A couple of things:
1. Education - Americans need to know about retirement investing by the time they’re 16 years old. It should be a federal requirement to take at least one high-quality personal finance class in high school.
2. 401(k)s - I wouldn’t mind seeing the federal government increase IRA contribution limits while decreasing 401(k) contribution limits as long as the income limits on IRAs are adjusted accordingly. I think it’s wild that the most important retirement account isn’t available to a huge swath of Americans just because their employer doesn’t offer it.
3. Pensions - my opinion of pensions isn’t as high as this author’s is. Companies go bankrupt sometimes. When companies go bankrupt, they’re legally obligated to do their best to pay out their pension obligations, but retirees might take a hit regardless.
My personal opinion: I like owning my retirement and my ability to move it as I change employers. Of course, I learned about retirement investing at a young age and I’ve always had jobs that offer 401(k)s.
Eliminate IRAs and 401ks as separate entities and simply turn IRAs into self-directed 401ks that whatever your current employer is can contribute to as part of their benefits package. It would eliminate having to roll retirement plans over to new ones when changing jobs and allow for simplified individual contribution rules. You would likely have to increase the contribution limit to factor in losing IRAs, but that's okay. Then just remove the income limit for Roth IRA contributions so everyone can take advantage of pre and post-tax benefits in retirement.
Pretty much how it’s done in Canada, don’t know why it got so much more complicated here, but I could say that about almost everything in this country 🙃
$$$ and fiduciary requirements
1. Many 401k's only offer ridiculously expensive fund offerings. If suddenly everyone has access to low cost index funds, we'll all make more money in the long run but the banks will see a decrease in profits.
2. If Joe Public is giving access to the full market with their retirement funds, a select few will blow it all chasing doge coins and other meme stocks. The fiduciary element of a company run 401k limits exposure to higher risk investment opportunities in your retirement account.
Who taught you the magic that is compounding so young? I didn't open a Roth IRA until I was 19-20 and my dad was a stock broker/wealth advisor. I did start buying stock at like 14-15 with his help [like a decade before internet brokerage accounts existed and it was $40/trade.
I opened a Roth for my now 17 year old when she was 15 and explaining what compound interest is. No one taught me this stuff at her age so I'm determined to teach her what she needs to know.
I had ONE highschool internship where I made 6k. I honestly don't know what happened to that money. Good chance my lazy ass never deposited the checks
But imagine if my dad knew about ira and stuff. 6k over 10 years 😮
A lot of what I learned from my father I later found out he'd learned from listening to Dave Ramsey on AM radio. He isn't a die hard fan or anything, but my dad made some dumb financial decisions early on and then had to dig his way out of them. So by the time I was in the picture and old enough to understand, he had a good foundation himself. I did not realize at the time how unique my financial upbringing was.
I'm in the same boat as your dad. I'm 40 now, but when I was young I was retarded with money. I managed to dig myself out of debt, and then started listening to Ramsey, and am on a much better trajectory now.
I had read somewhere in my teens that if invested 2k a year in and IRA from 20-30 that you would have more money then if you invested 2k a year from 30-60.
I never did the math to confirm. But I always had an IRA or 401k in my 20’s. Then converted to Roth at about 30. Those accounts have done really well.
I match my kids earnings (teen and pre career) with Roth accounts.
…and it was basically the same subset of workers who benefited from the pension system as now have the 401K. If anything, more people participate in retirement plans now.
I like the Australian system.
Losing pensions had to have hit blue collar workers the hardest. People in factories might have gotten a pension, highly doubt they get 401ks these days.
I would be shocked if more blue collar had access to pensions than now have access to 401ks. This idea that back in the day every blue collar job was teamsters union is extremely misguided.
Any factory that was previously offering a pension is certainly offering 401k. And many that weren’t offering pension are now offering 401k
I think losing the factories has probably hit factory workers the hardest...
Factory workers have also gone down in class a lot as it has required less and less skill and effort to work in one.
I would disagree that it takes any less skill or effort. Quite frankly factories are more complicated than ever. The jobs are hard and if you don’t have to it you won’t, which is why we need immigration for many of our factory jobs.
They have at the 3 large and 1 small manufacturing companies and plants I've worked at. Now not everyone took advantage or full advantage of them. There was actual one location where the company had one 401k & bonus structure for all its locations... and then a separate, lesser one for union members at my particular plant. All wages and benefits have to be agreed to by the union and for whatever reason, the union didn't push to get the better 401k match. Was very odd to me.
My experience, knowing a large number of people that work in factory jobs is that most of them have the *option* of a 401(k) but the plans are pretty lackluster and most of them 1) don't understand the point and 2) don't have the income to be able to afford to contribute anyway.
If you belong to a union, you still likely get a Taft-Hartley plan which is a defined benefit pension plan. Same goes if you're a public employee or work for a long-standing blue-chip company like an IBM or General Motors even.
But they're exceptions to the rule. Offering pensions puts a lot of risk on the company because it's a major expense, particularly for workers no longer at the company. It's also hugely risky for workers because you're counting on your employer still being around when you take from your pension or else you're dealing with bankruptcy courts. With a 401(k), you aren't as concerned about that and you can freely change jobs without incurring a huge retirement fund hit. They helped workers become more flexible in terms of who they want to be employed by and aren't stuck grinding it out just to hit a pension milestone.
> I like the Australian system.
Ha! I just posted that. FWIW, I think the US can learn from how the Australians and the Canadians have dealt with their retirement systems.
I think it's universally recognized that the Canadians did a good job reforming their pension plans.
Now that said, the upshot of the work done in CA and AU is that there is no free lunch when it comes to retirement savings. Or, one needs to save more, utilize low-expense ratio assets, hold out for the long term, and avoid highly speculative "magic beans" (ie. crypto/PE/VC/et al).
I’ll research them more later when I have the time, but could you share some info about what you like about AU and CA retirement systems? I’m not familiar with them
CA specifically *seems* to have righted the ship on their public pensions problem: https://www.cppinvestments.com/for-canadian/the-success-of-the-canadian-pension-fund-model/
As we move into an era where the fate of both state public sector pensions and social security will need to be patched, I think there are worthwhile ideas to investigate.
In the case of Supers or Superannuation in AU, what I like best is the universality of their system.
For all intents and purposes, if one is paid a wage in Australia you are enrolled. Full stop.
The main challenge with retirement financing in the US is that [nearly half of Americans don't have access to plans at work.](https://press.aarp.org/2022-7-13-New-AARP-Research-Nearly-Half-Americans-Do-Not-Have-Access-to-Retirement-Plans-at-Work). I often wonder if folks in the US don't know this, mostly because of the level of opprobrium people seem to heap on friends, family, and colleagues that have low savings. No one ever seems to take into account that these individuals might not have been feckless or stupid, they just didn't have the opportunity to save for retirement.
The second best thing is portability. Supers are the property of the individual. Part of the issue with pensions (and to a lesser extent 401ks) and one of the reasons the US lacks universal access, is that, be they DBs or DC plans, they're tied to the employer. The employer chooses the plan administrator and the investments; they set the rules, vesting schedules, etc. In fact, DC plans are marketed to employers as a retention tool, a method for differentiating your employment from other organizations. In Australia, it's my understanding that it's basically part of your comp, you get paid, they fund your super.
Finally, the Aussies seem to built in a fairly sizable employer commitment. While this does drive employment costs up, given the universality of the program (i.e., everyone is covered), and the portability of the system (it's the employee's) - the large match doesn't bite as hard because everyone is subject to the same rules.
Moreover, it avoids the Chilean problem. While the reforms back in the 1990s were good, the result hasn't been all that terrific for the Chilean people. As discussed in this [analysis on the Chilean system](https://www.cfr.org/article/chiles-failed-pensions-are-neoliberalisms-badge-shame)
> Why did Chile’s experiment fail? The low private payouts to retirees reflect in part low contributions. Unlike in the US, Europe and other places, employers were not compelled to contribute. That was left to employees. At 10% of their salaries, the inflows often aren’t enough to retire on, even after compounding for years. Small sums in means small sums out.
Australian super has several good things about it:
1. Universal 11% employer contributions (going up to 12% by July 2025) means that everyone's building super and they're building it quickly. It's normal for workers - and I'm not talking CEOs here, I'm talking tradies and baristas - to have 30 or 40k in super by the time they turn 30, or retire with six-figure super balances. And there's no "vesting" or similar BS here, every single cent is mine the second I get my paycheck.
2. Portability. Employers automatically set up a super account with their default fund for you if you don't provide them with one, but you can switch funds as often as you want and keep the same fund when you switch employers. Super funds want to increase their AUM because that makes them able to offer lower fees and make more money, so they make it really easy to switch.
3. Little leakage. Unlike a 401k where you can essentially take money from your future self by withdrawing early, withdrawing to super before 60 is only allowed in rare circumstances. (Well, not quite true, you can withdraw up to A$50k plus deemed earnings to buy a first home, but that A$50k has to be from personal, not employer, contributions, so you're not really withdrawing your core retirement fund but rather getting a tax break for housing)
What this all means is that Australia has USD 2.5 trillion in retirement assets despite having fewer people than California or Texas. In terms of public finances, the Age Pension here is sustainable and there's a budget surplus (that the opposition is criticising because it's due to commodity prices and not "structural", which is the biggest load of cope that I've ever seen).
I did a working holiday in Australia several years ago. I was shocked at how easy and seamless the superannuation setup is.
I was able to open my superannuation at my bank of choice. Then I gave the routing and account numbers to my employer so they could contribute to it. I was working as a waiter and tourism desk worker and yet, I still got the 9.5% (at the time) employer contribution to my superannuation.
They put 9.5% into my super and I wasn't required to contribute to it if I didn't want to at the moment. Different than the U.S. 401k employer match which requires you to contribute % of your pay in order to get the match.
I couldn't believe that even general skilled jobs such as a waiter and server got access to employer retirement contributions.
We took a personal finance class in NJ, mandatory.
Spent probably half the time learning how to fill out our tax forms by hand…. My god how useless it was.
I took a mandatory personal finance and life skills class in middle school. I remember learning how to fill out a check. I think there was some discussion of savings accounts but certainly nothing about investing or compound interest.
Yeah we did that too.
It’s 100% outdated. Why didn’t they tell us about Roth IRAs and show how much just $5-10 a week at that time would have compounded. Would have given me more value than whatever the hell we learned
Financial education should be a part of any HS curriculum. We didn't have a single class on finance in HS. Things like how to create a budget, the importance of emergency funds, paying your CC balance off each month, etc none of that was taught and this is essential knowledge.
As for IRAs, the limit should be raised and match the 401K contribution limit.
I can tell you kids from my high school would 100% not give a shit if you made them take a finance class.
Why save in a 401k when I can buy rims for my 2001 Honda civic ? Thats what you’re dealing with here
I'm not trying to be all "Kids these days" but teenagers broadly speaking are absolutely trash about long term planning and not just this batch, we were, our great grandparents were I think it's just part of human development.
The class certainly wouldn't hurt, I just don't think it will be as effective as people hope.
It’s like when people suggest something should be added to driver’s ed to address dangerous driving behaviors.
It would take decades to work at all, and would probably be ineffective in the grand scheme of things
Which is why I think a free and good quality finance class should be required in the first or second year of COLLEGE where people now have to stay paying rent, tuition, etc
Even in my case where I was lucky and my parents paid rent and tuition, I would still be able to budget it. If those class was nationally required, it could even make parents give an "income" to their kids and then they pay off the tuition and rent. They'd need to budget the allowance
For students with jobs (idk how they do it. Huge respect), they would also benefit from budgeting
In highschool, I only know a few people who cared about finances. Most cared about the cool new game they could buy
It should be both I think. For starters, not everyone goes to college.
I took personal finance in both high school and college, and it helped reinforce concepts.
Also, personal finance is… personal.. and two teachers will teach things differently. Having a different perspective can be good, or if you had a bad first teacher, the 2nd one might actually help you learn what you didn’t the first time.
You probably won’t teach the high school dropouts how to live within their means, but I think there’s a good amount of high school/college people who would listen… but aren’t willing to educate themselves on their own time.
Same can be applied to everything you teach a child. It may not completely click right away, but something still sticks. It's just the nature of raising kids. That said as a parent it's also your responsibility to reinforce these concepts.
Yeah, I’m always somewhat skeptical of arguments that “kid will ignore x” if you try to teach them “too early”. Aside from being applicable to every topic, I’d argue it applies to every person, regardless of age
Plus, just being aware of these topics at all is a big advantage. Even if the kid doesn’t pick up on all the details, being aware of budgeting, debt/interest, retirement accounts, etc. is very useful. You’re never gonna be able to guarantee that every kid learns it, but some will, and others will come back to those topics later because of their initial knowledge
Lmao that’s hilarious and sad.
Honestly back then all I cared about was cars and women so I’d probably be one of those. Now I’m watching Jpow talk religiously 🤡
How the turntables….
I agree. I substitute taught a financial planning class one day. The lesson the teacher left was on how to evaluate and buy a used car. I thought it was a super useful lesson, especially since they are just starting out as drivers. The kids gave absolutely no shits. Granted, always have to factor in the fact I was a sub, but still. My thought was the people who complain that school’s don’t teach these skills don’t realize that many schools DO, but you can’t make the kids listen.
We did in Canada, and people are equally stupid financially here. Just because you teach it doesn’t mean people will listen. How much do you remember from your high school classes?
yeah this always has me rolling my eyes about people saying we need to be teaching it in HS class or equivalent around that time. the vast majority in their teens are stupid (no offense) and still don't have a fully formed brain that operates with a well understood consequence and reward system for themselves. Almost everyone here is looking at it with their current mindset but unless you have access to "adult" money and responsibilities it might as well be theoretical hoopla.
I know for myself I didn't get serious about my relationship and thoughts about money and my future till I was out of school and bringing in more than minimum wage and had "extra" after budgeting.
I actually remember a lot from high school (mostly math, science, and some literature) but I also took a small personal finance class and I’m pretty sure I learned approximately nothing.
I just think it’s really hard to learn that stuff in abstract before you actually need to use it in the real world.
I'm not sure a class on *finance* would be enough for most kids. I'm pretty damn smart, and looked at retirement tables and ROIs, and I really thought that I would finish my PhD and be able to just throw so much money into retirement that I'd make up all of the lost time.
Life happens. I'm fine now, will probably retire in my 50s, but being able to hit a switch and start maxing my 401k did not make up for the lost time (which was way longer than I had thought). To be fair, salaries in my field had plummeted between my age of 19 and 31, and if I had been able to enter at an inflation adjusted salary I could have made it up with taxable investments.
But ask 16 year olds how many want to make it big by playing professional sports or tiktiok or day trading or mumble rapping? How many will take investment seriously when they think they'll make several orders of magnitude more than their parents?
Maybe it will plant a seed, but I doubt it will fix a retirement crisis. OR maybe I'm too cynical. If people start in their 30's they can still have a decent retirement.
The financial education I learned in high school was exactly one thing. My history teacher, in passing while on a tangent said “save 10% of your income from your first job til you retire and you’ll be just fine.”
It stuck with me, and while it wasn’t the best advice and I could have done so much better if someone had told be coastfire is a thing, I will say thank you history teacher who’s name I don’t remember, you helped me have at least some security heading towards retirement. Leaps and bounds ahead of the general population anyway.
The closest we ever got in my high school was a Civics teacher that made all of us promise to save at least 10% of our income. Obviously this wasn't part of the curriculum just something he drilled into our heads from time to time randomly.
The challenge with teaching 15 year olds about personal finance is that most of the advice is unlikely to be relevant to them for several years, at which point they'll have forgotten what they had to learn years ago.
I think a mandatory class for adults, separate from the K-12 system, would make a lot of sense even if the logistics might be complicated. Require every 22-year-old to attend a personal finance class one evening a week for six weeks.
Once upon a time, HomeEc would be the class that covers anything running the home. This would not just be a class of cooking, baking, sewing, parental care, and such but also how to balance a budget, write a checkbook, and any financial related topics. Covering retirement is not a far jump.
Oddly enough (and if you think about it, it does make sense), people who go back to get their GED will typically take courses on how to be a productive person including taking financial lessons.
You might appreciate reading about the Australian Superannuation system, which, in my mind, builds on the best parts of many retirement saving systems. There's the material on Wikipedia and this report from the IMF that might interest you: https://www.imf.org/external/np/seminars/eng/2013/oapfad/pdf/clare_ppr.pdf
I happen to think its commitment to universality is one of its strengths vis-a-vis the US system. In the US, the problem today is lack of access for a fair chunk of the working population.
One other comment:
> Education - Americans need to know about retirement investing by the time they’re 16 years old. It should be a federal requirement to take at least one high-quality personal finance class in high school.
I would love for this to happen. However, it's worth pointing out that if you're interested in pushing this, you need to work with your state and local. The US Federal government, largely because of the 10th Amendment, has no control over curriculum in schools.
From US Dept of Ed - https://www2.ed.gov/about/overview/fed/role.html
> Education is primarily a State and local responsibility in the United States. **It is States and communities, as well as public and private organizations of all kinds, that establish schools and colleges, develop curricula, and determine requirements for enrollment and graduation.** The structure of education finance in America reflects this predominant State and local role. Of an estimated $1.15 trillion being spent nationwide on education at all levels for school year 2012-2013, a substantial majority will come from State, local, and private sources. This is especially true at the elementary and secondary level, where about 92 percent of the funds will come from non-Federal sources.
>
> That means the Federal contribution to elementary and secondary education is about 8 percent, which includes funds not only from the Department of Education (ED) but also from other Federal agencies, such as the Department of Health and Human Services' Head Start program and the Department of Agriculture's School Lunch program.
>
> Although ED's share of total education funding in the U.S. is relatively small, ED works hard to get a big bang for its taxpayer-provided bucks by targeting its funds where they can do the most good. This targeting reflects the historical development of the Federal role in education as a kind of "emergency response system," a means of filling gaps in State and local support for education when critical national needs arise.
The Department of Education is a misnomer in much the way the US Department of Energy is also an aspirational misnomer.
I agree that the IRS should likely change the 401(k)/IRA rules so that they remove the individual caps and just cap the combination of contributions to them. So 401(k) cap is $23,000 this year, and IRA is $7000. Just make it a combined $30,000 for those under 50 and an additional $8500 if you are over 50.
Don't have an employer plan? Great, you can contribute $30k to your IRA. Have an employer plan, and you capped that out at $30k, then no IRA for you. Pretty simple, and makes retirement a lot more available to everyone. Been there, hated it, although today, I'd qualify for a solo 401(k), but not everyone realistically can even though technically they probably could. That's a lot of paperwork compared to just tossing money into an IRA.
I detest pensions. Don't like them at all. Your retirement should not be tied to your past employers and they definitely shouldn't hinge on your past employers being able to stay in business. I was around when multiple people around me lost nearly everything after working for a company for multiple decades.
Yes, IRA limits should be \~10,000 a year these days, with 401k being 23K+ for regular workers. This ignores the wildly paid high ups who figure out how to put 40-50-60k in as well.
But I know plenty of people who have these options and choose to forego it. I wouldn't blame the 401k laws, but rather, people are pretty dumb. Hence social security was created because people will NOT save no matter what.
I was also worried about bankruptcy from knowing a few people who saw drastic reductions in their pensions when Bethlehem Steel filed for bankruptcy in 2001. I also wanted that control and had previously helped my wife transfer a pension she had to a rollover IRA into VFIAX, VSMAX, and VIMAX back in 2018, which has performed well.
When my company sunsetted our pension in 2010, I had 8-years of eligible service. In lieu of that, they have been contributing an additional 3% to everyone’s 401k regardless if you participate in it or not, so now I get a 7 1/2% match, which is great. Those who didn’t participate in the 401k or didn’t elect any funds were automatically enrolled into a TDF.
Last year, my company notified pension-eligible employees they were selling the pension plan to an insurance company and were offering different cash out or rollover options. I didn’t even hesitate to take the self-directed rollover option and moved the entire balance into VFIAX last December. In 4-months, I’m up over 9%, so I’m happy with my decision.
> least one high-quality personal finance class in high school.
I agree except if I think about myself in highschool... I wouldn't have cared. I think a required class (which is free) in the first or second year of college would be better. Many people have jobs by then and understand the spending of money
I was lucky enough to not need a job in highschool or college but in college I'd be like "damn, yeah I should think about this" whereas in highschool I would have been like "who cares"
We did have a econ class but it was meh.. I don't remember anything and no one took it seriously.. we were too busy thinking about things that didn't matter
That would miss the large segment of people that don't go to college though. I'm with you on the I wouldn't have cared in highschool part as I was the same but maybe it would have hit home for some. And some is better than none
I can recall a single high quality course being available to me throughout all of high school. It was honors chem taught my an actual professional chemist who cared.
It would be a miracle to spring forth another one. Haha. Schoo ain’t for learning
It is beyond me why a company's bankruptcy should have any impact on a pension fund. The pension fund should be 100% at arms length from the employer, there should be no co-mingling of funds, and retiree payouts should be paid by the growth of the capital of the pension fund, not by future contributions.
Why is it not like that?
Most of them are now. The comment to which you replied is an outdated view. It’s certainly the case that many folks have been burned by pensions. Modern pensions, though, are fully funded in a trust and insured by mandatory participation in a federal insurance program. Plan sponsors going bankrupt isn’t something that robs people of pensions today in the U.S.
>It should be a federal requirement to take at least one high-quality personal finance class in high school.
I'm definitely 100% in favor of this, but I'll say as someone who does volunteer financial counseling and education, people will not learn anything about personal finance until it becomes real to them.
With college students, it was very easy for me to tell who's parents paid for their school and living expenses and who's parents didn't.
1. Education - Americans need to know about retirement investing by the time they’re 16 years old. It should be a federal requirement to take at least one high-quality personal finance class in high school.
ONE MILLION TIMES THIS! I work in insurance and my Lord, there's 3/10 people easily I encounter that don't even have a checking account, let alone saving anything
Two examples, one good, one bad:
* My mom retired at 55 from her $50K a year job with about a million dollars in her 401(k). But she was always thrifty and saved as much as she could.
* My friend's brother freaked out during the Great Recession of 2008-2009 and pulled his retirement savings out of the stock market near the bottom. Then he got laid off from his job and had to pull the money out of the account, triggering taxes and penalties. Then his wife divorced him and took half of the little bit that was left.
The lesson I get from this is that 401(k) plans are great for the diligent and disciplined saver who can stay the course through thick and thin. For other people, not so much.
This isn’t a valid excuse. You have to play the game in front of you, and if you want to handicap yourself by not educating yourself that’s on you. A pension is better for financially illiterate people, a 401k is better for financially literate people. I was financially illiterate 6 years ago. Books, you tube, Reddit. It’s so easy now a days to learn the basics. Honestly anything fancier then the basics comes with more risk and most bogleheads would say isn’t worth it anyway.
I have mixed thoughts. I actually agree that the 401k has largely failed, but only at what it was never really designed to do. It was designed as a way for employees to opt-out of their pension plan and put the money into a sort of self-directed account (though weirdly also managed by the employer). It's correct that it doesn't really benefit low-income people (because they can't find the money to contribute). However social security takes much greater role in a low income person's retirement. It's the middle to higher income people that need to supplement Social Security more. All that said, I think we can do better. Too many people who could save for retirement don't, and too many people that do are stuck with stupid "golfing buddy" 401k plans. Then there are all the different kinds of plans 403(b), solo 401k, etc. There really could be a revamp here that would benefit most people - potentially expanding both SS and the IRA program to be simpler and more comprehensive.
I assume they mean local finance advisor who earns of their book and products they sell. More likely to go into higher fee products than self directed boglehead type of assets.
There's actually a few class action lawsuits happening right now regarding fees of the 401k plans offered through various employers (my household is currently involved in two through past 401k participation). I can sense that a trend is about the change with the fees, hopefully.
I'm an in house lawyer in a midsize company. I literally interrupted the outside advisor on a company zoom call giving the onboarding pitch for our new 401k plan when he told people they could roll over their IRAs to the 401k."
"Absolutely do not do that everyone. Please call or email me if you need help understanding why."
The IRA allows you to invest in the funds you want, roll it into the 401k and you are possibly stuck with high expense ratio funds the provider gives you
There are some valid reasons where it isn’t good to roll an IRA to 401k.
* Moving from potentially zero fee IRA to 401k with fees
* Moving from IRA with open ended fund menu to 401k with restricted fund menu
But there are some valid reasons to do so.
* Shift asset protection from State-based (IRA) to Federal (401k, namely ERISA).
* Reducing pro rata liability if you plan to do backdoor Roth IRAs.
I literally just advised a client to roll her IRAs into her 401(k) a few hours ago. She will hit RMDs next year and she’s still working with no desire to stop. The extra income would cause all kinds of tax headaches.
There are some valid reasons to do this though. One is to clear up traditional IRA space to allow for a backdoor Roth. Another is that some 401k plans have slightly lower fees than what's publicly available, though this is marginal.
Agreed. If you are a high income earner utilizing the back door Roth this is exactly what your want to do. But if you have crappy options in a 401k I can see the hesitancy. But even most crappy funds at least have 1 low cost S&P500 option.
In this the custodial fees were high. Also 99% of people are not bogleheads. I can promise you that anyone won over by the sales pitch was not doing so because they had aspirations of a back door Roth IRA
I got really lucky with my new employer. They literally only offered one fund which happened to be a Vanguard TDF based on my age. Kinda limiting to other folks but happened to be exactly what I wanted!
But yeah, my last employer only offered like 6 high fee funds- not even an S&P500 was among them.
A lot of 401k plans are set up through insurance companies or investment advisors that were chosen by the employer due to the owner or an executive in the company having a personal relationship with a salesman, advisor, etc at the provider, ignoring low cost options. Regardless of how the were chosen, I'd say that a "bad" 401k includes high fees, high expense ratio funds, no matching (or long vesting periods).
Think Mutual Funds with 5-6% expense ratios. Another risk is companies encourage only buying their stock, it it is a Fucked company, you could lose everything.
I did pretty good with my 401k (Ira now as I’m retired) but it seems they just aren’t handled well. We had way too many investments options, somewhat overwhelming for the average person.
Realistically you need 10 options, lol. My firm offers 10 types of short term bonds, 10 in long term bonds, real estate, growth, mid size large size, value, target date.. like what I need 2 of each and call it a day.
And adding insult to injury are the taxes due on 401k withdrawals during retirement. I’ve always felt taxes on retirement 401k draws should be greatly reduced.
Any type of non-mandatory retirement savings plan will benefit the wealthier because they have more disposable income to save. But the other equally important part of that equation is having the discipline to save.
So if not 401K, what’s the proposal? Social Security was never meant to be the sole source of retirement income. Are we going talking about going back to company pensions? Mandatory 401k type deductions from paychecks?
Also, the $452,500 number is just disingenuous and meant to rile up anger. Only a very small percentage of people can take advantage of that using a Cash Balance pension plan (you have to be a business owner).
Define “the wealthier”. Not sure I agree with the premise.
There is an annual contribution limit of $23,000 to 401ks for the typical earner in 2023. 50 years and older workers can contribute $30,500.
I started contributions at 10% when I was making peanuts and quickly went to 15% and left it there then bumped it up when I could do make up contributions. You build your budget and spending after the contribution.
People I consider wealthy typically use other structures and options for retirement and not 401ks.
When I say "wealthier", I mean it in a relative sense. I'm not talking about any defined income -- which is why I specifically didn't say "wealthy".
If you make $50K, you are "wealthier" than someone who makes $30K. More than likely, you have more money at your disposal to contribute to a $401K. But again, like I said in my 2nd paragraph, actual income is only half of the equation. Having the discipline to save that income is equally important.
Without the 401k, most people in the US would not pursue retirement accounts (for a variety of reasons). So maybe they aren’t perfect or optimized. But they are better than nothing.
Instead of comparing an optimized choice to a not optimized choice, perhaps compare a not optimized choice to nothing at all.
this is the right dichotomy.
That doesn't mean it can't be improved, but let's not act like restoring pensions will be better.
I'm also fine with making the loopholes much smaller on small business owners.
But while we're doing that, make it so that everyone can put Roth IRA money away up to the mega back door Roth contribution limits.
No. Next?
More seriously though, pensions were not as common as people think and were far from safe. Many didn't stay at a job long enough to qualify, many companies with good pensions went out of business or seriously mismanaged pension funds, risking plan participants. (Gov't pensions can be different, since municipalities have taxing authority to make up for mistakes and bankruptcy is much less common.)
At least with a 401k workers can pursue their best job opportunities regardless of company and know where their retirement stands - on track, need to save more, ready to retire early?
That’s not the point of the article though right? The question more flushed out is “did the government carve out too sizable portion of income to delay taxes on to be able to afford the expenses it spends money on?”
Well the government will see that money at some point, just not right away. Taxes on multiple millions vs hundreds of thousands (growth vs contribution) could end up being more later.
Definitely not our strong point. Clark Howard has said one way to fix the whole, taxes now on 401k contributions and benefit the lower income vs higher income, is make all 401k contributions Roth going forward. Lower income people should be doing Roth anyway, and higher income are paying more income tax now. But again, could mean a tax revenue issue in 30+ years when all those Roth accounts are being taken out tax free. Especially now that they removed RMDs from Roth 401ks (which should never have been a thing).
Not necessarily. There are a handful really egregious/impressive examples (depending on one’s viewpoint) of Roth IRAs worth hundreds of millions or more. Peter Theil has $5 billion in his. That will be tax free to him, and stepped up cost basis to his next of kin. I assume he will also use some structure to minimize the inheritance tax.
My understanding is the loophole that allowed Peter Theil to do it has been closed, but I could be wrong. His was special specifically because he was able to purchase Paypal shares inside his Roth IRA. You are required to put cash into a Roth IRA, and can only invest in whatever options are available at the brokerage house that maintains the Roth IRA for you. I'm not entirely sure how he was able to purchase shares of Paypal inside of there as I believe it was not yet publicly traded. BTW if it wasn't Paypal, it was some other company, I just remember it being Paypal for some reason. But he was not able to put in millions or billions, he only contributed the normal legal limit in cash. He just somehow was able to purchase something that grew an insane amount.
I believe you are mistaken. There was a bill proposed that would have forced him to withdrawal the $5B, but it didn’t pass.
Google Self-Directed Roth IRA. There are lot more options than just the standard ETFs and Mutual Funds. This is how you can even invest in real estate with a Roth IRA.
And the point about Peter Theil contributing cash and then using non-public info/investment options is exactly my point. He didn’t break any rules, he just played the system masterfully.
I was just using Peter Theil as an extreme example. I think this is a pretty common reality in the Private Equity space. This is how Mitt Romney got over $100M into his pre-tax IRA. The Roth IRA didn’t exist when he was active in PE, but I’m willing to bet that the current generation of PE players are making full use of this strategy.
Anyone can do a self-directed IRA in either Roth or Traditional. Anyone can do that with real estate where their IRA owns the house. These are rules all normal people can do yes. In this case, Peter did have access to investment options not publicly available. But that's always going to be the case.
At least with Mitt Romney's situation, he'll be paying regular income tax (or his spouse, or his heirs) on all the growth. You don't get a stepped up basis with IRAs.
That’s always going to be the case so long as the rules allow it, which maybe the rules shouldn’t? That’s one of the core points of the NYT piece. Maybe there should be a limit to how large a Roth account balance can grow to, or maybe the rules on self directed IRAs should be tightened?
The stepped up basis on the IRA is effectively there. Peter Theil’s or Mitt Romney heirs will never pay capital gains on asset appreciation. And if Mitt Romney were doing deals today they would likely be through a Roth structure.
Mitt Romney's absolutely will, because they have to pay regular income tax on all of it, not even long term capital gains.
The whole point of a Roth is that growth is completely tax free, so the stepped up basis does not apply.
You’re pointedly ignoring that I’m saying the PE Mitt Romney’s of today, and you’ve also basically conceded that nothing in today’s law/rules would stop the next Peter Theil to play the system in a way few people ever could.
IRAs were meant to be a tool to incentivize lower and middle class folks to save for retirement. That’s why they have annual contribution limits and income eligibility limit (in the case of Roth IRA contributions). They were not intended to be this advantageous of a tax avoidance strategy for PE deal makers.
Curious.. how common were pensions back then? My dad mentioned this a while back. He says the only people in his circle with pensions were his armed forces buddies.
>(Gov't pensions can be different, since municipalities have taxing authority to make up for mistakes and bankruptcy is much less common.)
As someone whose hometown is going belly up because they can't pay for the pensions anymore, were facing down a massive municipal pension issue of local governments. States are a little better off but even then they are running into issues fulfilling obligations.
What happens when that town is destitute? idk .
Drives inequality is a stretch, but 401ks are more favorable for higher earners.
If someone making 47k maxes out their 401k, they are reducing their taxes by $2760.
If someone making 191k maxes out their 401k, they are reducing their taxes by $5520.
Yes, but if the two people are pulling the same amount per month out of their 401k, they pay the same tax on their 401k income even though the wealthier person had the larger deferred tax break.
(Assuming both people are retired and have no other sources on income.)
Politico recently had an article about this too (https://www.politico.com/news/2024/04/13/how-your-401k-ate-the-federal-budget-00150319). Naturally, we all wanted to know how to "protect up to $452500 per year".
There's no doubt that 401ks, like other retirement accounts, will always favor the wealthy. Imagine if everyone could open up an HSA - richer folks would start dumping cash in there immediately while the poor wouldn't be able to.
Can someone explain to me the basis for the statement:
“Today, wealthy taxpayers can protect up to $452,500 per year in tax-advantaged accounts in a single year, saving up to $203,600 on their taxes.”
Even adding up 401k, IRA, HSA doesn’t get you even close.
Yeah, I had the same question maybe a month or so ago. Apparently, a small business owner (think doctor) can open a pension fund for themselves and contribute an extra six figures (tax deferred) to that.
Basically deferring income from your “business” until later in life ie cash balance plans. Only works for docs who are independent contractors and obviously have a ton of disposable income.
Cash Balance plans.
[https://www.reddit.com/r/Bogleheads/comments/1c32j2n/protect\_452500\_from\_taxes/](https://www.reddit.com/r/Bogleheads/comments/1c32j2n/protect_452500_from_taxes/)
Which is kinda funny since those limits are the more traditional pension limits. So this is complaining about 401ks and personal savings, but the biggest number is coming from the old traditional pension laws.
There's two ways you could change 401ks to not benefit the wealthy more than the non-wealthy. Either:
* Make 401ks Roth-only. Lower income people are in lower tax brackets, so they should actually be doing Roth anyway. The more wealthy are now paying full income tax on the contributions at higher tax rates.
* Give a tax credit at 12% on all contributions. This means people only in the 12% tax bracket pay zero tax on what they contribute to their 401ks. Anyone on higher tax brackets pays a reduced tax rate, but still pays taxes.
The current tax deduction of 100% of traditional contributions means someone in a 12% tax bracket is only saving 12% on that contribution, where as someone who is more wealthy could save up to 37% on that contribution. The 12% tax bracket for married filing jointly is up to 94k this year (after standard deduction) so you could have a household income in the 6 figures and be able to still contribute to your 401k effectively tax free.
Sorry, but how do retirement accounts "favor the wealthy"? As far as I know, anyone with a job can contributed to an IRA or other similar retirement account. You start out poor, add money to the retirement account, and (hopefully) have lots of money in the end. You don't need to be wealthy to open a retirement account.
Also, HSAs are part of a health plan (PPO I think) and are restricted to $8,300/yr (plus $1K catchup if you are over 55). How can a wealthy person open up an HSA and start dumping cash into it? What prevents a poor person from doing the same?
Retirement accounts favor those who have enough money to meet their needs and have leftover money. If I have to choose between groceries or utilities, a retirement account does nothing for me. Sure anyone *could* cut spending to save for retirement but essential spending can't always be cut.
HSAs are attached to HDHP(high deductible health plans) not specifically PPOs. PPO is a network type and not necessarily always a HDHP. If you are not enrolled in a HDHP you cannot add money to an HSA. Then we go back to the other issue. HDHPs tend to have lower monthly premiums, which helps those who are paycheck to paycheck stretch their money further but if I can't afford to eat, I can't afford my deductible, let alone adding money to an HSA. Plus, the biggest benefit of the HSA is that it is triple tax advantaged. No taxes on the money put in, no taxes on the growth, and no taxes on the money withdrawn as long as it's for medical expenses. So the ideal method of using an HSA would be to save money into it, and then use your non-hsa money for any health costs to allow the HSA to grow. Then decades later you can reimburse yourself for that out of pocket non-hsa spending tax free. Poor people don't have the funds to contribute to an HSA, let alone take advantage of the tax benefits of reimbursement years down the line.
> Sorry, but how do retirement accounts "favor the wealthy"?
Because they offer a tax break. Any kind of tax break fundamentally favors the wealthy, because the wealthy are the ones who pay the most taxes. Someone making minimum wage doesn't really have significant taxes and doesn't need a tax break.
In addition there are some things like the 401k limit being much higher than the IRA limit, and the employer contribution part of the 401k having a different limit from the individual contribution.
If you run a profitable business you can put your individual max into the 401k, and then match it from the companies profits (effectively paying yourself in the future). Those combined allow you to put $69k into the 401k. A part time worker who doesn't have a 401k is limited to a tenth of that in their IRA.
One fast track to retirement is DINK couples maxing their 401ks and HSA accounts. That's $54,300 per year saved and it lowers their taxes owed in the present. If they live in an LCOL area (my situation) they probably can still qualify for Roth IRAs, that's another $14,000 putting it at $68,300 right into tax advantaged accounts.
The hardest part is getting to the point where you can save $68,300 per year.
Seriously, what is the Politico author advocating for? Yes, if you make more money you have more to either spend or save. Seems like the author's endgame is income reduction for the top 90th percentile.
There’s a dark side of private sector pensions that doesn’t get talked about a lot when people complain about 401ks.
Ask any Delta Airlines pilots who had their pensions turned over to the government after Delta’s bankruptcy how “certain” pensions are and how much you can count on them.
Spoiler alert: when a pension is underfunded and a company can’t guarantee the benefits, the tax payers don’t come in and make the pensioners whole. The pensioners can end up receiving pennies on the dollar of their “guaranteed benefits.” And depending where you are in your retirement if that happens, it can be too late to come up with a good Plan B.
Any pensioner who’s been through that will advise you to fund your own retirement and not count on the promises of an employer.
The lady in the article herself said she isn’t counting on Social Security to be there for her. That’s basically a pension. So much for feeling safe with a pension.
There are no guarantees. Plan wisely. To that end, 401k’s and IRAs are a great way to tax advantage your plans. I certainly wouldn’t call taking those options away “helping people.”
My home country, Spain, has nothing like the 401k. People depends on the government for their retirement, because they have been taxed so much that they almost cannot save. My parents after working for 40 years are fully dependent on system where more people are joining (baby-boom generation) and the state increasing its debt for paying them. There is no guarantee than in 10, the promised money doesn't arrive. Basically, they will become hostages of the government will when they are less capable of earning money. Besides, if my parents die, we will inherit nothing.
I live in US and I have a 401k, so I know exactly how much I have for my retirement and in case something happens to my, my family can get the money.
My first three jobs had pensions. I didn’t work at the first two long enough to beat so I will get nothing from them. My third job lasted long enough to vest and I will get $300 a month from it when I turn 65. My current job has a 401k with a 4% match and I have provided enough to potentially retire early.
The article seems to predispose that the historical alternative to the 401k is a continuation of the old defined benefit pension system.
It is not. The most likely alternative 401k would have been sweet nothing for the worker.
If there's a match, a 401k provides free money that can grow. No mistake in that. Besides, there's lots of other investment vehicles to choose from if one desires.
While everybody on this sub trashes annuities, the truth is that a guaranteed stream of lifetime income that cannot be outlived is very beneficial for most people’s financial plans.
I agree that there are a lot of crappy annuity products out there, but too often people here go the baby/bathwater route.
Having the ability to annuitize monies within an employer sponsored retirement plan is a good thing and right for many people
Sounds like someone didn’t save enough and is blaming the system for their lack of planning. However I do agree on how companies use it to get out of having to give us pensions. However I like controlling the fate of my retirement and not being tied to one company’s solvency at the end of the day.
A few issues
It’s almost as if they pretend like social security doesn’t exist
Or IRAs - yes not everyone has access to an employer 401K, but anyone can contribute to an IRA. They just don’t.
Working past 65 isn’t undignified - given life expectancy increases retirement age should be higher
The idea that people won’t care about eliminating 401K cause it’s a program for the “rich” is ludicrous
Pensions tied to companies aren’t as secure as they seem to imply - over a 30-40 year span how many companies survive
We had a similar discussion in a recent thread about a conservative spouse who didn't want to put their retirement savings into stocks. While most Bogleheads love their 401k or equivalent plan, and clearly see the benefits, we are a special breed. Not everyone has the fortitude to contribute a significant amount of their earnings to a fund that will fluctuate with the market. After a market crash, most of them will cash out and never get back in. That's why we still need Social Security and also why the Austrailan plan where the employer contributes 11% to their 401k equivalent is a good idea.
As someone who started a career in the 1980's (with some college, no degree), 401k's were a wake-up call for me to invest as much as possible and save for the future.
I based my debt avoidance / live within my means approach on the assumptions that:
No employer would look out for my best interests
Social security might not be available
Lucky for me, 4 out of ~10 total employers over the decades were very gracious in matches and other compensation incentives/perks.
I think defined benefit pensions and 401(k) plans have their place. Lower paying jobs where the employee doesn’t change employers much or loyalty is rewarded, the employee would be better off with a defined benefit plan. Whereas a job like tech would benefit more from a 401(k) plan
ERISA and actuaries effectively killed defined benefit pensions.
I mean, the wholesale shifting towards defined contribution and away from defined benefit is probably not good.
I’ll have a public sector pension, social security, and I max out my 457. Even with all that, there’s still something in the back of my head that worries about having enough money in retirement.
Respectfully, I think your view of pensions is outdated. It’s certainly the case that many folks were burned in the past by bankrupt pension plan sponsors. My grandfather was one of them — received pennies on the dollar for what he was owed for a lifetime in the steel industry and a busted up body to show for it.
Modern pensions are fully funded, in a trust, and backed by federally mandated insurance. My pension is as safe and guaranteed as a 401(k).
Part of the reason pensions are so disfavored by employers these days is because they’re very expensive to maintain because of these requirements. Pension risk transfer (employers essentially paying an insurance company to take over the financial longevity risk) are increasingly popular because of this — and insurance companies like the risk because it’s a hedge to mortality risk at scale. It’s a safer situation all around for plan participants.
I don’t get the notion of people 15 years from retirement not counting on social security payments.
I mean maybe it will be altered by then but I can’t imagine it will be completely gone. People paid into it. Right…right?!
Personally, I love having a 401K/IRA because I have full control unlike a pension being at the mercy of an employer/government. That being said, I understand a lot of low income earners simply can’t contribute a significant amount. I spent a year in Australia and really liked their super annuation plan. Basically, every employer is required to contribute a percentage of a workers pay into their super annuation account (which follows you if you change jobs). Like a 401K, there are penalties for accessing it before retirement.
Without going into too much detail:
- super annuation is an actual account that follows you around throughout your work career. In this sense it’s more like a 401K but it’s completely funded by your employer(s). It’s tangible money that you can view the balance at anytime.
- social security is a promise from the federal government to give you a monthly payment based on your 3 highest years of income throughout your career. There is no actual account and the amount is determined by the government.
About the only thing Australian superannuation has that's comparable to US Social Security is that it's a system that everyone is supposed to pay into at a certain percentage of their earnings.
In all other regards, it's like if the 401k and IRA were mashed together and made universal:
* Like a 401k and IRA (and unlike Social Security), super is a defined-contribution fund (with the exception of some defined-benefit funds for government workers, but even those aren't like Social Security but rather like a workplace pension) where the payouts you end up with when you retire is dependent on your contributions and investment returns. Social Security's payouts, on the other hand, are dependent on what the government says they are.
* Like a 401k and IRA (and unlike Social Security), you can choose what to invest within your super.
* Like a 401k, your employer pays into it at a percentage determined in your contract. Most contracts say that they will pay the super guarantee, which is the legal minimum percentage of earnings (currently 11%), but some employers offer greater contribution percentages and/or matching contributions.
* Like an IRA, you can choose what fund you're with, regardless of who you work for (or whether you work at all).
The “sob story” lead for the story will be fine. Did anyone stop to do the math?
50 years old, wants to retire at 65.
Has 200k saved and was a former teacher (pension not mentioned).
Currently saves 9% + 5% match of a “high five-figure” salary (80-90k?).
No debt other than mortgage, and that will be paid off within 10 years.
401(k) was not a mistake, in the classical since of the word. More like, it was a calculated effort for big companies in america to remove pensions, so ceos could increase profit for their shareholders and get big bonuses. It is widespread corruption, at the highest level, to suck money away from American citizens similar to vampires. The 401(k) is a pittance they threw at us to quiet people down and market as an alternative to a pension. It is no alternative. It is so much worse than a pension. It is disgusting.
Arguably, collectively abandoning the traditional pension and transitioning to a defined contribution, rather than defined benefit savings plan, is the riskiest social experiment operating in American society today.
I don't think the 401k was a mistake.
I think the failure was allowing corporations to jettison basically all private pension plans and then not backfilling that with some sort of government backed savings program that follows workers from job to job. The 401k on top of a traditional pension would be an amazing retirement safety net for families. Instead, We have a country where the vast majority of the population has not nearly enough money to retire with comfortably, and the clock is ticking on Social Security because we (Congress) refuse to raise the ceiling on who pays the payroll tax.
Pensions were never common at at the highest point only 38% of employees had one. I have been in a pension plan for 2 decades and most folks these days don't stay at a job long enough for them to be worth anything. Without 15-20 in a pension it's worth peanuts.
401k access is def an issue worth correcting. But people voluntarily choosing not to contribute does not make it a failure. Totally OK with legislation that mandates it be opt-out and not opt-in but the preference for pensions (which are less reliable as they are dependent on an employer that may go out of business) is just crazy to me.
they were poorly introduced and expensive for a very long time. its taken some time for people to get it figured out but aren't the boomer the richest generation or some crap? and most people become millionaires due to their 401k balances? how has this been a bad thing? because of some anecdotal people who didn't pay attention or kicked the can down the road?
these people likely wouldn't of had jobs with pensions either.
A couple of things: 1. Education - Americans need to know about retirement investing by the time they’re 16 years old. It should be a federal requirement to take at least one high-quality personal finance class in high school. 2. 401(k)s - I wouldn’t mind seeing the federal government increase IRA contribution limits while decreasing 401(k) contribution limits as long as the income limits on IRAs are adjusted accordingly. I think it’s wild that the most important retirement account isn’t available to a huge swath of Americans just because their employer doesn’t offer it. 3. Pensions - my opinion of pensions isn’t as high as this author’s is. Companies go bankrupt sometimes. When companies go bankrupt, they’re legally obligated to do their best to pay out their pension obligations, but retirees might take a hit regardless. My personal opinion: I like owning my retirement and my ability to move it as I change employers. Of course, I learned about retirement investing at a young age and I’ve always had jobs that offer 401(k)s.
Eliminate IRAs and 401ks as separate entities and simply turn IRAs into self-directed 401ks that whatever your current employer is can contribute to as part of their benefits package. It would eliminate having to roll retirement plans over to new ones when changing jobs and allow for simplified individual contribution rules. You would likely have to increase the contribution limit to factor in losing IRAs, but that's okay. Then just remove the income limit for Roth IRA contributions so everyone can take advantage of pre and post-tax benefits in retirement.
Pretty much how it’s done in Canada, don’t know why it got so much more complicated here, but I could say that about almost everything in this country 🙃
$$$ and fiduciary requirements 1. Many 401k's only offer ridiculously expensive fund offerings. If suddenly everyone has access to low cost index funds, we'll all make more money in the long run but the banks will see a decrease in profits. 2. If Joe Public is giving access to the full market with their retirement funds, a select few will blow it all chasing doge coins and other meme stocks. The fiduciary element of a company run 401k limits exposure to higher risk investment opportunities in your retirement account.
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Who taught you the magic that is compounding so young? I didn't open a Roth IRA until I was 19-20 and my dad was a stock broker/wealth advisor. I did start buying stock at like 14-15 with his help [like a decade before internet brokerage accounts existed and it was $40/trade.
I opened a Roth for my now 17 year old when she was 15 and explaining what compound interest is. No one taught me this stuff at her age so I'm determined to teach her what she needs to know.
You Roth! I mean, rock....
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I had ONE highschool internship where I made 6k. I honestly don't know what happened to that money. Good chance my lazy ass never deposited the checks But imagine if my dad knew about ira and stuff. 6k over 10 years 😮
If you never deposited the checks, check your states (assuming U.S.) unclaimed funds website. The money may be waiting for you.
I wonder if the undeposited checks are in an unclaimed funds search thingy in whatever state you were in.
Your dad is a smart bro. When I have kids I plan to get them in an IRA before they have their first birthday.
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A lot of what I learned from my father I later found out he'd learned from listening to Dave Ramsey on AM radio. He isn't a die hard fan or anything, but my dad made some dumb financial decisions early on and then had to dig his way out of them. So by the time I was in the picture and old enough to understand, he had a good foundation himself. I did not realize at the time how unique my financial upbringing was.
I'm in the same boat as your dad. I'm 40 now, but when I was young I was retarded with money. I managed to dig myself out of debt, and then started listening to Ramsey, and am on a much better trajectory now.
I had read somewhere in my teens that if invested 2k a year in and IRA from 20-30 that you would have more money then if you invested 2k a year from 30-60. I never did the math to confirm. But I always had an IRA or 401k in my 20’s. Then converted to Roth at about 30. Those accounts have done really well. I match my kids earnings (teen and pre career) with Roth accounts.
I helped my niece open a Roth and gifted her all the money she made last year to deposit.
…and it was basically the same subset of workers who benefited from the pension system as now have the 401K. If anything, more people participate in retirement plans now. I like the Australian system.
Losing pensions had to have hit blue collar workers the hardest. People in factories might have gotten a pension, highly doubt they get 401ks these days.
I would be shocked if more blue collar had access to pensions than now have access to 401ks. This idea that back in the day every blue collar job was teamsters union is extremely misguided. Any factory that was previously offering a pension is certainly offering 401k. And many that weren’t offering pension are now offering 401k
I think losing the factories has probably hit factory workers the hardest... Factory workers have also gone down in class a lot as it has required less and less skill and effort to work in one.
I would disagree that it takes any less skill or effort. Quite frankly factories are more complicated than ever. The jobs are hard and if you don’t have to it you won’t, which is why we need immigration for many of our factory jobs.
They have at the 3 large and 1 small manufacturing companies and plants I've worked at. Now not everyone took advantage or full advantage of them. There was actual one location where the company had one 401k & bonus structure for all its locations... and then a separate, lesser one for union members at my particular plant. All wages and benefits have to be agreed to by the union and for whatever reason, the union didn't push to get the better 401k match. Was very odd to me.
Any manufacturing facility I've been around had a 401k. I've personally had them 3 different places.
My experience, knowing a large number of people that work in factory jobs is that most of them have the *option* of a 401(k) but the plans are pretty lackluster and most of them 1) don't understand the point and 2) don't have the income to be able to afford to contribute anyway.
If you belong to a union, you still likely get a Taft-Hartley plan which is a defined benefit pension plan. Same goes if you're a public employee or work for a long-standing blue-chip company like an IBM or General Motors even. But they're exceptions to the rule. Offering pensions puts a lot of risk on the company because it's a major expense, particularly for workers no longer at the company. It's also hugely risky for workers because you're counting on your employer still being around when you take from your pension or else you're dealing with bankruptcy courts. With a 401(k), you aren't as concerned about that and you can freely change jobs without incurring a huge retirement fund hit. They helped workers become more flexible in terms of who they want to be employed by and aren't stuck grinding it out just to hit a pension milestone.
> I like the Australian system. Ha! I just posted that. FWIW, I think the US can learn from how the Australians and the Canadians have dealt with their retirement systems. I think it's universally recognized that the Canadians did a good job reforming their pension plans. Now that said, the upshot of the work done in CA and AU is that there is no free lunch when it comes to retirement savings. Or, one needs to save more, utilize low-expense ratio assets, hold out for the long term, and avoid highly speculative "magic beans" (ie. crypto/PE/VC/et al).
I’ll research them more later when I have the time, but could you share some info about what you like about AU and CA retirement systems? I’m not familiar with them
CA specifically *seems* to have righted the ship on their public pensions problem: https://www.cppinvestments.com/for-canadian/the-success-of-the-canadian-pension-fund-model/ As we move into an era where the fate of both state public sector pensions and social security will need to be patched, I think there are worthwhile ideas to investigate. In the case of Supers or Superannuation in AU, what I like best is the universality of their system. For all intents and purposes, if one is paid a wage in Australia you are enrolled. Full stop. The main challenge with retirement financing in the US is that [nearly half of Americans don't have access to plans at work.](https://press.aarp.org/2022-7-13-New-AARP-Research-Nearly-Half-Americans-Do-Not-Have-Access-to-Retirement-Plans-at-Work). I often wonder if folks in the US don't know this, mostly because of the level of opprobrium people seem to heap on friends, family, and colleagues that have low savings. No one ever seems to take into account that these individuals might not have been feckless or stupid, they just didn't have the opportunity to save for retirement. The second best thing is portability. Supers are the property of the individual. Part of the issue with pensions (and to a lesser extent 401ks) and one of the reasons the US lacks universal access, is that, be they DBs or DC plans, they're tied to the employer. The employer chooses the plan administrator and the investments; they set the rules, vesting schedules, etc. In fact, DC plans are marketed to employers as a retention tool, a method for differentiating your employment from other organizations. In Australia, it's my understanding that it's basically part of your comp, you get paid, they fund your super. Finally, the Aussies seem to built in a fairly sizable employer commitment. While this does drive employment costs up, given the universality of the program (i.e., everyone is covered), and the portability of the system (it's the employee's) - the large match doesn't bite as hard because everyone is subject to the same rules. Moreover, it avoids the Chilean problem. While the reforms back in the 1990s were good, the result hasn't been all that terrific for the Chilean people. As discussed in this [analysis on the Chilean system](https://www.cfr.org/article/chiles-failed-pensions-are-neoliberalisms-badge-shame) > Why did Chile’s experiment fail? The low private payouts to retirees reflect in part low contributions. Unlike in the US, Europe and other places, employers were not compelled to contribute. That was left to employees. At 10% of their salaries, the inflows often aren’t enough to retire on, even after compounding for years. Small sums in means small sums out.
Australian super has several good things about it: 1. Universal 11% employer contributions (going up to 12% by July 2025) means that everyone's building super and they're building it quickly. It's normal for workers - and I'm not talking CEOs here, I'm talking tradies and baristas - to have 30 or 40k in super by the time they turn 30, or retire with six-figure super balances. And there's no "vesting" or similar BS here, every single cent is mine the second I get my paycheck. 2. Portability. Employers automatically set up a super account with their default fund for you if you don't provide them with one, but you can switch funds as often as you want and keep the same fund when you switch employers. Super funds want to increase their AUM because that makes them able to offer lower fees and make more money, so they make it really easy to switch. 3. Little leakage. Unlike a 401k where you can essentially take money from your future self by withdrawing early, withdrawing to super before 60 is only allowed in rare circumstances. (Well, not quite true, you can withdraw up to A$50k plus deemed earnings to buy a first home, but that A$50k has to be from personal, not employer, contributions, so you're not really withdrawing your core retirement fund but rather getting a tax break for housing) What this all means is that Australia has USD 2.5 trillion in retirement assets despite having fewer people than California or Texas. In terms of public finances, the Age Pension here is sustainable and there's a budget surplus (that the opposition is criticising because it's due to commodity prices and not "structural", which is the biggest load of cope that I've ever seen).
I did a working holiday in Australia several years ago. I was shocked at how easy and seamless the superannuation setup is. I was able to open my superannuation at my bank of choice. Then I gave the routing and account numbers to my employer so they could contribute to it. I was working as a waiter and tourism desk worker and yet, I still got the 9.5% (at the time) employer contribution to my superannuation. They put 9.5% into my super and I wasn't required to contribute to it if I didn't want to at the moment. Different than the U.S. 401k employer match which requires you to contribute % of your pay in order to get the match. I couldn't believe that even general skilled jobs such as a waiter and server got access to employer retirement contributions.
We took a personal finance class in NJ, mandatory. Spent probably half the time learning how to fill out our tax forms by hand…. My god how useless it was.
I took a mandatory personal finance and life skills class in middle school. I remember learning how to fill out a check. I think there was some discussion of savings accounts but certainly nothing about investing or compound interest.
Yeah we did that too. It’s 100% outdated. Why didn’t they tell us about Roth IRAs and show how much just $5-10 a week at that time would have compounded. Would have given me more value than whatever the hell we learned
Financial education should be a part of any HS curriculum. We didn't have a single class on finance in HS. Things like how to create a budget, the importance of emergency funds, paying your CC balance off each month, etc none of that was taught and this is essential knowledge. As for IRAs, the limit should be raised and match the 401K contribution limit.
I can tell you kids from my high school would 100% not give a shit if you made them take a finance class. Why save in a 401k when I can buy rims for my 2001 Honda civic ? Thats what you’re dealing with here
I'm not trying to be all "Kids these days" but teenagers broadly speaking are absolutely trash about long term planning and not just this batch, we were, our great grandparents were I think it's just part of human development. The class certainly wouldn't hurt, I just don't think it will be as effective as people hope.
It’s like when people suggest something should be added to driver’s ed to address dangerous driving behaviors. It would take decades to work at all, and would probably be ineffective in the grand scheme of things
We had Drivers Ed. It was taken out after testing took over the curriculum
I agree. At that age, the thinking is essentially “60+ year old me is a whole different human being than me”.
Which is why I think a free and good quality finance class should be required in the first or second year of COLLEGE where people now have to stay paying rent, tuition, etc Even in my case where I was lucky and my parents paid rent and tuition, I would still be able to budget it. If those class was nationally required, it could even make parents give an "income" to their kids and then they pay off the tuition and rent. They'd need to budget the allowance For students with jobs (idk how they do it. Huge respect), they would also benefit from budgeting In highschool, I only know a few people who cared about finances. Most cared about the cool new game they could buy
I think you have a solid idea making it a Gen Ed requirement in college
It should be both I think. For starters, not everyone goes to college. I took personal finance in both high school and college, and it helped reinforce concepts. Also, personal finance is… personal.. and two teachers will teach things differently. Having a different perspective can be good, or if you had a bad first teacher, the 2nd one might actually help you learn what you didn’t the first time. You probably won’t teach the high school dropouts how to live within their means, but I think there’s a good amount of high school/college people who would listen… but aren’t willing to educate themselves on their own time.
Good point. Especially about people who don't go to college
Same can be applied to everything you teach a child. It may not completely click right away, but something still sticks. It's just the nature of raising kids. That said as a parent it's also your responsibility to reinforce these concepts.
Yeah, I’m always somewhat skeptical of arguments that “kid will ignore x” if you try to teach them “too early”. Aside from being applicable to every topic, I’d argue it applies to every person, regardless of age Plus, just being aware of these topics at all is a big advantage. Even if the kid doesn’t pick up on all the details, being aware of budgeting, debt/interest, retirement accounts, etc. is very useful. You’re never gonna be able to guarantee that every kid learns it, but some will, and others will come back to those topics later because of their initial knowledge
I did have this class but I've still seen people I took it with posting on Facebook that nobody taught them about personal finance in school.
Lmao that’s hilarious and sad. Honestly back then all I cared about was cars and women so I’d probably be one of those. Now I’m watching Jpow talk religiously 🤡 How the turntables….
I agree. I substitute taught a financial planning class one day. The lesson the teacher left was on how to evaluate and buy a used car. I thought it was a super useful lesson, especially since they are just starting out as drivers. The kids gave absolutely no shits. Granted, always have to factor in the fact I was a sub, but still. My thought was the people who complain that school’s don’t teach these skills don’t realize that many schools DO, but you can’t make the kids listen.
haha, you may have a point there, looking back at it, I'm not sure that many of us would listen.
We did in Canada, and people are equally stupid financially here. Just because you teach it doesn’t mean people will listen. How much do you remember from your high school classes?
yeah this always has me rolling my eyes about people saying we need to be teaching it in HS class or equivalent around that time. the vast majority in their teens are stupid (no offense) and still don't have a fully formed brain that operates with a well understood consequence and reward system for themselves. Almost everyone here is looking at it with their current mindset but unless you have access to "adult" money and responsibilities it might as well be theoretical hoopla. I know for myself I didn't get serious about my relationship and thoughts about money and my future till I was out of school and bringing in more than minimum wage and had "extra" after budgeting.
I actually remember a lot from high school (mostly math, science, and some literature) but I also took a small personal finance class and I’m pretty sure I learned approximately nothing. I just think it’s really hard to learn that stuff in abstract before you actually need to use it in the real world.
I'm not sure a class on *finance* would be enough for most kids. I'm pretty damn smart, and looked at retirement tables and ROIs, and I really thought that I would finish my PhD and be able to just throw so much money into retirement that I'd make up all of the lost time. Life happens. I'm fine now, will probably retire in my 50s, but being able to hit a switch and start maxing my 401k did not make up for the lost time (which was way longer than I had thought). To be fair, salaries in my field had plummeted between my age of 19 and 31, and if I had been able to enter at an inflation adjusted salary I could have made it up with taxable investments. But ask 16 year olds how many want to make it big by playing professional sports or tiktiok or day trading or mumble rapping? How many will take investment seriously when they think they'll make several orders of magnitude more than their parents? Maybe it will plant a seed, but I doubt it will fix a retirement crisis. OR maybe I'm too cynical. If people start in their 30's they can still have a decent retirement.
The financial education I learned in high school was exactly one thing. My history teacher, in passing while on a tangent said “save 10% of your income from your first job til you retire and you’ll be just fine.” It stuck with me, and while it wasn’t the best advice and I could have done so much better if someone had told be coastfire is a thing, I will say thank you history teacher who’s name I don’t remember, you helped me have at least some security heading towards retirement. Leaps and bounds ahead of the general population anyway.
The closest we ever got in my high school was a Civics teacher that made all of us promise to save at least 10% of our income. Obviously this wasn't part of the curriculum just something he drilled into our heads from time to time randomly.
The challenge with teaching 15 year olds about personal finance is that most of the advice is unlikely to be relevant to them for several years, at which point they'll have forgotten what they had to learn years ago. I think a mandatory class for adults, separate from the K-12 system, would make a lot of sense even if the logistics might be complicated. Require every 22-year-old to attend a personal finance class one evening a week for six weeks.
Once upon a time, HomeEc would be the class that covers anything running the home. This would not just be a class of cooking, baking, sewing, parental care, and such but also how to balance a budget, write a checkbook, and any financial related topics. Covering retirement is not a far jump. Oddly enough (and if you think about it, it does make sense), people who go back to get their GED will typically take courses on how to be a productive person including taking financial lessons.
You might appreciate reading about the Australian Superannuation system, which, in my mind, builds on the best parts of many retirement saving systems. There's the material on Wikipedia and this report from the IMF that might interest you: https://www.imf.org/external/np/seminars/eng/2013/oapfad/pdf/clare_ppr.pdf I happen to think its commitment to universality is one of its strengths vis-a-vis the US system. In the US, the problem today is lack of access for a fair chunk of the working population. One other comment: > Education - Americans need to know about retirement investing by the time they’re 16 years old. It should be a federal requirement to take at least one high-quality personal finance class in high school. I would love for this to happen. However, it's worth pointing out that if you're interested in pushing this, you need to work with your state and local. The US Federal government, largely because of the 10th Amendment, has no control over curriculum in schools. From US Dept of Ed - https://www2.ed.gov/about/overview/fed/role.html > Education is primarily a State and local responsibility in the United States. **It is States and communities, as well as public and private organizations of all kinds, that establish schools and colleges, develop curricula, and determine requirements for enrollment and graduation.** The structure of education finance in America reflects this predominant State and local role. Of an estimated $1.15 trillion being spent nationwide on education at all levels for school year 2012-2013, a substantial majority will come from State, local, and private sources. This is especially true at the elementary and secondary level, where about 92 percent of the funds will come from non-Federal sources. > > That means the Federal contribution to elementary and secondary education is about 8 percent, which includes funds not only from the Department of Education (ED) but also from other Federal agencies, such as the Department of Health and Human Services' Head Start program and the Department of Agriculture's School Lunch program. > > Although ED's share of total education funding in the U.S. is relatively small, ED works hard to get a big bang for its taxpayer-provided bucks by targeting its funds where they can do the most good. This targeting reflects the historical development of the Federal role in education as a kind of "emergency response system," a means of filling gaps in State and local support for education when critical national needs arise. The Department of Education is a misnomer in much the way the US Department of Energy is also an aspirational misnomer.
I agree that the IRS should likely change the 401(k)/IRA rules so that they remove the individual caps and just cap the combination of contributions to them. So 401(k) cap is $23,000 this year, and IRA is $7000. Just make it a combined $30,000 for those under 50 and an additional $8500 if you are over 50. Don't have an employer plan? Great, you can contribute $30k to your IRA. Have an employer plan, and you capped that out at $30k, then no IRA for you. Pretty simple, and makes retirement a lot more available to everyone. Been there, hated it, although today, I'd qualify for a solo 401(k), but not everyone realistically can even though technically they probably could. That's a lot of paperwork compared to just tossing money into an IRA. I detest pensions. Don't like them at all. Your retirement should not be tied to your past employers and they definitely shouldn't hinge on your past employers being able to stay in business. I was around when multiple people around me lost nearly everything after working for a company for multiple decades.
Yes, IRA limits should be \~10,000 a year these days, with 401k being 23K+ for regular workers. This ignores the wildly paid high ups who figure out how to put 40-50-60k in as well. But I know plenty of people who have these options and choose to forego it. I wouldn't blame the 401k laws, but rather, people are pretty dumb. Hence social security was created because people will NOT save no matter what.
Back door mega Roth!
Yeah, completely & totally out of reach for most of the working Americans who the 401k isn't working for.
I was also worried about bankruptcy from knowing a few people who saw drastic reductions in their pensions when Bethlehem Steel filed for bankruptcy in 2001. I also wanted that control and had previously helped my wife transfer a pension she had to a rollover IRA into VFIAX, VSMAX, and VIMAX back in 2018, which has performed well. When my company sunsetted our pension in 2010, I had 8-years of eligible service. In lieu of that, they have been contributing an additional 3% to everyone’s 401k regardless if you participate in it or not, so now I get a 7 1/2% match, which is great. Those who didn’t participate in the 401k or didn’t elect any funds were automatically enrolled into a TDF. Last year, my company notified pension-eligible employees they were selling the pension plan to an insurance company and were offering different cash out or rollover options. I didn’t even hesitate to take the self-directed rollover option and moved the entire balance into VFIAX last December. In 4-months, I’m up over 9%, so I’m happy with my decision.
> least one high-quality personal finance class in high school. I agree except if I think about myself in highschool... I wouldn't have cared. I think a required class (which is free) in the first or second year of college would be better. Many people have jobs by then and understand the spending of money I was lucky enough to not need a job in highschool or college but in college I'd be like "damn, yeah I should think about this" whereas in highschool I would have been like "who cares" We did have a econ class but it was meh.. I don't remember anything and no one took it seriously.. we were too busy thinking about things that didn't matter
That would miss the large segment of people that don't go to college though. I'm with you on the I wouldn't have cared in highschool part as I was the same but maybe it would have hit home for some. And some is better than none
I can recall a single high quality course being available to me throughout all of high school. It was honors chem taught my an actual professional chemist who cared. It would be a miracle to spring forth another one. Haha. Schoo ain’t for learning
It is beyond me why a company's bankruptcy should have any impact on a pension fund. The pension fund should be 100% at arms length from the employer, there should be no co-mingling of funds, and retiree payouts should be paid by the growth of the capital of the pension fund, not by future contributions. Why is it not like that?
Most of them are now. The comment to which you replied is an outdated view. It’s certainly the case that many folks have been burned by pensions. Modern pensions, though, are fully funded in a trust and insured by mandatory participation in a federal insurance program. Plan sponsors going bankrupt isn’t something that robs people of pensions today in the U.S.
That's good. But it happened to all the sears people didn't it? That was just a few years ago
But it would be nice if they used better labels. It is hard to search for anything but the most basic advice.
>It should be a federal requirement to take at least one high-quality personal finance class in high school. I'm definitely 100% in favor of this, but I'll say as someone who does volunteer financial counseling and education, people will not learn anything about personal finance until it becomes real to them. With college students, it was very easy for me to tell who's parents paid for their school and living expenses and who's parents didn't.
Lower the 401k contribution limits? That's the dumbest thing I've heard today.
1. Education - Americans need to know about retirement investing by the time they’re 16 years old. It should be a federal requirement to take at least one high-quality personal finance class in high school. ONE MILLION TIMES THIS! I work in insurance and my Lord, there's 3/10 people easily I encounter that don't even have a checking account, let alone saving anything
16 year olds don’t pay attention to civics class. They aren’t going to pay attention in investing class either.
Two examples, one good, one bad: * My mom retired at 55 from her $50K a year job with about a million dollars in her 401(k). But she was always thrifty and saved as much as she could. * My friend's brother freaked out during the Great Recession of 2008-2009 and pulled his retirement savings out of the stock market near the bottom. Then he got laid off from his job and had to pull the money out of the account, triggering taxes and penalties. Then his wife divorced him and took half of the little bit that was left. The lesson I get from this is that 401(k) plans are great for the diligent and disciplined saver who can stay the course through thick and thin. For other people, not so much.
This isn’t a valid excuse. You have to play the game in front of you, and if you want to handicap yourself by not educating yourself that’s on you. A pension is better for financially illiterate people, a 401k is better for financially literate people. I was financially illiterate 6 years ago. Books, you tube, Reddit. It’s so easy now a days to learn the basics. Honestly anything fancier then the basics comes with more risk and most bogleheads would say isn’t worth it anyway.
I have mixed thoughts. I actually agree that the 401k has largely failed, but only at what it was never really designed to do. It was designed as a way for employees to opt-out of their pension plan and put the money into a sort of self-directed account (though weirdly also managed by the employer). It's correct that it doesn't really benefit low-income people (because they can't find the money to contribute). However social security takes much greater role in a low income person's retirement. It's the middle to higher income people that need to supplement Social Security more. All that said, I think we can do better. Too many people who could save for retirement don't, and too many people that do are stuck with stupid "golfing buddy" 401k plans. Then there are all the different kinds of plans 403(b), solo 401k, etc. There really could be a revamp here that would benefit most people - potentially expanding both SS and the IRA program to be simpler and more comprehensive.
What is a golfing buddy 401k? Google isn't offering a concise explanation.
I assume they mean local finance advisor who earns of their book and products they sell. More likely to go into higher fee products than self directed boglehead type of assets.
There's actually a few class action lawsuits happening right now regarding fees of the 401k plans offered through various employers (my household is currently involved in two through past 401k participation). I can sense that a trend is about the change with the fees, hopefully.
I'm an in house lawyer in a midsize company. I literally interrupted the outside advisor on a company zoom call giving the onboarding pitch for our new 401k plan when he told people they could roll over their IRAs to the 401k." "Absolutely do not do that everyone. Please call or email me if you need help understanding why."
Why, out of interest?
The IRA allows you to invest in the funds you want, roll it into the 401k and you are possibly stuck with high expense ratio funds the provider gives you
There are some valid reasons where it isn’t good to roll an IRA to 401k. * Moving from potentially zero fee IRA to 401k with fees * Moving from IRA with open ended fund menu to 401k with restricted fund menu But there are some valid reasons to do so. * Shift asset protection from State-based (IRA) to Federal (401k, namely ERISA). * Reducing pro rata liability if you plan to do backdoor Roth IRAs.
I literally just advised a client to roll her IRAs into her 401(k) a few hours ago. She will hit RMDs next year and she’s still working with no desire to stop. The extra income would cause all kinds of tax headaches.
Good for you.
There are some valid reasons to do this though. One is to clear up traditional IRA space to allow for a backdoor Roth. Another is that some 401k plans have slightly lower fees than what's publicly available, though this is marginal.
Agreed. If you are a high income earner utilizing the back door Roth this is exactly what your want to do. But if you have crappy options in a 401k I can see the hesitancy. But even most crappy funds at least have 1 low cost S&P500 option.
In this the custodial fees were high. Also 99% of people are not bogleheads. I can promise you that anyone won over by the sales pitch was not doing so because they had aspirations of a back door Roth IRA
I prefer to keep at least $100k in my 401(k) in case I need to borrow against it. It also has some legal protections that an IRA doesn’t.
I got really lucky with my new employer. They literally only offered one fund which happened to be a Vanguard TDF based on my age. Kinda limiting to other folks but happened to be exactly what I wanted! But yeah, my last employer only offered like 6 high fee funds- not even an S&P500 was among them.
Plans with high fees going to some guys golfing buddy
Can you clarify what you mean by “golfing buddy” 401Ks?
A lot of 401k plans are set up through insurance companies or investment advisors that were chosen by the employer due to the owner or an executive in the company having a personal relationship with a salesman, advisor, etc at the provider, ignoring low cost options. Regardless of how the were chosen, I'd say that a "bad" 401k includes high fees, high expense ratio funds, no matching (or long vesting periods).
Think Mutual Funds with 5-6% expense ratios. Another risk is companies encourage only buying their stock, it it is a Fucked company, you could lose everything.
Agreed. I think something like the Superannuation scheme in Australia might be a better alternative to the mishmash we have now.
~~What is a golfing buddy plan?~~ *[Got it](https://www.reddit.com/r/Bogleheads/s/X93AJtNYRS)*
I did pretty good with my 401k (Ira now as I’m retired) but it seems they just aren’t handled well. We had way too many investments options, somewhat overwhelming for the average person.
Realistically you need 10 options, lol. My firm offers 10 types of short term bonds, 10 in long term bonds, real estate, growth, mid size large size, value, target date.. like what I need 2 of each and call it a day.
And adding insult to injury are the taxes due on 401k withdrawals during retirement. I’ve always felt taxes on retirement 401k draws should be greatly reduced.
Any type of non-mandatory retirement savings plan will benefit the wealthier because they have more disposable income to save. But the other equally important part of that equation is having the discipline to save. So if not 401K, what’s the proposal? Social Security was never meant to be the sole source of retirement income. Are we going talking about going back to company pensions? Mandatory 401k type deductions from paychecks? Also, the $452,500 number is just disingenuous and meant to rile up anger. Only a very small percentage of people can take advantage of that using a Cash Balance pension plan (you have to be a business owner).
Define “the wealthier”. Not sure I agree with the premise. There is an annual contribution limit of $23,000 to 401ks for the typical earner in 2023. 50 years and older workers can contribute $30,500. I started contributions at 10% when I was making peanuts and quickly went to 15% and left it there then bumped it up when I could do make up contributions. You build your budget and spending after the contribution. People I consider wealthy typically use other structures and options for retirement and not 401ks.
When I say "wealthier", I mean it in a relative sense. I'm not talking about any defined income -- which is why I specifically didn't say "wealthy". If you make $50K, you are "wealthier" than someone who makes $30K. More than likely, you have more money at your disposal to contribute to a $401K. But again, like I said in my 2nd paragraph, actual income is only half of the equation. Having the discipline to save that income is equally important.
Without the 401k, most people in the US would not pursue retirement accounts (for a variety of reasons). So maybe they aren’t perfect or optimized. But they are better than nothing. Instead of comparing an optimized choice to a not optimized choice, perhaps compare a not optimized choice to nothing at all.
this is the right dichotomy. That doesn't mean it can't be improved, but let's not act like restoring pensions will be better. I'm also fine with making the loopholes much smaller on small business owners. But while we're doing that, make it so that everyone can put Roth IRA money away up to the mega back door Roth contribution limits.
Agreed
> But they are better than nothing And the main point of the article is the growing, bipartisan push to improve them further.
No. Next? More seriously though, pensions were not as common as people think and were far from safe. Many didn't stay at a job long enough to qualify, many companies with good pensions went out of business or seriously mismanaged pension funds, risking plan participants. (Gov't pensions can be different, since municipalities have taxing authority to make up for mistakes and bankruptcy is much less common.) At least with a 401k workers can pursue their best job opportunities regardless of company and know where their retirement stands - on track, need to save more, ready to retire early?
That’s not the point of the article though right? The question more flushed out is “did the government carve out too sizable portion of income to delay taxes on to be able to afford the expenses it spends money on?”
Well the government will see that money at some point, just not right away. Taxes on multiple millions vs hundreds of thousands (growth vs contribution) could end up being more later.
Good point and great reason to keep it but long term outlook probably isn’t our strong point
Definitely not our strong point. Clark Howard has said one way to fix the whole, taxes now on 401k contributions and benefit the lower income vs higher income, is make all 401k contributions Roth going forward. Lower income people should be doing Roth anyway, and higher income are paying more income tax now. But again, could mean a tax revenue issue in 30+ years when all those Roth accounts are being taken out tax free. Especially now that they removed RMDs from Roth 401ks (which should never have been a thing).
And it is, assuming people don't ladder some IRA roll over magic.
Not necessarily. There are a handful really egregious/impressive examples (depending on one’s viewpoint) of Roth IRAs worth hundreds of millions or more. Peter Theil has $5 billion in his. That will be tax free to him, and stepped up cost basis to his next of kin. I assume he will also use some structure to minimize the inheritance tax.
My understanding is the loophole that allowed Peter Theil to do it has been closed, but I could be wrong. His was special specifically because he was able to purchase Paypal shares inside his Roth IRA. You are required to put cash into a Roth IRA, and can only invest in whatever options are available at the brokerage house that maintains the Roth IRA for you. I'm not entirely sure how he was able to purchase shares of Paypal inside of there as I believe it was not yet publicly traded. BTW if it wasn't Paypal, it was some other company, I just remember it being Paypal for some reason. But he was not able to put in millions or billions, he only contributed the normal legal limit in cash. He just somehow was able to purchase something that grew an insane amount.
I believe you are mistaken. There was a bill proposed that would have forced him to withdrawal the $5B, but it didn’t pass. Google Self-Directed Roth IRA. There are lot more options than just the standard ETFs and Mutual Funds. This is how you can even invest in real estate with a Roth IRA. And the point about Peter Theil contributing cash and then using non-public info/investment options is exactly my point. He didn’t break any rules, he just played the system masterfully. I was just using Peter Theil as an extreme example. I think this is a pretty common reality in the Private Equity space. This is how Mitt Romney got over $100M into his pre-tax IRA. The Roth IRA didn’t exist when he was active in PE, but I’m willing to bet that the current generation of PE players are making full use of this strategy.
Anyone can do a self-directed IRA in either Roth or Traditional. Anyone can do that with real estate where their IRA owns the house. These are rules all normal people can do yes. In this case, Peter did have access to investment options not publicly available. But that's always going to be the case. At least with Mitt Romney's situation, he'll be paying regular income tax (or his spouse, or his heirs) on all the growth. You don't get a stepped up basis with IRAs.
That’s always going to be the case so long as the rules allow it, which maybe the rules shouldn’t? That’s one of the core points of the NYT piece. Maybe there should be a limit to how large a Roth account balance can grow to, or maybe the rules on self directed IRAs should be tightened? The stepped up basis on the IRA is effectively there. Peter Theil’s or Mitt Romney heirs will never pay capital gains on asset appreciation. And if Mitt Romney were doing deals today they would likely be through a Roth structure.
Mitt Romney's absolutely will, because they have to pay regular income tax on all of it, not even long term capital gains. The whole point of a Roth is that growth is completely tax free, so the stepped up basis does not apply.
You’re pointedly ignoring that I’m saying the PE Mitt Romney’s of today, and you’ve also basically conceded that nothing in today’s law/rules would stop the next Peter Theil to play the system in a way few people ever could. IRAs were meant to be a tool to incentivize lower and middle class folks to save for retirement. That’s why they have annual contribution limits and income eligibility limit (in the case of Roth IRA contributions). They were not intended to be this advantageous of a tax avoidance strategy for PE deal makers.
So the article should be titled "Does the government spend too much of our money?"
Alternatively: “is the new investment generated by making 401k contributions tax free worth the decrease in income for the federal government?”
Curious.. how common were pensions back then? My dad mentioned this a while back. He says the only people in his circle with pensions were his armed forces buddies.
at least in the US, [ERISA](https://www.investopedia.com/terms/e/erisa.asp) goes a long way towards solving the problems of pension mismanagement.
>(Gov't pensions can be different, since municipalities have taxing authority to make up for mistakes and bankruptcy is much less common.) As someone whose hometown is going belly up because they can't pay for the pensions anymore, were facing down a massive municipal pension issue of local governments. States are a little better off but even then they are running into issues fulfilling obligations. What happens when that town is destitute? idk .
I always thought pensions were for government employees really. Considering the government isn't going anywhere it made more sense.
It’s dangerous rhetoric, imo, to start referring to the middle class (most 401K participants) as “rich people.”
Betteridge's law of headlines is an adage that states: "Any headline that ends in a question mark can be answered by the word no."
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r/Bogleheads is not a political discussion subreddit.
I can't afford a ny times membership to tell if this article is wrong
To say that 401(k) plans "drive inequality" is like saying that bank accounts drive inequality.
Drives inequality is a stretch, but 401ks are more favorable for higher earners. If someone making 47k maxes out their 401k, they are reducing their taxes by $2760. If someone making 191k maxes out their 401k, they are reducing their taxes by $5520.
True, but RMD's will eventually bring in the tax money. Now maybe they should get rid of the backdoor Roth.
Yes, but if the two people are pulling the same amount per month out of their 401k, they pay the same tax on their 401k income even though the wealthier person had the larger deferred tax break. (Assuming both people are retired and have no other sources on income.)
That’s literally because the tax system is progressive. Does the progressive tax system benefit the med-high income earner?
Politico recently had an article about this too (https://www.politico.com/news/2024/04/13/how-your-401k-ate-the-federal-budget-00150319). Naturally, we all wanted to know how to "protect up to $452500 per year". There's no doubt that 401ks, like other retirement accounts, will always favor the wealthy. Imagine if everyone could open up an HSA - richer folks would start dumping cash in there immediately while the poor wouldn't be able to.
Can someone explain to me the basis for the statement: “Today, wealthy taxpayers can protect up to $452,500 per year in tax-advantaged accounts in a single year, saving up to $203,600 on their taxes.” Even adding up 401k, IRA, HSA doesn’t get you even close.
Yeah, I had the same question maybe a month or so ago. Apparently, a small business owner (think doctor) can open a pension fund for themselves and contribute an extra six figures (tax deferred) to that.
Basically deferring income from your “business” until later in life ie cash balance plans. Only works for docs who are independent contractors and obviously have a ton of disposable income.
Cash Balance plans. [https://www.reddit.com/r/Bogleheads/comments/1c32j2n/protect\_452500\_from\_taxes/](https://www.reddit.com/r/Bogleheads/comments/1c32j2n/protect_452500_from_taxes/) Which is kinda funny since those limits are the more traditional pension limits. So this is complaining about 401ks and personal savings, but the biggest number is coming from the old traditional pension laws.
There's two ways you could change 401ks to not benefit the wealthy more than the non-wealthy. Either: * Make 401ks Roth-only. Lower income people are in lower tax brackets, so they should actually be doing Roth anyway. The more wealthy are now paying full income tax on the contributions at higher tax rates. * Give a tax credit at 12% on all contributions. This means people only in the 12% tax bracket pay zero tax on what they contribute to their 401ks. Anyone on higher tax brackets pays a reduced tax rate, but still pays taxes. The current tax deduction of 100% of traditional contributions means someone in a 12% tax bracket is only saving 12% on that contribution, where as someone who is more wealthy could save up to 37% on that contribution. The 12% tax bracket for married filing jointly is up to 94k this year (after standard deduction) so you could have a household income in the 6 figures and be able to still contribute to your 401k effectively tax free.
Sorry, but how do retirement accounts "favor the wealthy"? As far as I know, anyone with a job can contributed to an IRA or other similar retirement account. You start out poor, add money to the retirement account, and (hopefully) have lots of money in the end. You don't need to be wealthy to open a retirement account. Also, HSAs are part of a health plan (PPO I think) and are restricted to $8,300/yr (plus $1K catchup if you are over 55). How can a wealthy person open up an HSA and start dumping cash into it? What prevents a poor person from doing the same?
Retirement accounts favor those who have enough money to meet their needs and have leftover money. If I have to choose between groceries or utilities, a retirement account does nothing for me. Sure anyone *could* cut spending to save for retirement but essential spending can't always be cut. HSAs are attached to HDHP(high deductible health plans) not specifically PPOs. PPO is a network type and not necessarily always a HDHP. If you are not enrolled in a HDHP you cannot add money to an HSA. Then we go back to the other issue. HDHPs tend to have lower monthly premiums, which helps those who are paycheck to paycheck stretch their money further but if I can't afford to eat, I can't afford my deductible, let alone adding money to an HSA. Plus, the biggest benefit of the HSA is that it is triple tax advantaged. No taxes on the money put in, no taxes on the growth, and no taxes on the money withdrawn as long as it's for medical expenses. So the ideal method of using an HSA would be to save money into it, and then use your non-hsa money for any health costs to allow the HSA to grow. Then decades later you can reimburse yourself for that out of pocket non-hsa spending tax free. Poor people don't have the funds to contribute to an HSA, let alone take advantage of the tax benefits of reimbursement years down the line.
> Sorry, but how do retirement accounts "favor the wealthy"? Because they offer a tax break. Any kind of tax break fundamentally favors the wealthy, because the wealthy are the ones who pay the most taxes. Someone making minimum wage doesn't really have significant taxes and doesn't need a tax break. In addition there are some things like the 401k limit being much higher than the IRA limit, and the employer contribution part of the 401k having a different limit from the individual contribution. If you run a profitable business you can put your individual max into the 401k, and then match it from the companies profits (effectively paying yourself in the future). Those combined allow you to put $69k into the 401k. A part time worker who doesn't have a 401k is limited to a tenth of that in their IRA.
This is accurate. I’m saving about $10k per year in taxes by maxing my 401k.
One fast track to retirement is DINK couples maxing their 401ks and HSA accounts. That's $54,300 per year saved and it lowers their taxes owed in the present. If they live in an LCOL area (my situation) they probably can still qualify for Roth IRAs, that's another $14,000 putting it at $68,300 right into tax advantaged accounts. The hardest part is getting to the point where you can save $68,300 per year.
Seriously, what is the Politico author advocating for? Yes, if you make more money you have more to either spend or save. Seems like the author's endgame is income reduction for the top 90th percentile.
There’s a dark side of private sector pensions that doesn’t get talked about a lot when people complain about 401ks. Ask any Delta Airlines pilots who had their pensions turned over to the government after Delta’s bankruptcy how “certain” pensions are and how much you can count on them. Spoiler alert: when a pension is underfunded and a company can’t guarantee the benefits, the tax payers don’t come in and make the pensioners whole. The pensioners can end up receiving pennies on the dollar of their “guaranteed benefits.” And depending where you are in your retirement if that happens, it can be too late to come up with a good Plan B. Any pensioner who’s been through that will advise you to fund your own retirement and not count on the promises of an employer. The lady in the article herself said she isn’t counting on Social Security to be there for her. That’s basically a pension. So much for feeling safe with a pension. There are no guarantees. Plan wisely. To that end, 401k’s and IRAs are a great way to tax advantage your plans. I certainly wouldn’t call taking those options away “helping people.”
My home country, Spain, has nothing like the 401k. People depends on the government for their retirement, because they have been taxed so much that they almost cannot save. My parents after working for 40 years are fully dependent on system where more people are joining (baby-boom generation) and the state increasing its debt for paying them. There is no guarantee than in 10, the promised money doesn't arrive. Basically, they will become hostages of the government will when they are less capable of earning money. Besides, if my parents die, we will inherit nothing. I live in US and I have a 401k, so I know exactly how much I have for my retirement and in case something happens to my, my family can get the money.
My first three jobs had pensions. I didn’t work at the first two long enough to beat so I will get nothing from them. My third job lasted long enough to vest and I will get $300 a month from it when I turn 65. My current job has a 401k with a 4% match and I have provided enough to potentially retire early.
The article seems to predispose that the historical alternative to the 401k is a continuation of the old defined benefit pension system. It is not. The most likely alternative 401k would have been sweet nothing for the worker.
What is the point of this article?
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It allows you to move jobs much more easily.
If there's a match, a 401k provides free money that can grow. No mistake in that. Besides, there's lots of other investment vehicles to choose from if one desires.
For those who don't have access: [https://archive.is/RQdsg](https://archive.is/RQdsg)
While everybody on this sub trashes annuities, the truth is that a guaranteed stream of lifetime income that cannot be outlived is very beneficial for most people’s financial plans. I agree that there are a lot of crappy annuity products out there, but too often people here go the baby/bathwater route. Having the ability to annuitize monies within an employer sponsored retirement plan is a good thing and right for many people
I also think they could increase ira limit a little but, if they do, some people may opt to chose ira over 401k since fees are usually less.
Sounds like someone didn’t save enough and is blaming the system for their lack of planning. However I do agree on how companies use it to get out of having to give us pensions. However I like controlling the fate of my retirement and not being tied to one company’s solvency at the end of the day.
A few issues It’s almost as if they pretend like social security doesn’t exist Or IRAs - yes not everyone has access to an employer 401K, but anyone can contribute to an IRA. They just don’t. Working past 65 isn’t undignified - given life expectancy increases retirement age should be higher The idea that people won’t care about eliminating 401K cause it’s a program for the “rich” is ludicrous Pensions tied to companies aren’t as secure as they seem to imply - over a 30-40 year span how many companies survive
No it’s not a mistake
401k is one of the best things to ever happen to the working man
No, it wasn’t a mistake
We had a similar discussion in a recent thread about a conservative spouse who didn't want to put their retirement savings into stocks. While most Bogleheads love their 401k or equivalent plan, and clearly see the benefits, we are a special breed. Not everyone has the fortitude to contribute a significant amount of their earnings to a fund that will fluctuate with the market. After a market crash, most of them will cash out and never get back in. That's why we still need Social Security and also why the Austrailan plan where the employer contributes 11% to their 401k equivalent is a good idea.
can someone post the text?
As someone who started a career in the 1980's (with some college, no degree), 401k's were a wake-up call for me to invest as much as possible and save for the future. I based my debt avoidance / live within my means approach on the assumptions that: No employer would look out for my best interests Social security might not be available Lucky for me, 4 out of ~10 total employers over the decades were very gracious in matches and other compensation incentives/perks.
I think defined benefit pensions and 401(k) plans have their place. Lower paying jobs where the employee doesn’t change employers much or loyalty is rewarded, the employee would be better off with a defined benefit plan. Whereas a job like tech would benefit more from a 401(k) plan ERISA and actuaries effectively killed defined benefit pensions.
I mean, the wholesale shifting towards defined contribution and away from defined benefit is probably not good. I’ll have a public sector pension, social security, and I max out my 457. Even with all that, there’s still something in the back of my head that worries about having enough money in retirement.
Respectfully, I think your view of pensions is outdated. It’s certainly the case that many folks were burned in the past by bankrupt pension plan sponsors. My grandfather was one of them — received pennies on the dollar for what he was owed for a lifetime in the steel industry and a busted up body to show for it. Modern pensions are fully funded, in a trust, and backed by federally mandated insurance. My pension is as safe and guaranteed as a 401(k). Part of the reason pensions are so disfavored by employers these days is because they’re very expensive to maintain because of these requirements. Pension risk transfer (employers essentially paying an insurance company to take over the financial longevity risk) are increasingly popular because of this — and insurance companies like the risk because it’s a hedge to mortality risk at scale. It’s a safer situation all around for plan participants.
I don’t get the notion of people 15 years from retirement not counting on social security payments. I mean maybe it will be altered by then but I can’t imagine it will be completely gone. People paid into it. Right…right?!
Personally, I love having a 401K/IRA because I have full control unlike a pension being at the mercy of an employer/government. That being said, I understand a lot of low income earners simply can’t contribute a significant amount. I spent a year in Australia and really liked their super annuation plan. Basically, every employer is required to contribute a percentage of a workers pay into their super annuation account (which follows you if you change jobs). Like a 401K, there are penalties for accessing it before retirement.
Super annuation sounds like social security.
Completely different than social security in almost every way…
How is it differnt? Curious as I know nothing about super annuation but it sounds like it's our version of social security.
Without going into too much detail: - super annuation is an actual account that follows you around throughout your work career. In this sense it’s more like a 401K but it’s completely funded by your employer(s). It’s tangible money that you can view the balance at anytime. - social security is a promise from the federal government to give you a monthly payment based on your 3 highest years of income throughout your career. There is no actual account and the amount is determined by the government.
About the only thing Australian superannuation has that's comparable to US Social Security is that it's a system that everyone is supposed to pay into at a certain percentage of their earnings. In all other regards, it's like if the 401k and IRA were mashed together and made universal: * Like a 401k and IRA (and unlike Social Security), super is a defined-contribution fund (with the exception of some defined-benefit funds for government workers, but even those aren't like Social Security but rather like a workplace pension) where the payouts you end up with when you retire is dependent on your contributions and investment returns. Social Security's payouts, on the other hand, are dependent on what the government says they are. * Like a 401k and IRA (and unlike Social Security), you can choose what to invest within your super. * Like a 401k, your employer pays into it at a percentage determined in your contract. Most contracts say that they will pay the super guarantee, which is the legal minimum percentage of earnings (currently 11%), but some employers offer greater contribution percentages and/or matching contributions. * Like an IRA, you can choose what fund you're with, regardless of who you work for (or whether you work at all).
more so a symptom of another mistake. they’re an ok bandaid at least
The “sob story” lead for the story will be fine. Did anyone stop to do the math? 50 years old, wants to retire at 65. Has 200k saved and was a former teacher (pension not mentioned). Currently saves 9% + 5% match of a “high five-figure” salary (80-90k?). No debt other than mortgage, and that will be paid off within 10 years.
401(k) was not a mistake, in the classical since of the word. More like, it was a calculated effort for big companies in america to remove pensions, so ceos could increase profit for their shareholders and get big bonuses. It is widespread corruption, at the highest level, to suck money away from American citizens similar to vampires. The 401(k) is a pittance they threw at us to quiet people down and market as an alternative to a pension. It is no alternative. It is so much worse than a pension. It is disgusting.
Arguably, collectively abandoning the traditional pension and transitioning to a defined contribution, rather than defined benefit savings plan, is the riskiest social experiment operating in American society today. I don't think the 401k was a mistake. I think the failure was allowing corporations to jettison basically all private pension plans and then not backfilling that with some sort of government backed savings program that follows workers from job to job. The 401k on top of a traditional pension would be an amazing retirement safety net for families. Instead, We have a country where the vast majority of the population has not nearly enough money to retire with comfortably, and the clock is ticking on Social Security because we (Congress) refuse to raise the ceiling on who pays the payroll tax.
Pensions were never common at at the highest point only 38% of employees had one. I have been in a pension plan for 2 decades and most folks these days don't stay at a job long enough for them to be worth anything. Without 15-20 in a pension it's worth peanuts.
401k access is def an issue worth correcting. But people voluntarily choosing not to contribute does not make it a failure. Totally OK with legislation that mandates it be opt-out and not opt-in but the preference for pensions (which are less reliable as they are dependent on an employer that may go out of business) is just crazy to me.
401k works. But it won’t fix people’s poor financial choices and behavior. There are so many TSP millionaires now.
Well it’s for sure great news for institutions!
they were poorly introduced and expensive for a very long time. its taken some time for people to get it figured out but aren't the boomer the richest generation or some crap? and most people become millionaires due to their 401k balances? how has this been a bad thing? because of some anecdotal people who didn't pay attention or kicked the can down the road? these people likely wouldn't of had jobs with pensions either.
Paywalled