There’s talk about capping 401(k) savings at $3 million. What’s disturbing is the assumption behind this proposal: that it takes $3 million in savings to generate an annual income of $205,000. That’s a pipe dream.
I’m sorry, but to get $205,000 per year, you’re going to need much more money than $3 million. At a 4% draw, $3 million would kick off $120,000 per year. For my money, I wouldn’t recommend socking away a penny under $5,125,000 to guarantee $205,000 a year. But this gives you an inside look at how little attention is paid to prudent money management. It’s called kicking the can down the road.
Public- and private-sector pensions have been using assumed rates of return in the 8% range for years and complain that there’s no money left. What did they expect? The market isn’t going to come to the rescue.
Insurance companies that sell these assumptions are to blame. They sell a false sense of hope. And hope is not a strategy. Insurance companies rake in the premiums, invest the money, and then pray—that they’re comfortably retired by the time the next bailout comes around.
Capping the 401(k) is yet another way of devaluing the principles of saving money. Don’t get me started on their reasons for capping tax-deferred savings. For now, I’m fired up enough about the assumption that it will only take $3 million to generate a $205,000-per-year annuity. Let’s stop the pretending.