By Cyril Tuohy
If ever there were a reason for middle-class Americans to sign up for an employer-sponsored retirement plan, this would be it: The median amount saved by people with 401(k)s compared to those without is “much higher” across every age range, a new study finds.
Middle-class Americans between the ages of 25 and 29 with access to a 401(k) plan have saved a median of $10,000 versus a median of zero savings for those without access, according to the fifth-annual Wells Fargo Middle-Class Retirement study.
Survey respondents between the ages of 30 and 39 with access to a 401(k) have saved a median of $35,000. Compare this with those without access to a 401(k), who have saved a median of less than $1,000, the telephone survey of 1,001 respondents found.
Those between the ages of 40 and 49 with access to a 401(k) have saved a median of $50,000, versus the $10,000 saved by those without 401(k) access, according to the survey.
“The 401(k) makes a significant difference for people in that it gives them the ability to save in a regular, systematic way,” Joe Ready, Wells Fargo's director of Institutional Retirement and Trust, said in a news release. “It conditions people to think that saving money is paying themselves first and is just as important as paying day-to-day bills.”
Critics of the 401(k) defined contribution model have pointed to its flaws as a thrift savings plan instead of a true retirement plan.
But while Congress debates how to reform the nation’s patchwork retirement system, the 401(k) has emerged as one of the most — if not the most — convenient retirement savings tool in the retirement arsenal of private employers.
“We as an industry need to work to help continue to shift that thinking so that it’s viewed as the primary, essential benefit it is,” Ready wrote in an email to a series of follow-up questions. “When used properly, the 401(k) can and does work for many and can be a major source of retirement income. We need middle-class Americans to be more aware of this.”
Funded through pretax contributions, the 401(k) lowers taxable income. Employee and employer matching contributions are redirected into mutual fund investments where money grows tax-deferred, instead of disappearing in a household budget.
The Pension Reform Act of 2006 further encouraged employers to nudge workers into setting money aside for their later years through automatic enrollment options, automatic escalation contributions and employer matches.
The widely quoted survey also found that 70 percent of respondents have a 401(k) or equivalent plan available to them through their employer, and that 93 percent of employees working for employers that offer a plan are contributing to it.
Still, though, big swaths of workers — as many as 34 percent — are not contributing to any kind of retirement plan, the survey found, and 41 percent of middle-class Americans between the ages of 50 and 59 are not saving for retirement.
Some public policy experts say the retirement crisis is overblown because many assets that retirees use to fund their golden years — a home or an inheritance, for example — are not included in retirement account assets.
Nevertheless, the survey found that across all retirement accounts, the median savings for middle class investors was $20,000, down from $25,000 in 2013.
Ready said that for a long time the retirement industry has focused on 401(k) accumulation, but that the industry is undergoing an important shift to incorporate ways to generate income in order to derive a paycheck in retirement.
The survey found that 28 percent of all age groups in the survey reported that they had a written financial plan for retirement. It also found that people who have a written plan were saving a median of $250 per month, compared to the median $100 per month socked away by those without a written plan.
“People who have a written plan for retirement are helping themselves create a future on their own terms, with a foundation built on savings, and hopefully investing,” Ready said. “As evidenced by the difference in monthly savings amounts for those with a written plan and those without, it is clear that a plan makes a sizeable difference.”
Planning can be as simple as developing a budget, getting in the habit of saving, and taking maximum advantage of an employer-sponsored retirement 401(k) or equivalent, he said.
“This evolves over time to a focus on how to monetize that nest egg,” Ready said in the email. “This planning evolution starts from the first day on the job all the way through retirement distribution. It’s not a one-time event.”
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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