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.
Moon,
You are saying that a pension is far superior to a 401K, right? I’ve never been lucky enough to have a job where I had the option of a pension, so I don’t have enough knowledge to compare the two.
Do you know if Prince William County employees and PWC Schools’ employees are *required* to contribute a portion of their salary to the VRS whether they want to or not? As a county employee, are you allowed to “opt out” of VRS if you know you won’t ever work 30 years and receive the pension?
Yes, you are required to contribute. It isn’t an option. You are not allowed to opt out.
You also don’t want to take it out if you leave. I know many people who had to double up and pay back because they rejoined the “VRS family” and they wanted to get full benefits.
Pensions are far superior in every case I have ever seen. The main reason is, when a 401k runs out, it runs out. You will “run out” before your pension runs out.
If the economy is faltering to the extent that folks are drawing down their retirement funds prematurely, the NRA is missing a good opportunity to argue that we need to arm ourselves against lawless roving gangs of senior citizens who will be scavenging for food and coins as they live out their golden years under highway underpasses huddled around Sterno cans. We need more fear factors to keep the market for firearms bubbling. We’re pretty scared now, but one always has to think about the next fright.
Excellent point and the reality isn’t all tongue in cheek.
@Janelle Anderson
Janelle – you do not need to work a full 30 years to be eligible. One is vested after 5 years in the system, and will get something at retirement age – if one chooses (with VRS), they can withdraw their contribution from the plan when they leave employment. I do not think you can opt out.
Major difference between the 401K and Pension – is that the Pension does not run out – you start collecting, and it keeps paying. Giving people the ability to do it themselves, also allows them to spend it before they no longer need it. Most people are not diligent enough to save or smart enough to invest wisely – they often buy high and sell low – even in their 401k. Or, have no clue how much a fund is costing them in management fees (ER).
Very correct, Pat.
@Scout
Those old people already have guns. So…instead of scavenging, they’ll be raiding. GRAY PANTHERS UNITE! I had to cash in my 401K over a year ago!
You paid dearly for doing that also! Did you file for hardship? I hope so. That avoided the fine. Even so, you lost 24% of it, before you ever even saw it. Been there, done that. Didn’t like the T-shirt.
Seriously, This isn’t the time in life you want to be doing that. Again, I have had to do it. Long story….
No. My wife makes too much money for hardship. Gotta do what ya gotta do.
Forget I said anything. It wont matter how much your wife makes. I went to prove my point and decided the deck was stacked. Also rules for IRA vs 401k vs 403b have slight differences on this. The bottom line is, you will be screwed. Get used to it.
In my case, my husband was the one unemployed, not me and I owned the account and therefore was still employeed. I got around the 10% penalty. It wouldnt have worked for you because you no longer work for the company, they aren’t going to give you ‘hardship.’
Tell me how screwed up THAT is!!!!
@Moon-howler
“you will be screwed. Get used to it.”
Am fiscal conservative. Am screwed. Used to it.
See, it isn’t so bad, now is it? 👿