 public and privately held companies. Participants ranged from top executives to clerks and janitors.

Enrichetta Ravina, a visiting professor at the Kellogg School of Management at Northwestern University who worked on the research, offered a five-point plan to encourage people to save more and invest it wisely. (See below.)

Ravina explained that she and the other researchers boiled the sample down to a still-huge 300,000-plus people, then ran multiple simulations based on various real-world events (like job loss and early withdrawals from 401(k) plans) that could affect retirement savings. Their benchmark: Would retirees have enough, along with their Social Security and Medicare benefits, to fund 80% of their pre-retirement income plus retiree medical expenses, which Fidelity estimates at $285,000 per couple?

Read: The money in your 401(k) and IRA accounts doesn’t belong entirely to you

The answer is no, not by a long shot.

The study confirms what I’ve been saying for a long time: Many Americans don’t save enough for retirement because they just don’t have the money. Others work in small companies that don’t offer 401(k)s, so all in all, only one in three Americans is saving in a company retirement plan, according to the U.S. Census Bureau.

And even many people who have good company retirement plans don’t put enough money into stocks; others go haywire on wacky “investments” like crypto or cannabis in a misguided effort to beat the broader stock market. In plain English, many investors simply don’t know what they’re doing.

The best thing that ever happened to most investors was the Pension Protection Act of 2006, which allowed companies to automatically enroll employees in 401(k) plans and make their default investments balanced or target funds. This was somewhere between a nudge and a shove, but it recognized that people generally stick with the default investment out of laziness or inertia and that giving them reasonable exposure to equities would also give them a decent shot at maintaining their living standards in retirement.

Related video: Maxing out a 401(k) may be easier than you think, but should you? (provided by Buzz60)

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Ravina suggests some simple moves by companies, plan participants and the government. Here are the five points:

1. Companies should increase their matching contributions. Ravina says many plans will match employee contributions up to 3% of their salary. She thinks that’s a start, but companies should consider increasing that match to 5% of salary, giving employees more incentive to save.

2. The government should limit retirement-plan withdrawals. Early withdrawals from retirement plans not only reduce the absolute amount people will have later on, they also prevent the withdrawn funds from compounding tax-free over many years. Plus, if you take your money out of a retirement plan before you turn 59 ½, you’ll pay taxes and a 10% penalty. Ravina wants to extend that a few years, making withdrawals penalty-free only from age 65 on. “Making it harder for people who have reached 59 ½ and are not in hardship to withdraw would be something that helps, because there are still many years they could be contributing and longevity is increasing,” she says.

3. Start saving for retirement as early as possible. Student debt payments suck up much of many millennials’ disposable income. “If you have debt, you should not be saving, you should pay off your debt first,” Ravina says. Still, “a lot of people don’t realize the power of compounding. So as soon as you are ready, start saving.”

4. Don’t make early withdrawals. Short of legislative changes (see above), individuals should not withdraw money from their retirement accounts early. Borrow from a relative, pretend the money doesn’t exist, but don’t touch it except in dire emergencies. “When people change jobs, they should try to keep their savings in … the 401(k) or roll it over to an IRA [individual retirement account], but they should not take it out, because … with compounding, with the employer match, with the tax advantage, it can come up to quite a lot of money,” Ravina says.

5. Keep a reasonable amount in stocks and don’t try to outguess the broader equity market. Target-date funds are great vehicles because they automatically rebalance as people age. The vast majority of retirees’ money should be in them or other stock-bond combinations. And don’t sell in a panic, especially in a market crash — of which we’ve seen two in the past 20 years. The average baby boomer in a Fidelity workplace plan in 2007 who didn’t sell but instead continued making regular contributions saw her balance nearly triple by June 2017. Those who sold in 2008 or 2009 still hadn’t caught up nearly a decade later.

Academic studies are often abstract and obscure, but Ravina and her colleagues’ findings and her suggestions point toward some common-sense solutions to a retirement crisis that seems to be only getting worse.

Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.

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