While the House and Senate tax bills were taking shape, lawmakers floated some changes to 401(k) contributions. A survey conducted around that time shows just how deeply those changes would have affected savers.
And what if their plan’s tax-deferred status were eliminated? Forty-six percent of respondents said they would save less or just stop saving, and 42% would save about the same amount.
The telephone survey was conducted in early November with 1,015 U.S. adult investors, 67% of whom were nonretired and 33% of whom were retired.
“The 401(k) plan has evolved into the greatest savings and investment vehicle that Americans have today to steadily build a retirement nest egg,” Fredrik Axsater, head of strategic business segments at Wells Fargo Asset Management, said in a statement.
“Pretax savings has a direct impact on the level of savings that people achieve, and we have to recognize this as the country contemplates changes in tax policy. The employer-sponsored 401(k) is critical to allowing working people to save and invest over time.”
In late October, rumors swirled that lawmakers debating tax reform were mulling a cap on 401(k) contributions at $2,400 per year. In a tweet, President Donald Trump quickly promised “NO change” to the accounts.
In mid-November, a senator proposed requiring that all catch-up contributions get Roth treatment, a plan that opponents called “mini-Rothification.” Neither provision made it into the tax bills.
Wells Fargo/Gallup’s fourth-quarter Investor and Retirement Optimism Index came in at +140, up from +138 in the third quarter and close to its September 2000 high of +147.
The index is an enhanced version of Gallup’s Index of Investor Optimism, which provides the historical trend data.
According to the poll, 72% of investors said they were somewhat or very optimistic that they would be able to achieve their investment goals over the next five years, up from 52% of investors during the same quarter five years ago.
Investor optimism generally tracks with market gains, as the S&P has gained nearly 100% since the fourth quarter of 2012, Wells Fargo noted.
Guaranteed Retirement Income Stream
Almost all nonretired investors in the survey strongly or somewhat agreed that it was important to have a guaranteed income stream in retirement, in addition to Social Security. Yet confusion exists about how to get this additional income stream.
Sixty-one percent strongly or somewhat agreed that they wanted a guaranteed monthly income stream that lasts as long as they need it, even if that meant giving up access to some of their money.
At the same time, 75% of nonretired investors either strongly or somewhat agreed that they wanted to be able to spend their money as they wished in retirement, even if that meant they might run out of money too soon.
Nearly half of investors also were unsure about what products were available to provide them with a guaranteed income throughout retirement.
Just over half of poll respondents said they had a savings number in mind for retirement; the rest did not. Those with a specific number said $1 million (median) was the right objective, while 29% said $500,000 or less.
Four in 10 nonretired investors not only had a specific savings number in mind, but could also estimate the income that sum would generate annually in retirement. Unfortunately, many of these estimates were unrealistic, Wells Fargo said.
According to the survey, 19% of nonretired investors had a savings goal and a somewhat realistic assumption of withdrawing 1% to 5% of their savings every year throughout retirement. The rest were unsure what their annual drawdown would be, or they estimated a number that amounted to more than a 5% annual withdrawal rate.