Fidelity Investments released a report yesterday that said 401K savings were at a 10-year high. The now record average for 401k balances was $71,500. The same report said (although reports can’t really talk) that over 51 million Americans have a 401k and contribute an average 8.2% of their annual salaries. Uh, yeah, WTF.
My 401k does not meet the national average. Not even close, and I’ve been saving in this particular 401k for eight years. Depositing a modest 3% of, what I consider, my meager earnings. I’m not telling you this so y’all will throw me a pity party. I just think we need to take a little closer look at this “record” average savings balance.
Fidelity says that you need 14.6 times your last annual salary to retire at the same level of “poverty” that you maintained during your working life. So if we do the math, a person earning $50,000 net income (which means you probably have to be earning $110,000 annually before deductions) will need $730,000! I think, on average, that we’re a bit short. This is without any cost of living adjustments for the future, which could be substantial. I mean, gas prices went up 10 cents here overnight.
A few more thoughts about 401k’s. You are not federally taxed on your contributions…..until you start withdrawing them at retirement age defined as 59 1/2. However, for this tax break, should you suffer a financial emergency and have to withdraw these funds early, Uncle Sam will thoroughly rape you and not provide the lubricant. You can borrow against your 401k at reasonable interest rates (reasonable defined as less than the exorbitant rates the banks charge for personal loans) and you don’t have to qualify because the value of the loan is guaranteed by the value of the 401k. In other words, when you withdraw this money early for that financial emergency, after Uncle Sam finishes raping you with penalties and taxes, you won’t have enough to pay the penalties and taxes which will be on the full amount of the 401k distribution. But the loans are paid off.
Since 401k’s have virtually replaced retirement plans, and many of the companies that contributed matching funds towards those retirement savings stopped doing that during the recession, I think the Federal Government needs to loosen up. They give us the tax break to entice us to save. A good thing, because most of us probably wouldn’t save otherwise. But there should not be any penalty other than the tax due, under most conditions, for early withdrawal. I’m just saying it needs to be looked at. I know that the Feds are worried that it will become a tax shelter for the rich, but you just put a limit on it. The first $100,000 withdrawn under certain conditions will not be penalized. There are exceptions to the withdrawal penalty which is 10% of the taxable amount, but I think it falls short. Don’t forget, the withdrawal is added to your taxable income, because the tax was deferred on that amount when you were saving.
Well, after that boring diatribe on 401k penalties, the bottom line is, that at the average record rate we are saving, most of us aren’t going to be able to retire. Not at 59 1/2, or 69 1/2 or 79 1/2. There’s always “Megabucks” slot machines, over $10 million payout right now, or the Lottery, but wait until you see the income tax you’ll pay on that. Not to mention the slim odds of winning.