Once Again, Alicia Munnell Gets it Wrong When It Comes to 401(k) Plans
It’s bad enough that the media does a poor job of covering 401(k) plans--blaming the stock market for account inadequacy rather than the inadequate employer matching contributions--but academics such as Boston College’s Alicia Munnell continue to provide the wrong formula for retirement adequacy.
For example, in a recent interview with Smart Money, Munnell insisted that most workers simply need to work four years longer to accomplish adequacy. What’s more, in her book, “Coming Up Short,” she came up with a one-size-fits-all retirement goal of $380,000 for everyone, regardless of income.
As I pointed out in a recent blog on the Huffington Post, because pension actuaries are rarely hired to consult to 401(k) plan few Americans realize that if you’ve got a $50,000 salary at retirement Social Security will only replace 40% of your income, so you need to accumulate 10 times your “final pay,” or your salary near retirement, in your 401(k) savings so you’ll be able to replace at least 70% of your income. On the other hand, if your salary at retirement is $100,000 or more, you need to aim for almost 13 times your final pay, because Social Security replaces even less, around 29% of your salary. According to pension actuary James Turpin, how much you need to save is based on when you start saving: to achieve “10 times final” it’s at least 10% of your pay if you start at age 25% but it increases the longer you wait, up to at least 48% of it if you wait until age 50.
Perhaps Munnell’s one-size-fits $380,000 figure was an estimate of medical expenses for those over 65. But retirees don’t simply have expenses related to age but continue to have monthly expenses such as mortgages--the more you earn the more expensive those mortgages tend to be. More than 50% of Boomers between the ages of 55 and 65 were paying mortgages in 2007--on average owing more than $140,000--according to the Federal Reserve Board’s Survey of Consumer Finances. That amount is nearly three times what was owed by that age group in 1989, when only 34% were still making mortgage payments.
Ironically both Munnell and Theresa Ghilarducci, an academic at the New School of Research who thinks 401(k) plans are too risky, have generous 401(k) plans that allow at least those academics with tenure to retire comfortably. For example, Munnell’s employer contributes the equivalent of 8% of pay for those with fewer than 9 years of service and 10% for those with more and Ghilarducci’s contributes 7% for those with fewer than six years and 10% for those with more. In fact, most universities have offered generous plans since the 1940s when the increase in college enrollments thanks to the GI bill increased the demand for professors, who in turn demanded better compensation.
If we can’t require employers to offer as generous 401(k) plans to the non-academic workforce, we should at least require academics to learn actuarial math before they criticize the plans.
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