Cashing In on 401(k)s

Boomers are about to find out whether their 401(k)'s are such a sweet deal.

Who says nothing good can come of the nation's byzantine tax code?

Twenty-five years ago, a young employee benefits consultant in Philadelphia was studying the Internal Revenue Code when he came across a passage that got him thinking.

What Ted Benna noticed was new language in the code that he thought permitted the creation of a new type of retirement plan. Not only could employees save money tax deferred, Benna felt, but the new language also allowed workers to fund such retirement accounts by setting aside a portion of their salary before taxes. The Internal Revenue Service later agreed.

His idea, of course, turned out to be the 401(k), the first of which was established at Benna's own firm on Jan. 1, 1981.

A quarter century later, these employer-sponsored retirement accounts have become as ubiquitous in the workplace as E-mail and corporate downsizing.

Yet it may take another 25 years before 401(k)'s can be deemed a success or a failure. This may sound silly, since around 43 million workers have already stuffed more than $2 trillion into these accounts.

But older baby boomers, the first generation to have climbed the corporate ladder in the 401(k) era, are just now turning 60. This means that boomers have only begun the long and anxious transition from work life to retirement. And since many boomers are expected to live well into their 80s, it's too early to say whether 401(k)'s have encouraged a sufficient level of saving to fund a full--and fulfilling--retirement.

Coming up short. So far, the news is decidedly mixed. While the vast majority of workers eligible for 401(k)'s contribute to these tax-deferred plans, a third of workers 60 and older aren't using them. Even among older boomers who are participating, nearly 20 percent don't take full advantage of their company matches.

The upshot: The average 50-something has less than $130,000 saved up in his or her account. Workers 60 and older aren't doing much better: They have only slightly more than $136,000 in their 401(k)'s, on average. That's barely enough to generate $6,000 to $7,000 a year of income during retirement, assuming they withdraw no more than 5 percent of their account each year. What's more, these are just averages, which can be skewed by wealthier workers with large balances. The median 401(k) balance for those 65 and over is only about $53,400, according to the Vanguard Group. "It's pretty scary," says Mark Kenison, president of Kenison Financial Services, a planning firm near Charlotte, N.C. "If it were me, and I only had $50,000 in my 401(k), I'd be terrified."

Older boomers are. A recent retirement confidence survey found that only 1 in 5 older workers is "very confident" of having enough money to finance a comfortable retirement. Even fewer are confident of being able to save enough to cover medical expenses and long-term care during retirement.

Compounding these worries is the confusion surrounding the ever changing landscape of tax-advantaged savings. This year, Uncle Sam is beginning to allow companies to establish a new type of 401(k) known as the Roth 401(k) (story, Page 42). These newfangled accounts differ from traditional 401(k)'s in that you contribute to them with after-tax dollars. Traditional 401(k)'s are primarily funded with pretax money. But in exchange, workers are allowed to pull money out of Roth 401(k)'s tax free at retirement. Money withdrawn from a traditional 401(k) is generally taxed as ordinary income.

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