You don’t need a budget to plan for retirement

Mr. Quinn, I’m a long-time reader of your enjoyable blog. However, this is the first time I disagree with your ideas about retirement planning.
Here’s how I see budgeting as an essential part of funding a 401k plan for retirement (a word I rarely use).
All employees – especially younger ones – need a budget to help them pay for the largest purchase they will likely ever want to make: their future financial lifestyle when their full-time paychecks end.
The sooner they start saving money, the more time it has to grow. The longer employees wait to save, the more they’ll need to contribute – or end up with less.
That’s the nature of ‘America’s Retirement Plan’ – the 401k.
Overall, a 401k is a good plan if employees understand how to use it. But most of them don’t.
The retirement industry has had 40 years to create a robust 401k education program that ensures all employees have the knowledge needed to make good decisions. But 401k education continues to be the biggest failure ever of adult education. 401k plan sponsors continue to buy it anyway. And employees suffer the consequences.
A quick Google search reveals some cruel facts.
Half of the employees at age 65 have less – often much less – than $75,000 in their 401k.
Typical annual social security retirement benefits are less than $20,000.
These amounts are likely higher for working couples.
In the big picture, pensions and stocks don’t add much. Today, less than 5% of companies (private sector) provide pensions (defined benefits) – more are found in government jobs. And under 40% of employees say they own stock (outside a 401k). One study reported half of them had less than $60,000 in stock.
How much different would it be if all employees had a deep understanding of the most basic 401k information from the start of their careers? For example: for every $100,000 they accumulated by age 65, they could likely take out around $4,000 a year for their lifetime. Nope, not $10,000, just $4,000 year – $334 a month.
That’s the ‘4% rule’ (sometimes said to be closer to 3% or 5%. Never 10%.). But 4% is a far better estimate of how much employees’ future lifestyle will cost than what they often say – which is ‘no idea.’
Knowing this, they can start to think about how many $100,000 they want in their account. Far better than ‘no idea.’
Here’s a simple test. Pose this question to some employees. ‘If you were fast-forwarded to age 65 and today is your last day of full-time employment, and say you have $100,000 in your 401k, how much money do you think you can take out each year for as long as you live without running out of money? (
Shouldn’t every employee relying on a 401k be able to answer $4,000 – plus or minus $1,000?
Every employee should have a personal, clear, believable, and motivational understanding of the ‘layaway-purchase price’ of the future financial lifestyle they want.
Certainly, employees will change the price of that lifestyle at times throughout their careers. Yet, the income amount from each $100k in an account won’t likely change a huge amount. But no one knows for sure.
There’s little doubt that some employees will decide not to fund their 401k adequately, even with full knowledge. It’s a voluntary plan. They get to choose. But if they do not have the knowledge to make a good decision, the retirement industry and plan sponsors must accept some of that responsibility.
Can America afford to have nearly half of its older population (also known as voters) with only a few years’ worth of retirement plan income? Who, if anyone, will be required to pick up the slack? I’m afraid we’ll find out.
Dennis Ackley
Retired – after a career with educators and actuaries.

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