Hole in 401(k) safety net widens by the day

TRIGAUX E-mail: Click here Archive

© St. Petersburg Times
published May 29, 2002

Having lived and worked many years in Manhattan and Washington, I'm all too familiar with the pitches made by our nation's urban panhandlers.

All that exposure soon may come in handy. Each time I open my paltry 401(k) retirement statement, I wince at the latest round of declining assets and negative returns.

Now, some new studies of the sorry pace of retirement savings and the "what -- me worry?" mind-set in this nation suggest many of us are going to have to learn some updated spare-a-dime lines to supplement our golden years.

Repeat after me: Buddy, can you spare a 401(k) contribution?

Not to get too down and out, but the latest trends about middle- and lower-income Americans preparing for retirement are bleak.

Despite constant harping about the need to save more, most of us still are not putting enough aside for our retirement. That many of us will live longer than our parents only makes it more pressing that we have more to pay for that longer retirement.

Not that pouring more income into retirement plans is any guarantee. Enron workers heavily invested in their own stock were blindsided when the energy company went bankrupt and wiped out thousands of retirement accounts.

Last year was also the first time in the 20-year history of the popular 401(k) retirement savings plan that the average account lost money, even after thousands of dollars of new contributions. Maybe this year's higher limits for contributions to both 401(k) plans and individual retirement accounts will help ease those losses.

But just as most of us start to realize our 401(k) plans are grossly underfunded, we are losing other traditional sources of income. Companies are rapidly phasing out the traditional "defined benefit" pensions our parents so enjoyed because they promised a fixed sum to retirees for life. Worse, companies obsessed with cutting costs are starting to reduce or even eliminate their matching contributions to their employee 401(k) plans.

Clearwater's Tech Data Corp., Tampa Bay's largest company by sales, last month acknowledged it suspended company contributions to employee 401(k) plans in a move expected to save the tech products distributor close to $3-million a year.

Plenty of other major corporations are pursuing similar cutbacks. Among the auto giants, General Motors opted to cut its company contribution to 60 cents from 80 cents for each dollar a salaried employee contributes. Ford and DaimlerChrysler Corp. decided to suspend matching contributions to their 401(k) plans early this year.

Other companies are making their matching contributions variable by tying them to corporate performance. That does not bode well in the near term, given this period of weak profits. But at least it offers some financial hope for the future.

The lengthy economic expansion of the 1980s and record boom of the 90s made most of us giddy with our apparent gains in wealth. But was it real?

Not really, says New York University economist and wealth expert Edward N. Wolff. In a study titled "Retirement Insecurity: The Income Shortfalls Awaiting the Soon-to-Retire," Wolff shows that despite the recent unprecedented stock market boom and rapid adoption of 401(k) retirement plans, typical Americans now facing retirement will have to scrimp and save more than previous retirees.

Wolff says more than 40 percent of households headed by someone between the ages of 47 and 64 will not be able to replace even half of their pre-retirement income once they stop working.

Four of 10 retirees won't have 50 percent of their working income? That's sobering, when the rule of thumb says households need at least 70-80 percent of pre-retirement income to maintain their standard of living.

Wolff's study also says that nearly 20 percent -- one in five -- will have retirement income below the poverty line.

Only the nation's richest households -- those with more than $1-million in net worth -- enjoyed a major windfall in retirement income through most of the '80s and '90s. Everyone else lost ground or, at best, stood still.

"The contraction of traditional defined benefit pension plans and their replacement by defined contribution plans" -- meaning 401(k)s -- "appears to have helped rich, older Americans but hurt a large group of lower-income Americans," Wolff says.

Among his other findings:

Recent retirees are losing ground. Between 1989 and 1998, the share of households whose projected retirement income is less than half of their pre-retirement income rose sharply from 29.9 per cent to 42.5 percent.

For African American and Hispanic households, the percentage that will have to live on less than half of their pre-retirement income shot up even higher, to 52.7 percent in 1998.

These declines went unnoticed, Wolff says, because studies tend to look at average rather than median retirement growth. The rising average was skewed by huge gains among the rich. Median wealth (half the retiring households above, half below) dropped.

Even modest retirement goals seem out of reach to many. If somebody makes $40,000 a year and hopes to retire on half that amount -- $20,000 a year -- is that so hard to achieve?

Yes. A survey by the non-profit Employee Benefits Research Institute this year found that almost half of all workers have saved less than $50,000, and 15 percent say they have saved nothing. Less than 25 percent of workers aged 40-59 have saved $100,000 or more.

If most workers expect to spend at least 20 years in retirement, those who saved even $100,000 would have only $5,000 per year to spend.

Sure, there are partial solutions to the nation's retirement predicament. Many people will work part-time jobs to make ends meet. Other will have spouses working who will supplement retirement income. Others will depend more on Social Security, Medicare and personal savings to help. And some will rely on relatives and children.

At the least, take some time and decide if you're on a savings path to keep you off the streets.

For the rest of you that still have no clue how to make ends meet in retirement, memorize the following. It may come in handy when you're asking for a handout.

My retirement fund's fallen, and it can't get up.

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.

© 2006 • All Rights Reserved • St. Petersburg Times
490 First Avenue South • St. Petersburg, FL 33701 • 727-893-8111

Contact the Times | Privacy Policy
Standard of Accuracy | Terms, Conditions & Copyright