Game On For Your 401(k)

There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!

— Donald J. Trump (@realDonaldTrump) October 23, 2017

Over the weekend we learned of a proposal floating around D.C. to significantly reduce maximum 401(k) contributions to help fund tax cuts. The specifics were not shared, but it was made public the proposal would cap savings at $2,400 a year–down from $18,000 in 2017 ($24,000 if over 50). This is the short-sighted thinking out of Washington that is so frustrating…let’s compound America’s under-preparedness for retirement by limiting the amount that can be saved, while simultaneously take away the incentive to save for retirement.

Thankfully, President Trump put those rumors to rest with his tweet letting us all know our 401(k)s are safe. But, this does not solve the problem at hand…Americans are not on pace to have enough savings to fund retirement.

Vanguard “How America Saves – 2017”

In light of the proposed changes, the Vanguard defined contribution (i.e. 401(k)) report, “How American Saves-2017”, began showing up in blog posts and on my Twitter feed. The numbers cited in the study have been questioned due to investors rolling out 401(k)s to IRAs held away from Vanguard, but regardless of what the actual numbers may be, the trend is obvious: too many Americans will run out of money in retirement.

Here are important numbers from the Vanguard study:

Only 79% of the workforce has access to a 401(k), or other employer retirement plan like a 403(b).
Of the 79% with access to a 401(k), only 41% of workers actually contribute to their retirement plan.
Of the 41% contributing to their 401(k), only 12% make the maximum contribution allowed to their retirement plan.
The average savings rate for participants is 6.8% of income.
According to 2017 Census Bureau, average median household income $59,039 in 2016, which means the average annual savings into 401(K) and employer retirement plans is $4,014.65.
35 years of saving $4,014.65 with 6% growth will get you $447,371.64. Not even close to enough for retirement!

Before you @ me, I’m aware the final figure I arrive to does not take into consideration any company match, increase to savings rate or any other number of factors that may occur over 35 years of work. Your personal situation may look better because you are saving more, plan to save more as your income rises, or even plan to work in retirement. But, if we just look at the averages (which has its flaws), America’s retirement picture isn’t pretty.

Now What?

Since most Americans are not saving enough for retirement, use this little scare from D.C. to refocus on your long-term planning. If you are not working with a financial advisor, find one who can help you determine how much you need to be saving to reach your retirement goals and also determine if your retirement goals are realistic. A financial advisor can also help you evaluate if your 401(k) is the best vehicle to save into, or if other options like a Roth IRA are more impactful. Financial planning is such a personal process that you cannot rely on averages and studies to determine how prepared you are for retirement; you can use the averages and studies as a gauge and as motivation, but working with a financial advisor is the best way to see where you stand and develop a plan to give you the best possible chance at reaching your goals.

The reality is the changes that were being proposed would have meaningfully impacted the minority of American savers, but now that your 401(k) will be keeping its higher maximum annual contribution limit, make sure to leverage it as much as your financial plan requires.