How America's Retirement Dream Became a Nightmare

A recent report by the Economic Policy Institute (EPI) makes it clear: The 401(k) plans Americans rely upon for retirement income are “inadequate and unequal,” and have increased gaps in retirement preparedness based on income, race, ethnicity, education and marital status. Moreover, the net worth of households approaching retirement fell by half in wake of the Great Recession and has only slightly improved since then.

The report states unequivocally that 401(k) plans have “proven to be a disaster” since the government authorized them 42 years ago, underscoring something I’ve been saying for years: For many participants, government-sponsored plans have turned out to be less effective than stuffing cash in a mattress .

As the EPI report explains in detail, “The shift from pensions to account-type savings plans has been a disaster for lower-income, black, Hispanic, non-college-educated and single workers, who together add up to a majority of the American population. But even among upper-income, white, college-educated married couples, many do not have adequate retirement savings or benefits. And women, who by some measures are narrowing gaps with men, remain much more vulnerable in retirement due to lower lifetime earnings and longer life expectancies.”

For the researchers, this “underscores the importance of preserving and expanding Social Security, defending defined benefit pensions for workers who have them and seeking new solutions for those who do not.”

Keep in mind: Social Security is designed to replace only about 40 percent of pre-retirement income and was never intended to be Americans’s sole source of retirement income. Yet it is the only income source for about 40 percent of retirees who don't have any savings or a pension , according to new research from the National Institute on Retirement Security. And the safety net is fraying as the Social Security Administration taps its trust funds to cover a deficit between what it pays out in benefits and what it collects in payroll taxes.

“Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing,” the Social Security and Medicare Boards of Trustees 2019 report states. It recommends “lawmakers take action sooner rather than later to address these shortfalls so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare.”

Are You Waiting for the Government to Come to Your Rescue?

Waiting for politicians to shore up these safety-net programs makes about as much sense as waiting to see if that light at the end of the tunnel is an oncoming train. The retirement nightmare has been rushing toward us for a long time and shows no signs of slowing down.

Per the EPI report, companies figured out that it’s cheaper to offer a small matching contribution to an employee’s 401(k) plan than to fund and pay for the management of a company pension plan, effectively transferring the burden of funding employees’s retirement to the employees themselves. And the government was only too willing to let them do it.

In 1978, Congress added Section 401(k) to the tax code, creating a tax-deferred way for employees to augment their pensions. These plans were never intended to replace company pension plans, but that’s exactly what has happened.

At one time, 80 percent of private-sector workers who had a workplace retirement plan had a pension fund. But by 2017, only 18 percent of private-sector workers did, and just 15 percent of people participated in one, according to the Bureau of Labor Statistics.

Where Has This Gotten Us?

Today, most Americans have:

• Absolutely no way to predict how much money they'll have in retirement.
• Little to no control over the money in their retirement accounts.
• Little or no access to their money.
• A potential tax time bomb on withdrawals from their retirement accounts.
• High fees that eat away at account balances year after year.

Should You Follow Conventional Wisdom or Take Charge?

Conventional retirement plans do nothing to address these concerns. For entrepreneurs, the only solution that makes sense is to take charge of your own retirement savings plan. Let’s face it: If you have the financial ability to start and run your own company, trying to live off Social Security alone isn’t going to cut it. Make sure a sizeable portion of your retirement savings is in assets that are secure, guaranteed and liquid and that give you control over your future, rather than being subject to the whims of the government or markets.

There’s an ancient proverb you may have heard: “The best time to plant a tree is 20 years ago. The second-best time is today.” Because when it comes to making sure you have a dream retirement rather than a nightmare, procrastination is not an option.