Saving and Investing for Retirement in a 401K

Dr. Richard Frenkiel, WINLAB, Rutgers University

Wednesday, November 9, 2011 - 10:00am - 12:00pm

CoRE Building, Board Room 701


Thirty years ago, most large companies had pension plans that promised retirees a "defined" pension-- usually about 1% of a person's final salary for each year worked. Someone with 40 years of service would therefore retire with about 40% of their final salary, plus another 20% or so from Social security. Some pensions even provided cost-of-living adjustments. This allowed a modest lifestyle in retirement or, with some savings, a comfortable and attractive lifestyle. In particular, these plans guaranteed income for life, at a time when people were retiring earlier and living longer.

From the employer's viewpoint, those "defined benefit" plans represented a substantial liability that could escalate sharply in a time of inflation, and as life expectancies increased. As a result, most employers abandoned these "promises to pay" as too expensive and risky in a competitive world. The "defined benefit" pension is now almost extinct, and a successful life now requires some new skills in planning and investing.

Savings plans like the 401K (and other similar retirement savings accounts) are essential to this task. They defer income taxes on "contributions" (money that is put in), and on growth (money that is earned in the account), until the money is removed. Additionally, some employers also "match" a fraction of the employee's contribution. Compared to saving without a 401K, the tax advantage and employer match can easily triple the "effective pension" that can be achieved (the amount of money a person can eventually take out annually in retirement). Even without an employer match, the "effective pension" can be doubled by the delayed tax alone, so there is a strong incentive to participate in whatever type of plan is available. Those who contribute a reasonable amount to these plans, and who invest the money in their plans intelligently, can look forward to retiring relatively early into lives that are interesting, secure and comfortable. Those who fail to contribute, or who invest foolishly, will work longer than they want to and spend their last years in relative poverty. For the new graduate with a first job, these issues may seem far off and more immediate concerns may seem more important. Frequently, action gets postponed, and with each year of delay the desired result becomes harder to achieve.

In this lecture, we will use a simple planning spreadsheet and some basic financial data to explore the issues of how much to save and how to invest those savings. There is no single answer to these questions, of course. Some will wish to retire earlier or live more expensively in retirement. Some will be willing to take greater risks to achieve their goals. The objective of the lecture is for the student to understand what is possible, and how such lifestyle goals are reflected in the overall plan.


Dick Frenkiel was born more than a half-century ago, in a small town called Brooklyn. He attended Tufts University and Rutgers University, emerging with degrees in Mechanical Engineering and a deceptive aura of competence. Soon after joining Bell Laboratories in 1963, he was mistaken for an electrical engineer of similar height and moved into cellular systems engineering, where for sixteen years he did little serious harm.

During the late 1960's. Dick was an author of AT&T's cellular system proposal to the FCC. After an obligatory "growth experience" at corporate headquarters, during which he acquired several suits, he returned to Bell Labs, where he became head of systems engineering for AMPS, the first cellular system in the US. He invented a method for efficient and low-cost cell-splitting, and served on the EIA committee which defined the first cellular standards to be used in the United States.

For Dick, the joy of seeing AT&T's first cellular service in Chicago was somewhat diminished when the company was torn apart by the government and excluded from the cellular business. While not responsible for this calamity, he exiled himself to the lowly world of consumer electronics. He became head of R&D for AT&T's cordless telephone business unit, and led a team that developed cordless telephones, some of which actually worked. He was also responsible for the first manufacture of these telephones in Singapore and Hong Kong, where he acquired several additional suits at attractive prices.

Dick retired from AT&T in 1993, and spent many happy years at WINLAB, the Wireless Information Networks Laboratory here at Rutgers. In 1999, he served as mayor of Manalapan Township in New Jersey and was not indicted. With Professor Narayan Mandayam he teaches a multi-disciplinary course in business strategy in the wireless industry.

For his work in wireless, Dick has received the National Medal of Technology, the Alexander Graham Bell Medal and the Industrial Research Institute Achievement Award. He is a member of the National Academy of Engineering, a New Jersey Inventor of the Year, and a Fellow of Bell Labs and the IEEE.