Originally published: September 15, 2023 (distributed by Andrews McMeel Syndication)
Retirement security is a particular interest of readers of this column, as is the subject of 401(k) plans -- for good reason. Anyone lucky enough to work for a company that offers a 401(k) that is matched gets to benefit from other people's money. Even an unmatched 401(k) benefits from pre-tax contributions that don't show up on a W-2 as taxable income.
A 401(k) wasn't the name of the game until the late 1970s, with the passage of section 401(k) as part of the Revenue Act of 1978. Before that, saving for retirement was based on the "three-legged stool," with the legs being made up of Social Security, a pension and personal savings.
Pensions had arrived on the scene in 1875, when the American Express Company set up the first private pension, according to the Pension Benefit Guaranty Corporation, a U.S. government agency (tinyurl.com/249s8zdc). Social Security was enacted in August 1935, when President Franklin D. Roosevelt signed the Social Security Act into law (tinyurl.com/4e8t96um).
Social Security still plays a very important role. However, Social Security payments don't -- and never were intended to -- cover all of a retiree's financial needs.
And, as you can imagine, financial needs do vary person to person, while Social Security payments cap out at a certain level. By design, lower earners' benefits can cover more of their living expenses than those of higher earners.
The estimated average Social Security monthly benefit for all workers in 2023 is $1,827 ($21,924 for the year). For a couple who are both receiving benefits, the average is $2,972 ($35,664 for the year), according to a Social Security fact sheet (tinyurl.com/5dvnspyd).
The maximum benefit is much larger ($4,555 a month for someone who claims Social Security at age 70). The maximum benefit for a 62-year-old claimant is $2,572 (tinyurl.com/3j2s8vst).
For me, as a proponent of financial literacy education and as a professional money manager, while Social Security remains important, the concept of the three-legged stool has lost its meaning.
We now have retirement accounts that individuals can set up on their own: IRAs, which entered into the picture in 1974 with the enactment of the Employee Retirement Income Security Act (tinyurl.com/bdzh4bn8). About 40% (48 million) of U.S. households have IRAs (tinyurl.com/3acbbh7z).
Four times as many (66%) private-sector workers had access to 401(k)s (and other defined contribution plans) than pensions as of March 2022, according to the Bureau of Labor Statistics (tinyurl.com/3p94c26d). Only 15% of private-sector workers had access to pensions (defined benefit plans).
Younger workers are aware of the benefits of 401(k)s, as can be seen from second quarter of 2023 data from Fidelity's analysis of 25,100 corporate defined contribution plans and 23.1 million participants as of June 30, 2023 (tinyurl.com/2rvc5cbx). Fidelity is a multinational financial services company.
Notably, 401(k) balances for Gen Z (born 1997-2012) were up 66% from the second quarter of 2022, and millennials (born 1981-1996) saw a 24.5% increase.
I like those trends.
But, if you step back a moment, you can see that some who could participate are missing out. They are missing the advantage of having other people helping them save: the employers who provide matches or other contributions, and our tax authorities who don't consider money earned at work but contributed pre-tax as W-2 taxable earnings.
Only 56% of eligible employees participated in their workplace 401(k) retirement plans in 2022, according to a Bank of America report examining data of more than 25,000 companies and more than 6 million employees (tinyurl.com/mt5j93t8).
If I were to guess, you probably know someone who is eligible for a 401(k) but not participating. What's stopping them? Let's see if you or I can help them learn about the benefits 401(k)s offer, including how to afford to make 401(k) contributions.
And, if you are a participant who gets "the big deal" about 401(k)s, I encourage you to compete for the title of 401(k) Champion®. The competition, which I sponsor pro bono, seeks to honor people who not only maximize their 401(k) benefits, but also to inspire others to do the same. Learn more at 401kchampion.com. Don't hesitate to write to me (email@example.com) with questions and comments.