Wednesday, October 21, 2009

Retirement overhaul: 401(k) s may not be the answer now

Congress created the 401(k) in 1980 to supplement company pension plans. But with pension plans no longer offered to all workers or frozen, millions of Americans, have been relying solely on 401(k) plans to fund retirement.

Others — nearly one-third of American households — don't have any retirement savings, according to a McKinsey & Co. report. And only 4% of middle-income married couples who don't have a pension and are nearing retirement are likely to have enough money to last their lifetime, according to a new report by Ernst & Young.

America faces a retirement crisis, says an influential group of organizations that have started a new retirement initiative called Retirement USA. Wednesday, the group meets in Washington, D.C., to begin searching for solutions.

"We're not under an illusion that this will happen overnight," says Karen Friedman, policy director of the Pension Rights Center. When the group comes up with a retirement proposal, it will need congressional support.

Millions of retirees are barely surviving financially, says Retirement USA. Nearly 24% of Americans older than 65 have incomes below the poverty threshold, according to the Organization for Economic Co-operation and Development.

The 401(k) is clearly the center of the retirement storm. Some consumer advocates say the 401(k) is a failure that should end. Others, especially financial industry representatives, think 401(k) plans are still the best retirement option and they simply need shoring up. Retirement USA wants to keep the best parts of the current system and add to it.

Statistics show that 401(k) plans don't serve everyone well, and that those who use them often make big investing mistakes, including cashing them out early.

People who have worked for 20 to 30 years will need to have 10 times their final pay banked to retire securely, says author Jane White. And not many people are that fortunate.

To come close to that, they need to start contributing at age 25 and keep contributing for 50 years, so they have the benefit of compound interest, she says. And they need to have a company match and avoid cashing out any of the savings until retirement, she says.

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