By John F. Darby
There are large problems facing our country, but solving the retirement savings crisis is not one of them.
The challenge of providing sufficient retirement funds for young workers could be solved over the course of their working lives by making worker contributions to a low-cost, U.S. stock market index fund mandatory from their very first paycheck.
If 21-year-old workers simply put $5 a day into a pretax 401(k) fund, invested those funds in large company stocks earning a 10 percent average long-term rate of return, over a 46-year working life they would accumulate a private retirement savings of over $1.6 million without the need for Social Security.
Want more money in retirement? Simply forgo that daily Starbucks coffee and make an additional contribution to your savings, and that single decision will produce an additional $1.3 million at retirement, giving you a total of close to $3 million. Drawing down those funds at a conservative 3 percent rate when you retire would provide a $90,000-a-year income during your retirement years.
In order for this example to be realized, however, a number of key things must happen.
• Mandatory contributions. Experience has taught us that voluntary financial contributions are hard to do, as alterative needs and wants are everywhere, every day. For us to overcome this, retirement contributions must be mandatory, sacrificing daily choices to provide for our ultimate good.
Start with the first paycheck. A famous quotation contends, “The most powerful force in the universe is compound interest.” The mathematical wonders of compound interest are only truly experienced when compounding starts early. Delay starting a 401(k) from age 21 to 27 and your future savings is reduced by $700,000.
• Fees matter. Low- or no-cost index funds allow workers unprecedented access to investments that put more money directly to work for them. Paying a typical 1 percent professional manager fee will reduce the above account by $150,000 at retirement.
Warren Buffett said management fees are a misbegotten reward for accomplishing something far short of what individuals on average, over time, could do for themselves.
• Severely limit withdrawals. A wise man said, “Money is like soap; the more you touch it, the less you have.” Early access to retirement savings must be tightly controlled, allowed only under the most significant circumstances, so that vital funds are available for retirement and not diverted to other competing uses.
Public policy achievements benefitting all are infrequent in today’s Washington, but this could be one.
I feel a compelling case can be made for mandating small, painless, 401(k) sacrifices today that over the next 50 years can produce very desirable societal outcomes: namely, allowing working Americans to retire in relative comfort without the need to increase payroll taxes and reduce Social Security benefit levels to get there.
John F. Darby, of Buffalo, is the president of a local manufacturing company.