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GRAY MATTERSPosted by Randy on: 2005-10-01 18:36:08 in category:
Retirement Headlines [ Print | Permalink / 0 Comment(s) ] GRAY MATTERS It may be your money, but it may also be gone On July 1, the first of the baby boomers reached the age of 59 1/2, when they were free to withdraw money from their 401(k)s and other tax-deferred retirement accounts without paying an additional 10 percent penalty in taxes. But any withdrawal would be foolish - and that reminds me of my young friend Robin. A lawyer and a middle-level government official, Robin resents the money withheld from her wages for Social Security on the grounds that she should be free to manage her own retirement plan, even foolishly. Like many young Americans who buy into President George W. Bush's proposal for private accounts, she doesn't like the coercive aspect of Social Security. However, sometimes coercion is necessary. Robin is probably a good driver, but imagine what the streets would be like if we weren't coerced by law to get a driver's license and buy insurance. Robin is probably a careful saver who'll nurture and hang onto her (government-sponsored) retirement plan for as long as possible. But to paraphrase John Lennon, life happens when you're making other plans. Robin cannot know what will befall her during her working life. And the sad fact is that too many 401(k)s and similar accounts, which are replacing "defined benefit" company pensions, won't be available for retirement because too many people are withdrawing the money prematurely. For background, let's review the differences between the traditional defined benefit pension, such as the ones that had been offered by many large companies, and "defined contribution" plans such as 401(k)s, which young people seem to prefer without knowing much about them. The first is a set retirement benefit, generally for life, based on length of service and salary, which is financed by worker and/or employer contributions that are invested by a professional pension manager. The second is not a benefit at all, but an investment account to which the worker contributes a percentage of his or her salary; the employer may contribute, although that's becoming less frequent. In a defined benefit plan, which the government regulates, the employer takes the risks of managing and keeping the plan solvent. In a defined contribution plan, all the risks fall on the workers or the managers hired by the employer to make profitable investments. Lately, all such plans have been losing value. And there is little government supervision of 401(k)s. That's why employers prefer them to traditional pensions. If there are profits on the investments in a 401(k) plan, the taxes are deferred until the money is withdrawn, which means it's wise to leave the accounts alone even after age 59 1/2. As any financial adviser will tell you, your retirement account is for your retirement, and shouldn't be used as a piggy bank. But Jim Jubak, the money markets editor for MSN, writes that the average owner of a 401(k) is not likely to hold onto his or her retirement nest egg. He cited a survey of nearly 200,000 holders of 401(k) plans by the pension consultants Hewitt Associates. They found that 45 percent of all workers who change jobs take their 401(k) in cash and spend it. So do 66 percent of workers younger than 30, who have the most to gain from leaving their money to grow. And 42 percent of workers 40 to 49, the prime earning years, will cash out their holdings and spend them. Although employees say they want the freedom to handle their own accounts, Jubak points out that employees do not have complete control over the investments in their retirement accounts. The asset allocation in my own 401(k) could be changed only every three months, and I never knew which stocks and bonds were to be chosen by the account managers. Many account holders don't even bother to find out what they have in it. The bottom line, William Greider noted in The Nation, is that even though 401(k)s and similar retirement accounts have been in existence for more than 25 years, including the boom times for Wall Street, the median value of the accounts held by 48 million Americans is only $27,000. That means half the accounts are worth less than that. And among workers nearing retirement age, the median value of their holdings is $55,000. Thus, the hope of putting a portion of every paycheck into a 401(k), and letting it grow during your working lifetime into a million-dollar retirement fund, usually runs into reality: market downturns, job loss, transfers, family emergencies, a new roof, illness, medical bills, the kids' college tuition. Now Congress may allow Hurricane Katrina victims to withdraw from their retirement without penalty. Alicia Munnell, director of Boston College's Center for Retirement Research, says four of 10 people older than 55 have saved less than $100,000. She estimates that a person earning $50,000 at retirement age needs $350,000 to adequately supplement Social Security. Karen Ferguson of the nonprofit Pension Rights Center said the substitution of 401(k)s for defined benefit pension plans as a vehicle for retirement "has failed miserably." The nation's savings rate has dwindled to near zero. And half of America's workers don't have a retirement account. "A completely free and non-coercive system will produce many workers who will confront poverty in retirement," Jubak wrote. Even Bush's proposal for private accounts has some coercion: It would prohibit early withdrawals. Of course, you should contribute as much as possible to a 401(k) as one part of your retirement plan. But if it doesn't make as much money or generate the income you had hoped for, it's nice to know you have one of the nation's last defined benefit plans to fall back on. It's called Social Security. WRITE TO Saul Friedman, Newsday, 235 Pinelawn Rd., Melville, NY, 11747-4250, or by e-mail at saulfriedman@comcast.net. Homepage Other open community sites http://www.business-business.biz Please support are sponsors. To design you custom retirement plan. http://www.retirement-plan.us For planning a IRA rollovers. http://www.ira-rollover.us Professional asset allocation and the wonders it can do. http://www.asset-allocation.us Professional money management: National ranked performance. http://www.roth-ira.us Managers selected to fit your needs. http://www.money-managers.us |
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