Sunday, January 20, 2008

Are 401ks stupid?

Well that's the question asked by a 26 year old writer, "Are 401ks stupid?". Wow, I can't believe there is a 20-something who doesn't believe in the 401k.

Now she's got reasonable arguments when she says she needs to pay off credit card debt, student loans, car loans. Those cost more than investing in a 401k. However this women gets a company match, so free money. She should be putting in minimally to the match.

But her main argument is she wants to live now. She doesn't want to save money to buy a trailer in 40 years, she wants to buy stuff now. I'd like to know how she plans to live in 40 years? Guess that hasn't hit her yet.

A second issue she raises is the 401k match is not guaranteed, but discretionary where they can be "Nixed" if the business does bad. Also the match usually requires people to stay at certain period of time to "vest". Both valid points, but your contributions are always there. So at least you are saving something for retirement. Also employers matches should be considered "gravy" not the main entree of retirement savings. Many financial advisors say don't count on it and save 10-15% of your income without the match.

Third, while she makes the point highly compensated employees don't get to contribute as much, I'd argue that's not necessarily true. What? Well DH is highly compensated but his company and previous company did something called safe harbour contributions for all employees which meant that everyone could contribute the maximum $15.5k no matter what their income, because the employer put in $X for every employee. Many companies do this to allow their HCEs an opporunity to save as well while not being dependent on lesser wage earners to save. It also helps lower wage earners have something saved for retirement.

Fourth she argues why save in a 401k if you get hit with a hardship withdrawal? Say you kid is ill or mortgage shoots through the roof? Well you should be saving for these expenses outside your 401k. And if you aren't even saving in a 401k, what makes you think you'll save outside of it? A 401k is designed to support you in retirement, not during your working years. Also trust me, if you can't find a penny to save into the 401k which is tax free, you're probably living paycheck to paycheck right now. And if an emergency happened you'd be screwed whether you are saving into a 401k or not. And I'd rather see you have the tiny 401k savings than NONE at all.

Fifth, she says people who save are steady eddies, but she'll have spent her younger years living. And if she's eating cat food at 65, at least she'll have had fun eating great cheese, travelling, and enjoying life.

I'd personally rather eat rice and beans my whole life than eat gourmet cheese for 30 years and suddenly have to eat cat food. A steady diet of knowing what I have to eat is more appealing than having been used to a better quality of life that I'm unable to maintain as I get old. Plus honestly who'd rather have a few luxuries as they age and need it more than when they are young and able to live leaner?

Well you've got a lot of thinking to do Ms Twenty-Something. I'm also a twenty-something, but I'd prefer a slightly different lifestyle than the one you've got planned for your future.


Data Babble said...

Interesting post. I actually just posted on my blog about the potential free money received by contributed to a 401(k). On the surface, it sounds great to be able to live and do everything you want while you're young, but I know many older people that used that logic and now regret it. Thanks!

Jim ~ said...

Saving for retirement in your 20s could be stupid if you don't make a whole lot of money. I think putting money into a 401k plan, especially with a company match, is a great idea. Saving enough to meet the company match ensures you'll get that free money. If your kids are sick or mortgage goes up, preparation wasn't done for health insurance and fixed rate mortgage. I love to live a little and not worry about money, but we have to look at what we need to meet our responsibilities first before blaming retirement savings for not having enough money.

My wife tends to live today because tomorrow is another day. I tend to be on the side of projecting things weeks in advance because today is tomorrow's yesterday. While it's nice to stay on top of the money, I have to allow her the freedom of being able to live a little. If I control things to the point we have no life, it can lead to a bigger problem later.

I think this girl's feelings on 401k savings are common. Saving isn't fun and you only live once, so why not enjoy the time you have today? I know social security won't be there for today's 20-somethings come retirement. It would be nice if the government would just stop this failed program and let us keep those extra dollars we're throwing away.

Living Almost Large said...

Nope, stopping social security now won't be the answer. What will you really do with the 6.5%? Save it or spend it?

Also SS will be around when 20-somethings retire, but it will be means based for those who have little in savings/income. So basically the more responsible you are the less you'll have.

But still setting aside something for savings is better than nothing. I guess it's easier to not save, but if you constantly live using your entire paycheck to live what happens when an emergency arises and you haven't saved anything?

johnstonteam said...

It was very difficult for me as a 20 something to see the value of a 401-k. Actually, I was 29 when my company stopped it's defined contribution program and moved us to a 401-k in 1984.

Actually, had they kept the original program in place, when the parent company closed my location, I would have had enough time and age combination to retire.

But when a 401-k is the only option to get the company to give you some retirement contribution, then you've gotta go for it.

I think 20 and 30 somethings have difficulty with the concept because gradually building to the max contribution seems impossible.
I know it did for me at the time. I still don't contribute the max but do save 15% of my gross income. But the real key to to incrementally do it so that it doesn't impact your immediate cash flow all that much and you can more easily adjust to the deferred income.

All I can say to that person is not to over analyze the situation and simply do it. It doesn't make sense now, but will later.

Living Almost Large said...

Yep, or you can try to start saving from your first job so you never see the money.

Jennifer E said...

It would be really nice if all employers offered their employees a 401(k) option, especially with matching contributions. Unfortunately, that will not happen. Even so, even a 20 something employee can start investing through automatic contributions if offered such a program. Learn more about 401(k)s at Jump on it if you can, if not, there are other options.