If 40l(k)s were not tax-deferred, workers would stash away less

January 25, 2018

Better “save” than sorry? Forty-six percent of Americans who are still in the workforce say they would “save less” or “stop saving” entirely if their 401(k) plan’s tax-deferred status were taken away, according to findings of a  Wells Fargo/Gallup Investor and Retirement Optimism Index updated in mid-December.

The Internal Revenue Service reports that 401(k) plans are the most popular type of retirement program used today by working Americans. A 401(k) allows employees to contribute a portion of their wages to individual accounts, with the stipulations that:

  • Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
  • Employers can contribute to employees’ accounts.
  • Distributions, including earnings, can be part of taxable income at retirement (except for qualified distributions of designated Roth accounts).

Three-quarters of non-retired investors who responded to the survey have a 401(k) plan, and more than half – 57% – say the most valued feature of their plan is the “match contribution from their employer,” the study found.

The next-most-valued feature is the tax deferral on the money they contribute, which was noted by 33% of the 1,015 U.S. investors (67% of whom already are retired) who were interviewed by telephone for the report

Of those, 42% said they would “save the same amount”—tax-advantaged or not.

“The 401(k) plan has evolved into the greatest savings and investment vehicle that Americans have today to steadily build a retirement nest egg,” stated Fredrik Axsater, executive vice president and head of Strategic Business Segments at Wells Fargo Asset Management.

According to the poll, 72% of investors are “somewhat” or “very optimistic” that they will be able to achieve their investment goals over the next five years,—up from 52% of investors during the same quarter five years ago.

Nearly all non-retired investors — 98% — “strongly agree” or “somewhat agree” that “it is important to have a guaranteed income stream in retirement, in addition to Social Security,” and yet there is confusion about how to get this additional income stream.

Six in ten (61 percent) either “strongly agree” or “somewhat agree” that they want a guaranteed monthly income stream that lasts as long as they need it, even if that means “giving up access to some of their money.”

But at the same time, 75% of non-retired investors either “strongly agree” or “somewhat agree” that they want the freedom to spend their money as they want in retirement, even if that means they may run out of money “too soon.”

Indeed, more than half of non-retired investors (53%) have a savings “number” in mind for retirement, but 47% do not.

Interestingly enough, investors who say they need to save a target of $1 million or more expect to draw 5% per year from their accounts, on average; while those who say they need to save less than $1 million expect to draw an average of 7% annually. The latter group is aiming to save less but to withdraw a larger proportion per year in retirement.

Research contact: Amy.HylandJones@wellsfargo.com

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