American workers beginning to save money for retirement find themselves confronting some big financial challenges as they plan for a comfortable future.
One fact they inevitably discover is that Social Security monthly payments, while a solid source of basic income, are not (and were never intended to be) of sufficient value to cover all living expenses for the entire length of one's retirement years.
Philanthropist and author Tony Robbins explains one vital strategy people use to save for the bulk of their retirement nest egg, but he says people often make a mistake while implementing it that can damage their financial future.
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Saving consistently in tax-advantaged retirement accounts such as 401(k) plans and IRAs (Individual Retirement Accounts) is important. Maximizing contributions, especially if one's employer offers a matching program, can significantly boost retirement savings over time.
Related: Tony Robbins warns U.S. workers on Social Security, retirement fact
It's also important to note that understanding how Social Security benefits are calculated — and determining the best age to begin claiming them — can maximize a retiree's monthly income. Delaying benefits past one's full retirement age allows a person to receive higher monthly payments from the federal program.
With all this in mind, Robbins focuses on a specific warning he shares regarding 401(k) plans about which he believes U.S. workers should pay specific attention.
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Tony Robbins says 401(k)s potentially hurt Americans' chances to gain wealth
In his book, Money: Master the Game, Robbins explained his belief that a 401(k) is a part of the tax code that, when used properly, can fund peoples' retirements for years. But he also expressed a concern.
"But if used as it is in most of today's plans, it can damage our chances for financial freedom," he wrote.
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Robbins acknowledged that, assuming the right market conditions exist, 401(k) plans help people invest and save for retirement. But he gave voice to his worry that, as 401(k)s replaced pensions, the risk and expense burden fell from the employer to the employee.
"The 401(k), given to us in 1984, gave us the opportunity to participate in the stock market. To own a piece of American capitalism," Robbins wrote. "And we could save on our taxes by making tax-deductible contributions from our paychecks."
He suggested that contributing too little to 401(k)s without any other retirement accounts could be a recipe for disaster for too many people.
Robbins recalled a conversation he had with Stanford economics professor John Shoven.
"Tony, you can't save just three percent of your income for thirty years and expect to live another thirty years in retirement with the same income you had when you were working," Shoven had told him.
Related: Tony Robbins warns Americans on Roth IRA, 401(k) obvious problem
Tony Robbins explains that individual control over 401(k)s and other investments can be risky
Robbins talked about Americans' retirement concerns with Dr. Alicia Munnell, the director of the Center for Retirement Research at Boston College, who added her thoughts to the discussion about the move from pensions to 401(k)s.
"We went from a system of defined benefits — where people had a pension; they had an income for life — to the idea of the 401(k), which was obviously cheaper for employers," she said. "And on the surface, it seemed like it was beneficial to individuals because they had more control of their own investment decisions."
Munnell, a former employee of the Federal Reserve, said that — with some hubris and an excess of individual control — she made a serious mistake when it came to her retirement.
"So, I have a defined benefit plan (guaranteed lifetime income) from the Federal Reserve Bank of Boston," she said. "When I was at the Treasury, one of my colleagues said, 'Oh! Take it early. You can invest that money much better than the Federal Reserve can.'"
"That money is long gone."
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