Do 401K plans still make sense?


Millions of Americans, unbeknown to them, are trusting their retirement to the luck of the stock market draw.  I recently talked about this in my post 401Ks: Main Street’s Friend or Foe? I just stumbled across a great article from the Wall Street Journal that adds data to my intuitive thinking.

Boston College’s retirement research center recently ran scenarios that assumed workers had contributed 6% of pay to a plan for 40 years, had invested in a target-date fund, had never touched their savings until retiring and had annuitized the assets at retirement. The chunk of pre-retirement income these savers could replace in retirement varied dramatically depending on when they retired. Those retiring in 1948 could replace just 19%; those retiring in 1999, 51%; and 2008 retirees, 28%.

Since no one can predict whether they will retire in a bull or bear market, the above statement should concern every 401K participant.

I am certain such data led to the development of “target-date” mutual funds.  These are funds where invested dollars automatically shift to more conservative investments as a person’s retirement date approaches.  Unfortunately, those plans were a bust in 2008.

…the funds haven’t offered investors much protection. The average target-date fund dropped 32% last year, slightly better than the Standard & Poor’s 500 stock index’s 38.5% decline. Funds with a target date of 2010, designed for investors on the brink of retirement, didn’t fare much better, losing nearly 25%.

I don’t believe that there are any simple roads to a comfortable retirement.  Blindly adding to your 401K every pay day doesn’t cut it.  Outsourcing it to a “financial professional” won’t get it done.  Becoming actively involved in your retirement planning, in my opinion,  is a must.  Make time to study the markets.  There is a whole world of alternative investments such as commodities that most advisors have no clue about.  Learn a little about market timing – it is not the voodoo many make it out to be.

As with most worthwhile things in life, retirement planning takes hard work.

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