Early Withdrawal Plagues Retirement Dreams

The fin-tech firm Betterment found a third of millennials/Gen Z have dipped into their retirement funds early. What a shame, the whole idea about saving early is compound interest. Save $125 per month at age 25 and you get nearly $900,000 at age 65, wait until age 45 and you have less than $150,000. Writing that fact sounds like a good plan. But the whole voluntary savings thing works better on paper. I don’t blame young people for not saving every month. Humans aren’t fatally flawed, Congress created a fatally-flawed retirement system that blame the victim.

It is good news of sorts that 71% of Gen Z and 82% of millennials say they do not feel too young to start saving for retirement and most, 88%, say they are actively saving some money on a monthly basis. But persistence matters most. The devastating truth that 23% of workers below age 50 dip into their retirement accounts and among millennials 1/3 dip into their retirement savings early—not only for debt payments and medical expenses, but for travel and leisure activities — our voluntary system of retirement savings a fake system.  

While more millennials are college graduates compared to older generations, they have more significant amounts of debt. And it is hard to say that millennials are on their way to an adult financial life when 28% receive some type of financial assistance from parents and/or family.

Retirement System is Weak for Most – 401(k) Balances Way Off Target

Average balances are different than median. Really different and averages distort reality. Jeff Bezos can walk in a room of 100 people with $15,000 in their retirement accounts and raise the average to about $150 million, but 99% of people still won’t have enough to retire on. The median of the group is $15,000 but the average is $150 million. True numbers both but each tell a very different story.

It is not surprising that Investopedia reporting Fidelity’s research – both entities are in the 401(k) business — uses averages. The average, not median, 401(k) balance for people in their sample is age 20–29 is $10,500, the average for people in their thirties is $38,400; in their forties, $93,400, in their fifties, $160,000, and sixties is $182,100. And those are the rosy numbers.

The median is zero because most people under 50 have barely anything in a workplace retirement plan, 15,000. The median balances for all ages except those over 50 are 0. The top ten percent of earners nearing retirement have a median balance of $200,000.

 According to AON

AON
associates people need over 11 times pay when they retire in their mid-sixties – or about $1,000,000 if your household earns $100,000 per year. Median retirement savings for older people is below $15,000 and the target is over a $1 million. The system falls short by a factor of about 100.

Congress Sets Up Workers to Fail at Retirement

Congress weakens the already weak system and exacerbates the already insidious tendency to blame workers for failing to save.

Congress – -in the CARES act containing all sorts of provisions to help households in the COVID – 19 recession, took away the only tiny barrier to withdrawing before retirement by allowing people to withdraw up to $100,000 from a 401(k) retirement plan for emergences– known as hardship distributions. Savers under age 59½ would be able to tap their 401(k) and 403(b) and IRA money without the usual 10% early withdrawal penalty. Why keep up the farce that we have a retirement system other than Social Security. Retirement savings are both too low because they are voluntary and too liquid. What is Congress going to next? Allow people to withdraw from their Social Security before age 62? If that happens, we won’t have a retirement system at all.