Posted on 04/16/2006 4:32:05 AM PDT by sitetest
An obscure paragraph added to the Revenue Act of 1978 by an unknown author has drastically changed the way Americans save for retirement and, possibly, how they vote. Over the past 25 years, since a 38-year-old retirement consultant in Philadelphia got IRS approval to establish the first tax-deferred account system, 401(k)s have exploded, dramatically increasing the nation's investor class and boosting individuals' total savings. Economic and political analysts say 401(k)s have enriched millions of American workers, particularly lower-income people, and their longer-term impact on the economy, especially investment capital formation, and the electorate is now coming into fuller view. "The 401(k)s have done an enormous amount of good for the prosperity and stability of our country. When citizens have a vested interest in the economy and own more property, the more stable and politically conservative your society will be," said Heritage Foundation economist Bill Beach.
~~ snip ~~
But many economists say that the government's savings yardstick does not measure the full extent of individual savings in stocks, which are becoming an increasing part of retirement nest eggs.
~~ snip ~~
Mr. Beach thinks the true savings rate in the U.S. is at least 15 percent when money being put into 401(k)s and other tax-advantage investment vehicles is added to traditional savings measures. "Mutual stock funds are all counted as investments even though they are savings. You're talking about $4 trillion in actual savings when you lump all this together. I think the savings rate is really high," he said.
(Excerpt) Read more at washtimes.com ...
Happy Easter!
From time to time, I've seen folks debate about the savings rate in the US, and precisely what's included and not included in that calculation.
This article quotes folks who are clear that the savings rate does not include qualified retirement accounts like 401(k)s and IRAs.
I don't remember many of the folks from other threads discussing this, but remembered at least a couple.
Pings are encouraged.
Another key excerpt:
"One of the most surprising conclusions by economists studying the growth in 401(k) accounts is that they have contributed to a sharp increase in private savings, a view sharply at odds with reports showing that the savings rate has been declining for years."
OMG. I thought I'd be the only one reading the Wash Times at 7:30 on a sunday morning. LOL!
I've heard some people (like Dave Ramsey) say you should only invest in 401k up to the point that the employer matches it. While other people (like Clark Howard) have said you should max it out as much as you can.
I've been in on some of the discussions about what is or is not savings. On the one hand, I do agree that when articles talk about the savings rate, they should at least include mention of 401K. On the other hand, I have argued that savings and investments are not the same thing. That's just me, I guess, but money put into stocks is an investment, which carries with it inherent risk. Savings, at least in my own way of looking at it, is not exposed to that sort of risk. CDs, for example, don't carry the risk that 401Ks do of losing their value, except to the extent that money loses it's value, but then, cashed out stocks would carry that risk as well. Anyway, when I was a cubicle drone, I maxed out my 401K investments, to get the full match from my employer, and just to have some stocks and bonds, but in addition to that I saved a considerable amount of money in CDs, to have on hand for emergencies, for large purchases, etc. I do both. But that's just me.
Dear buckeyesrule,
"OMG. I thought I'd be the only one reading the Wash Times at 7:30 on a sunday morning. LOL!"
LOL!
I'm trying to get my butt in gear to go to (relatively) early Mass.
sitetest
Dear buckeyesrule,
I think for most people, the advantages to maxing out outweigh the disadvantages (primary disadvantage in my opinion - capital gains wind up getting taxed at ordinary income tax rates upon withdrawal - ouch).
sitetest
Seems like a no brainer to me.
You can "save" your money after you've paid taxes on it, or you can "save" (in an IRA or 401K) your money and reduce your tax load now. We prefer to "save" it into tax-deferred plans.
Now it's time to get your retirement funds in shape. Contribute the maximum amount you can, your target being contributions of a full 15 percent of your household's gross (pre-tax) income. If you have tax-advantaged plans (401k or Roth IRA, for example) available to you, then exploit them to their fullest extent. If your company matches any part of your contributions, do not consider this as part of your 15 percent.
http://www.mdmproofing.com/iym/babysteps.shtml
Which is kinda interesting cuz I have never heard of the guy, but I did 15% in 401K.
So the savings rates are declining because their investments are increasing. Oh the horrors! Why are these idiots putting their money in savings where they can pocket 0.5% every year. What kind of fools are these Americans, trying to gamble to get 7-10%. Oh the sky is falling. I just hope people haven't been stupid enough to invest in the housing bubble. Those idiot have made trillions in the past few years, but just wait some of them may lose one of these days.
Dear Huck,
I understand your point, but the fact is that then the term "retirement savings" becomes a misnomer. As well as "college savings" and other things we call savings.
Beyond saving some money for emergencies, regular savings, as opposed to regular investing, probably doesn't make sense for most folks at most stages in their lives.
sitetest
Dear Always Right,
LOL.
sitetest
We always make "large purchases" on zero interest credit cards.
If I know I have a large purchase in the future, I'll wait till I get a really attractive credit card offer (LOL, they send 3 or 4 a day it seems.) But I'll pick one with zero interest for a year or more and then make the purchase, leave my money in the CD or bank, and divide up the purchase amount into increments so it's paid back by the time the zero interest expires.
The key concept to keep in mind is that the stock market has earned an average rate of return since its inception of around 10%, even including the Depression and the Carter era (sorry, couldn't help myself). You always want to be putting into the market (dollar cost averaging - e.g. buying all the time whether the market is high or low as it evens out over time), as that or investing in your own profitable business are the best ways to grow your net equity.
Or, you could just become a crooked politician like the Democrat from WV that heads the ethics committee. Unfortunately there aren't many of those positions out there, so you'll have to earn yours the old fashioned way. :-)
You have touched on one of the major flaws (IMO) of Roth IRA's. You put taxed money into a Roth with the "promise" that government won't tax it in the future when you withdraw it. Now we all know all know government has never lied to us when it comes to taxes.
Another thing to watch for in the near futuere is an attack on 401k's through the back door. It will go something like this, "You've got lots of money in your 401k, so you don't "need" social security." Even though you paid into it all your working life..
It'll be interesting to see how this works out.
Maxing your 401(k) only makes sense if you believe that your income tax rate will be less after you retire. Everyone should at least contribute to the employer match point since, after all, that is "free money".
The pundits who advise only going to the employer match point and then funding a Roth IRA are of the opinion that, the "Tax-Free" nature of Roth earnings will always remain.
Those who are a little more cynical (realistic?), feel that "The Congress Giveth and... Taketh Away". In other words, when seeking "Revenue Enhancements"..., the "Tax Free" treatment of Roth earnings will be partially or totally eliminated. I would wager that the vast majority of Freepers do not believe that Congress will always allow Roth earnings to be tax-free!
After all, since the vast majority of the population has never set aside sufficient savings for retirement..., why would they NOT vote for politicians who will increase taxes on their neighbors who have been saving???
I read an article (cannot remember the source) where some financial expert suggested only putting enough in the 401k to get your employer's matching contribution.
The argument was that tax rates are sure to go up over time, and that you'll get taxed at a much higher rate later.
I agree with this in part. Its probably better to get all of your employers matching contributions first, then max out your ROTH IRA contributions before making further contributions to the 401k.
But like others have said, its better to have 15% of gross income automatically taken out of the paycheck and safely stowed in the 401k if you have the slightest inclination towards being a spender rather than a saver.
In the 80's a CD's rate was 15%.
What forces in our economy contributed to that high of a rate than and 4% now?
Personally, I don't really expect much of SS. I think when the system gets into trouble, there will be a "means test." Fair, no way, but I fully expect it, so we try to max out our 401 K's.
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