Main Street Money: The path less taken
The retirement crisis is real, and I’m concerned about our future. I believe everything we’ve been told about saving money is wrong. I didn’t always, however, even though I am old enough to have remembered the truth, I, too, bought into the myth.
I came to financial services rather late in life, after I had been sold on the current way of doing things. But it hadn’t really worked out so well for me, like it hasn’t for so many other people.
I believe that’s why I have had a series of epiphanies, discovering the many ways the financial system is designed to benefit itself at the expense of the people who actually put up all the money and take all the risk. It gave me what I believe is rather a unique perspective.
Like you, I had believed the retirement landscape was always dominated by the 401(k) and other tax-deferred, defined contribution plans such as the IRAs and the 403(b).
Like you, I had believed the only way to prepare for retirement was to put all my savings in accounts that were subject to extreme risk of market losses and crippling, often hidden, fees. It just seems like it’s always been that way, but that’s simply false.
The truth is, it all came about by accident.
The 401(k) was originally created in 1978 with the passage of the Revenue Act of 1978. Xerox and Kodak wanted to give their top executives a nice tax benefit, so they approached Barber Conable, then the ranking member on the House Ways and Means Committee, as well as their congressman. He cooperated, burying the provided language deep in Section 401, Subsection (k) of the new legislation. Great for highly compensated executives in a 70% top marginal tax rate.
Soon, big business discovered it could save hundreds of billions of dollars by shifting all the risk onto employees and moving them from pensions, which defined and guaranteed the benefits, into 401(k)s, which guaranteed only risk, fees, and higher taxes in retirement.
Another big win for big business.
The mutual fund industry immediately understood the opportunity presented by tens of millions of inexperienced investors who were being pushed–bribed, really (you didn’t think they gave out those matches for their health, did you) –by their employers to invest billions of dollars into long-term captive accounts.
Accounts which, by the way, had limited investment choices that they–the mutual fund industry–would get to define, manage, and levy fees on. Huge win number three for the hat trick.
Not so much for you and me, however. It is estimated that the average person between 55 and 65 has only accumulated enough to fund one-tenth of one of those 1980s pensions we were sold on giving up.
Pensions worked because the objective was clear: to provide a safe, dependable income stream in retirement you could not outlive. What part of that describes the 401(k)? The pension defined and guaranteed the outcome. The 401(k) only focuses on the input. Benefits, if they exist, are unknown.
And by definition, the benefits are limited to those that can be provided by the 401(k). And these are few and far between. The tax benefit, for example is highly suspect. While it was great for those highly compensated execs at Xerox and Kodak who were facing 70% taxes on their bonuses, it’s not entirely clear what the benefit is in a 15% effective tax rate environment. Think of it this way: If you make $100,000 per year and put away 10% for 30 years, you save $1,500 per year in taxes. But you have succeeded in converting all your retirement income into taxable income, meaning you will still be in the 15% tax bracket when you retire. It also pushes your Social Security income into your taxable income. Do you really want higher taxes in retirement while you are on a fixed income and need every dime?
What about the income benefit? What income? It’s all outgo. Income is new money every month. Outgo simply spends down your nest egg, which is also subject to market losses, fees, taxes and a bunch of unknowns. In fact, the only guarantees provided by a 401(k) are risky investments and high fees you can’t outlive.
You cannot achieve a result by defining the inputs over the results. That’s backwards and simply pre-defines your outcomes.
Albert Einstein said you can’t solve a problem with the same thinking you used when you created it. There is a better way, but it must start with focusing on the desired outcomes.
Discovering that better way showed me how to rescue my own retirement, and that set me on my current path. Won’t you join me in rescuing yours as well?
Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, he services Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die,” which deals with the problem unknown lifespans create for retirement planning. He can be heard every weekend on the “Free to Retire” radio show on WCAP and WFEA, and he conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. Steve can be reached at 603-881-8811 or at www.FreeToRetireRadio.com.