Adam’s Blog

That’s my thing, keepin’ the faith, baby. –Joe Friday

The Magic of Your 401(k)

Posted by Adam Graham on April 13, 2009

My latest column is up at Pajamas Media. Here’s an excerpt:

Just a few years ago, it was a popular idea to make 401(k)s an opt-out proposition, where you would be signed up for 401(k)s rather than having to opt in. Now, the talk is of eliminating 401(k)s, because they are thought to be too volatile a vehicle for retirement. One proposal would require everyone to invest 5% of their income in government bonds with a guaranteed 3% rate of return adjusted for inflation. But is this truly what’s best for workers? Would we really be better off digging a hole and sticking our money in the ground or letting the government manage it?

Let’s take the case of one worker: me. I began putting money into my 401(k) in 2005. The market decline has seen my 401(k) take a beating. It lost nearly half its value between November 2007 and the end of business on March 31, 2009. Would I have been better putting my money under a mattress? Not at all. Even with steep losses over the past 17 months, I have 35% more in my 401(k) than I’ve put into it over the past four years.

I wish I could say this was because I am brilliant investor, but the secret of my gain is far simpler. First, the funds and stocks I invested in went up and they paid dividends. Also, I received an employer match. On top of the gain within the 401(k), I’ve received tax deductions for my 401(k) contributions, as well as the saver’s tax credit instituted by President George W. Bush to help middle and lower-middle class folks save for retirement. And while there have been significant losses in retirement accounts over the last year and a half, the media’s focus on this has left out several key facts.

The first question is whether people would have been worse off had they not invested in retirement savings. Secondly, will most people be better off if they don’t invest? In most cases, the answer to both questions is no. In general, those who have lost money wouldn’t be in nearly as good shape if they hadn’t invested in the first place. And if workers in their 30s and 40s panic and pull everything out of the market, they’ll miss the next big increase.

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