Are you afraid of your 401k?

You should be.

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Question:

Do you know how many Americans have saved enough money into their 401k’s from their early 20’s into retirement age, and had enough money to live on in their golden years?

Zero.

Seriously. Zero people have ever done this. Nobody. Not a soul.

To be honest, this was a bit of a trick question… so let me explain.

History.

Let’s have an interesting history lesson on the traditionally boring topic of 401k’s.

Long before Adrian was on this earth, it was commonplace for your employer to award you with a pension when you retired. In a nutshell, a pension is a fund into which a sum of money is added during your career with a particular company, and paid out to you monthly upon retirement until you die.

This monthly stipend could range from a percentage of your outgoing salary, to 100% of it. In the 1990’s, the chances of you working for a company that offered a pension plan was about 35%, but today… only about 20% of employers offer a pension plan.

Keep in mind, these figures are literal and even companies that offer pension plans may not make this eligible for every employee of the company.

So…what the hell happened?

I’m Just A Bill.

In the 1970’s a group of high earning employees from Kodak (you know, the former Camera company) approached Congress and asked for a portion of their salaries to be invested in the stock market…tax free.

Through the power of legislation, the end result was a change in tax regulation that allowed this type of tax-free investment tool…section 401(k).

In the 1980’s, a benefits consultant and attorney noticed this obscure provision in the tax code and figure out that it could be used to build an easy, tax-advantageous way to save for retirement.

This plan (called a 401k…based on the tax provision, surprise) grew into fruition and employees were now able to contribute a quarter of their salary (up to $30,000 in 1980’s money), into their employer’s 401(k) plan, tax free.

By the power invested in capitalism, why should a company fund a pension for their employees to use at retirement if they could kill the expensive pension plan and pass the “cost” of retirement onto their workforce? One by one, pension plans were de-funded.

The good news? The company is“generous” enough to contribute a matching percentage into your 401k plan! This is good for us, right? I’m not so sure.

Free Money > “Free” Money

If you have heard anything about 401k plans, the conversation is always catered towards this one principle = Take the company match.

Most companies that offer a 401k plan will agree to match your contributions, up to a certain percentage.

As an example if you are contributing 5% of your salary towards your 401k (tax free), your employer may offer to match your contribution (tax free)… meaning that 10% of your salary is being funded into your 401k…even though you’re only coming out-of-pocket for 5%.

Some companies match dollar for dollar, others will match halfway (you contribute 5% and they’ll match 2.5%), and a few companies do not provide any deposits towards your retirement at all.

“Taking the match” means this: If your company matches up to 5% and you are only contributing 4%, they are only going to contribute 4% into your fund…leaving an entire basis point on the table. If you earn $25,000 a year—the difference of that 1% is $250 of FREE money from your company that you’re leaving behind, every single year.

This reality is why taking the match is so important. However, there is another section of 401k plans that isn’t discussed as heavily, and I strongly believe it’s an important fact to consider since wage stagnation for staying employed with the same company is an issue we are faced with in 2018.

Vesting.

Look up any financial study and they almost all unanimously agree that wages are not growing in America. If you are interested in growing your salary, you must be willing to leave your company, learn new skills, and/or find a new job.

Employers are paying premiums to attract new employees, but not giving adequate or generous raises to existing ones. Sitting in one place for too long is bad for your earning ability.

If these are moves that you’re planning to make, this where Vesting comes into play.

This graphic is a vesting plan that I grabbed off Google Images from a redacted company.

In order to keep that lovely 401k match the employer gives you, you must stay employed with the company for a certain amount of time so you are “fully vested”.

Some companies have “immediate vesting” meaning that every dollar they contribute towards your 401k is automatically yours, but it is substantially more common that a company will require some years of service in order for you to keep their 401k contributions on your behalf.

I have my personal opinions on vesting, but my financial opinion is the following:

Vesting incentivizes the employee to stay employed with one company, regardless of external advancement or salary opportunities, at the cost of their retirement fund.

An employee who decides to leave a company prior to being fully vested does so with a weakened retirement position, while the company gets to reduce the overhead costs associated with their benefits package.

-Adrian Hall

In other words, back in the day… if you resign a job prior to retirement and being awarded your pension…you don’t get the pension, end of story.

However, currently, if you resign a job prior to being fully vested in your 401k plan…they get to keep their contributions and, yet again, you walk away with nothing.

I’m no corporate accountant, but I couldn’t imagine that those 5% tax-free deposits of your salary costs a company anywhere near what a full pension plan would cost for every employee.

We’ve become the sole depositors of our retirement.

Zero people have ever retired on just a 401k.

The 401(k) tax provision was added in 1978.

This means that if an 18 year old employee was wise enough to take advantage of this tax break BEFORE the 1980’s when 401k plans truly started to exist… that 18 year old worker will turn 58 years old in the year 2018.

Retirement age is 65, and it’s projected to increase beyond age 67 for my generation.

This means that the hypothetical savvy 18 year old investor in 1978 is still seven years away from retirement age.

We have zero people that have ever saved up through their entire lifetimes and retired with just a 401k and nothing else . There are zero proven models that anyone can manage to save enough money in their 401k’s to live on for numerous decades, and yet we’re being pushed towards depending solely on it.

That’s frightening to me, because there is substantial uncertainty that looms around the idea of retirement…even though we all eventually grow too old to work.

I’m Just…many bills. And I came from Capitol Hill.

Social Security has been robbed and misappropriated so many times over the years that it’s projected to run out of money in 2032 (14 years from now).

Company pension offerings have decreased by 12% in the last two decades, and are trending downwards.

Retirement age increased from 65 to 67 last year, and is expected to continue to become older and older… and life expectancy is doing the same.

…and I believe a lot of this has to do with the 401k.

The overwhelming majority of the workforce of today is required to fully fund their own retirement, with no social security or company sponsored pension plans, and we are going to need these funds to live on, after our ability to work is gone, for longer than ever before.

The responsibility for our financial futures lays squarely on ourselves, and not our employers or government anymore.

Financial experts agree that you need to save for retirement, but we’re getting static on how much we should save. Some sources advise 15% of your salary, while others state that the minimum you should be saving is 20%. The truth is? It doesn’t seem like anybody really knows.

Stagnant Wages Strike Again.

Not every worker has access to a 401k plan, millions simply aren’t educated enough on the topic to invest strongly, and many Americans live so tightly that they simply aren’t in the position to save more than a few percent into it… which is a far cry from the 20%+ percent we’re being advised to do. Let’s be honest, too.

Retirement is numerous decades away for a lot of us, and it simply doesn’t feel like a priority. The electricity bill is due today, and retirement is due in 25 years. Which are you going to choose?

My plan is to max out my 401k contributions over the next few years (maximum contribution is $18,000 per year, currently) and begin saving into an IRA (Individual Retirement Account) after that, but I don’t know how much money I should have saved.

I save pretty religiously, take advantage of compound interest, and target my 401k to act aggressively so it can enjoy high dividends—because I am 27 years old and have plenty of time to recover from any losses in the stock market.

However, that’s where my strategy ends.

At this point, there’s just a lot of unknown in the retirement arena for my demographic. However, there is one thing I know very well.

We either die young…or we live long enough to retire.

• The average contribution into a 401k contribution is $155 a month($1,860 a year)

• The average car payment is $479 a month($5,748 a year)

We will never build wealth this way.

I can’t tell you how much you need to be saving for retirement, but I can confidently inform you that the car I am paying $345 for a month has a higher monthly payment than my 401k is receiving. This same car has a life expectancy of 5-12 more years (depending on care), and I have 40 years until retirement.

If I spend all 40 years perpetually in debt with a car, I will never build enough wealth to live in retirement, and elderly Adrian will be pissed that I went from affluent to poverty.

For me, this is one of the driving reasons that I am on the debt free journey. Financial freedom, for me, means not having to worry about barely keeping up in life.

It feels so easy to ignore retirement, but not staying concerned about your 401k is a fast way to end up broke and elderly, because it’s the only thing we’ve got to depend on right now. We need to take it, and ourselves, seriously.

If you’re as unsure as I have been about retirement, consider this your sign to talk to a financial advisor or your 401k plan administrator and try to figure this thing out.

Don’t let complacency today cause the elderly version of you to struggle indefinitely.

The sooner you know learn about your particular situation, the better, because retirement is squarely in our own hands now.

Good luck!

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Pic credit in this post: Schoolhouse Rock