According to David Gensler, president of Madison Pension Services, the 30-year-old 401(k) plan was and remains the most effective tool for retirement for the vast majority of Americans. He says tax-deferred money with a company match, coupled with tax-deferred earnings, is still the most effective way to accumulate retirement dollars.
“Over the next 20 years, 76 million baby boomers will be reaching their retirement ages,” said David Gensler. “Notice I did not say that they would actually ”˜retire.”™ I have observed a shift in attitudes about what constitutes retirement. I find fewer and fewer of the baby boomer generation envision a retirement that would look anything like their parent”™s retirement. Most will continue to work, stay active and involved because they want to.”
According to Gensler the pre-tax savings that come out of a salary automatically is rarely mentioned anymore in the enrollment meetings.
“I think this simple concept has gotten lost,” said Gensler. “How many people would actually save anything, if it were not automatically deducted from their paycheck? The answer is probably very few. When you defer into your company”™s retirement plan, you are practicing one of the oldest forms of sound financial planning: Pay yourself first.”
Finding a company match is a unique aspect of 401(k) plans and, according to Gensler, every employee that does not take full advantage of a company match is leaving money on the table.
“I realize that not every plan has a match; the vast majority, however, do,” said Gensler. “One very real impact of our current economic situation is that your employer may need to cut back and/or eliminate the match. I am starting to see that. Remember, the source of your economic well being, your job and the viability of the plan sponsor, your company, must be maintained at all costs. When the economy rebounds, as sooner or later it must, the match is one of the first benefits that employers look to return to the employees.
“We live in competitive economic times. To attract and maintain good employees, your company must have a competitive benefits package. When things have stabilized, I have seen the match put back into place very quickly.”
Gensler has seen the loss of compound interest.
“Given the same investment experience, money saved on a pre-tax basis will always accumulate quicker than on an after tax basis. When economic times turn gloomy and your 401(k) account balance declines, you forget about compound interest.”
Gensler says plan participants that have been in 401(k) plans for some length of time should go back and subtract salary deferrals from the account balance, the difference is what the participant has earned.
“Most of you will be very pleasantly surprised to see just how much you have earned on your account through the years,” said Gensler.
Current statistics show that a couple where both spouses are 65 have a 50 percent probability that one of them will still be alive at 90. Gensler says that though people are living longer, everyone should be conscious of the effects of inflation and the cost of health care.
“Inflation is eroding how much you can purchase tomorrow every day,” says Gensler. “The cost of health care is kind of a double whammy. First of all, as you age it is almost a certainty that the amount disposable income devoted to health care will go up. Second of all, the cost of that health care goes up every year, as well. So the need for that care, coupled with the increasing cost of purchasing that care, must be considered.”
According to Gensler the possibility of outliving your retirement assets is leading to annuity products that allow participants to turn their retirement accounts into fixed payments every month for the rest of their lives.
“It is just starting to be given the attention it needs,” said Gensler. “That accomplishes two things, it takes the vagaries of the stock market out of the equation and as long as you are alive, you can count on receiving a check.”
