What was the rate of return on your 401k account last year? What about the year before? What about next year?
As per Pulitzer Prize-winning former New York Times reporter and editor and Emmy award-winning producer/correspondent Hedrick Smith:
“The fact is that the 401(k) has not worked out well for millions of average Americans and one big reason is that Congress gave birth to the 401 (k), it was never intended to become a nationwide retirement system.”
And according to Edward Siedle, Forbes magazine and Teresa Ghilarducci, a professor of economics at the New School for Social Research:
“Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is inevitable. With 75% of Americans nearing retirement in 2010, 401(k) balance is estimated at $30,000. The decades many elders will spend in forced or elected “retirement” will be grim. We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the ‘“new normal”’ for many elderly Americans.”
The votes are in and the financial experts agree, the largest problem with the 401k is that even the best employees did not contribute enough money!
Give inflation and our ever increasing cost of living, people who want to retire and enjoy their pre-retirement standard of living, typically need 401k savings on 10-12 times their final pre-retirement salary.
The Median household income in the United States is $50,000 annually. That means that for the median household members looking to retire today, they would need 401k savings of between $500,000-$600,000.
Median 401k balance for people in their 60s is $85,000, if they have been contributing to their 401k for the last 20 years. The reasons for this potential retirement crisis? Because even the best 401k plans only let employees contribute between 5%-6% on average of the pay to their plan. Followed by their company matching funds at between 2.5%-3% for a total contribution of 7.5%-9%. Why are all of these percentage numbers important? Because financial retirement experts agree that the total combined contribution for 401k accounts needs to be between 15%-18% before fees or 12%-15% after fees. Historically, the average return rate on 401k investments for a mix of stocks and bonds is 5% annually. This means that, after a modest fee payment to your 401k management company, the median gain is 4%. The 4% return, with a very conservative fee retirement management adjustment, is compounded and slowly, very slowly begins to build on itself. And so do your fees since they are also a percentage and not flat rates. Do you know what inflation is predicted at for 2014, 2015, 2016, etc…? The median return rate on 401k accounts for 2012, after fee adjustments, was 3.25%. Inflation in 2012, not including gas and groceries– two of my households largest bills– was 3%. This makes the total median return rate on all money contributed into 401k accounts for 2012, less inflation, was 0.25%– not including gas and groceries! Now here is something truly shocking. Keeping the inflation rate for 2012 in mind, 3%, check your local banks CD rates next time you stop by. Banks are currently advertising and celebrating the highest CD rates on record. Do you know what they are for the two banks with the highest rates…? 1 Year CD1.06%1.05%2 Year CD1.26%1.20%3 Year CD1.45%1.36%5 Year CD2.31%2.3%5 Year Jumbo CD- Minimum deposit of $100,000 or more2.37%2.32% Do you see a pattern? Not one of the CD interest rates beats inflation– not including gas and groceries. This means that the value of the funds you get back in 5 years is actually less than the value of the funds you put in 5 years before. The overall dollar amount has increase; however, the value of each dollar you get back in worth less… worthless? So the overriding question seems to be, how does retirement savings and/or investing make sense? How do you consistently earn 12%-15% on retirement savings? The first step of the answer is to take charge of your retirement savings and 401k accounts! Rollover your accounts so that they become self-directed, for a flat rate one-time fee, and then pay fees to yourself rather than someone else for managing your retirement. Did you know that you can borrower money from your self-directed retirement account, pay yourself a 3% interest rate on the loan and invest the funds you borrowed? Did you know you could do it without a hardship? Did you know that you can invest money directly from a self directed in the longest and most stable, when non-speculative, investment in the United States and, working with one of our Investment Specialists, become a real estate investor and have a real chance at retirement consistent with your pre-retirement standard of living. For more information, or to set up a free consultation, request more information via email to firstname.lastname@example.org subject: Investing in Retirement.