Tax-deferred 401(k) retirement accounts came into wide use in the 1980s, making Baby Boomers trying to retire now among the first to rely heavily on them.
The problems are widespread, especially among middle-income earners. About 60% of households nearing retirement age have 401(k)-type accounts, according to government data, and those represent the majority of most people's savings.
In general, people facing problems today got too little advice, or bad advice. They didn't realize that a 6% annual contribution, with a 3% company match, might not be enough.
Some started saving too late or suspended contributions when they or their spouses lost jobs. Others borrowed against 401(k) accounts for medical emergencies or ran up debts too close to their planned retirement dates.
In the stock-market collapses of 2000-2002 and 2007-2009, many people were over-invested in stocks. Some bailed out after the market collapse, suffering on the way down and then missing the rebound.
Initially envisioned as a way for management-level people to put aside extra retirement money, the 401(k) was embraced by big companies in the 1980s as a replacement for costly pension funds. Suddenly, they were able to transfer the burden of funding employees' retirement to the employees themselves. Employees had control over their savings, and were able carry them to new jobs.
They were a gold mine for money-management firms. In 30 years, the 401(k) went from a small program to a multi-trillion-dollar industry supporting thousands of financial planners and money managers.
But a 401(k) also requires steady, significant savings. And unlike corporate pension plans, which are guaranteed by the U.S. government, 401(k) plans have no such backstop.
The government and employers aren't going to pay more for people's retirements. Unless people begin saving earlier and contributing more to their 401(k) plans, advisers say, they are destined to hit retirement age with too little money.
Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined.
"Inevitably, we find that, for the average person, there is not enough there," says financial adviser Paul Merritt of NTrust Wealth Management in Virginia Beach, Va., who has found himself advising many retirement-age people with too little savings. "The discussion turns out to be: What kind of part-time work do you want to do after you retire?"
He has clients contemplating part-time work into their 70s, he says.
Source: The Wall Street Journal, February 19, 2011