Dan Kadlec - TIME

MONEY Retirement Longevity

Americans Are Living Longer Than Ever. And That May Kill Your Pension

Dan Kadlec @dankadlec

Oct. 28, 2014

With more workers likely to reach age 90, employers will have to step up their pension funding. Or, more likely, hand you a lump sum instead.

For the first time, both boys and girls born today can expect to see at least 90 years of age, according to revised mortality tables published on Monday by the Society of Actuaries. This represents a staggering extension of life over the past century. In 1900, newborns could not expect to see what is now the relatively youthful age of 50. But a big question looms: how we will pay for all these years?

In the last 100 years, the drumbeat of extended life expectancies has been interrupted during World War I and again during the Great Depression, but only fleetingly in any other period. Medical science and greater attention to health and nutrition have stretched lifetimes by a year or more every decade. In the new tables, newborn boys are expected to reach exactly 90 years of age—up from 87 in the last published tables in 2000. Girls are now expected to reach 92.8—up from 87.3.

This extraordinary expansion has changed every phase of human life. Only a few generations ago childhood came to an abrupt halt at ages 13 or 14, when boys went to work and girls married and started families. As lifetimes expanded, the teen years emerged and kids were kids longer. They went to high school and then to college. Today, the years of dependence have stretched even longer to 28 or 30 in a period recently defined as emerging adulthood.

Middle age and old age have also stretched out. Half a century ago reaching age 65 meant automatic retirement and imminent infirmity. Today, millions of 65-year-olds aren’t just in the workforce—they are reinventing themselves and looking for new pursuits, knowing they have many good years ahead.

According to the revised tables, which measure the longevity of those who hold pensions or buy annuities, a man at 65 can expect to live to 86.6—up from 84.6 in 2000. A woman at 65 can expect to live to 88.8—up from 86.4 in 2000. In another 15 years the typical 65-year-old will be expected to reach 90. And these are not necessarily years of old age; for many, most of these extra years will be lived in relatively good health.

What is good news for humanity, though, sends tremors through the pension world. Every few extra years of life expectancy come with a price tag. Already, many private and public pension funds are woefully underfunded—and the new tables essentially mean they are even further behind. Aon Hewitt, a benefits consultant, estimates that the new figures add about 7 percentage points to the amount a typical corporate pension must set aside.

So a typical pension that has only 85% of the funds it needs based on the old mortality rates now has only 78% of what it needs based on the new rates. This will almost certainly lead to a further erosion of individuals’ financial safety nets as pension managers try to figure out how to fill the holes. Already the majority of large companies have frozen or changed their pension plans in order to reduce their financial risk, while shifting workers to 401(k)s. Look for more employers to abolish their traditional pensions and to offer workers a lump sum settlement rather than remain on the hook for unknown years of providing guaranteed income.

“As individuals receive lump sum offers, they need to understand that their life expectancy is now longer,” says Rick Jones, senior partner at Aon Hewitt. “They need to be able to make the money last.”

Companies probably will have until 2017 before regulators require them to account for the new mortality rates, Jones says. That means, all things being equal, lump sum payments will be higher in a few years. For those on the verge of taking their benefits, it might make sense to wait. Public pensions, which generally are in worse shape than private pensions, will have to account for longer lives as well, though they are not subject to the same regulations and the adjustments will come slower.

The new figures also promise to speed changes in the 401(k) world, where both plan sponsors and plan participants have been slow to embrace annuities, which are insurance products that turn savings into guaranteed lifetime income. Savers have generally avoided certain annuities because they are seen as expensive and leave nothing for heirs. Lacking demand and facing legal hurdles, employers have also shied away.

Yet policymakers and academics have been arguing for a decade that 401(k) plans need to provide a guaranteed income option. The U.S. Treasury has been pushing the use of longevity annuities in 401(k)s, recently issuing guidelines for their use in target-date retirement funds. With a longevity annuity, also known as a deferred income annuity, you can buy lifetime guaranteed payout for a relatively small amount and have it kick in at a future date—say, age 80 or 85. And these days, even that’s not all that old.

MONEY Family Finance Insurance

Why Even a Fair Insurance Claim Will Send Customers Packing

Dan Kadlec @dankadlec

Oct. 24, 2014

The insurance claims process is so painful and outdated that about half of customers who confront it bolt no matter what.

The financial services industry has been among the slowest to embrace the mobile and other technologies that many consumers crave. Within the industry, insurers probably have been slowest—and their old-fashioned ways are stirring a high level of churn.

Insurance customers are generally pleased with their provider. Only 14% of those who submitted a claim in the past two years are unhappy with how it was handled, according to a report from Accenture. As you might expect, a high rate of those—83%—plan to switch providers. But even among the vast majority who filed a claim and were satisfied, 41% say they are likely to switch insurers in the next 12 months, the report found.

Why would satisfied customers switch? In general, their claims experience, while satisfactory, left them feeling it should have been better. “The bar has been raised and insurers now need to handle claims in a way that not only satisfies policyholders but also differentiates them from other insurers,” says Michael Costonis, global head of claims services at Accenture, a research and consulting firm.

Technology exists that would greatly streamline the claims process, he says. Consumers understand that, and when they file a claim and confront the old way of doing things they resolve to look for something better. For example, Costonis says, in the case of an auto accident, sensors could summon assistance automatically, notify a garage, and get a tow truck on the scene—all without a phone call. Your car could be fixed and delivered to your door, and if any money was due to you it might be put in your account without the tedious paperwork.

Customers expect quick claims and fair pricing. But they also want transparency and this is where technology can make a big difference. “More and more, especially with younger customers, this takes the form of providing anywhere, anytime access online or through mobile apps,” Costonis says. In the study, 44% said they would switch providers to be able to use digital channels to monitor the claims process.

Broader use of technology could help in other ways too. Three in four customers are willing to share more personal information in order to get better rates, the study found. Insurers could easily gather information about the condition of cars and customer driving habits. They could also gather information collected by smoke, carbon monoxide, humidity, and motion detectors. Such data could help them help their customers manage risks and wind up filing fewer claims—and that is the Holy Grail because customers hate the process and insurers lose a high percentage of those who file a claim no matter what.

MONEY Retirement 401(k)s

Why Millennials Are Flocking to 401(k)s in Record Numbers

Dan Kadlec @dankadlec

Oct. 23, 2014

hand clicking Apple mouse connected to egg with 401k on it — Jason York—Getty Images

First-time 401(k) plan enrollees are soaring as young workers enter the labor force. This is a positive development. But it won't solve our savings crisis by itself.

Young workers have received the message about long-term financial security—and with increasing assistance from employers they are doing something about it, new research shows.

In the first half of 2014, the number of Millennials enrolling for the first time in a 401(k) plan jumped 55%, according to the Bank of America Merrill Lynch 401(k) Wellness Scorecard. This twice-yearly report examines trends among 2.5 million plan participants with $129 billion of assets under the bank’s care.

The brisk initial enrollment pace is due partly to the sheer number of Millennials entering the workforce. They account for about 25% of workers today, a figure that will shoot to 50% by 2020. But it also reflects a broader trend toward 401(k) enrollment. Across all generations, the number enrolling for the first time jumped 37%, Bank of America found.

One key reason for the surge in 401(k) participation is the use of auto-enrollment by employers, as well as other enhancements. The report found that number of 401(k) plans that both automatically enroll new employees and automatically boost payroll contributions each year grew 19% in the 12 months ended June 30. And nearly all employers (94%) that added automatic enrollment in the first half also added automatic contribution increases, up from 50% the first half of last year.

Enrolling in a 401(k) plan may be the single best financial move a young worker can make. At all age levels, those who participate in a plan have far more savings than those who do not. Another important decision is making the most of the plan—by contributing enough to get the full company match and increasing contributions each year.

Other added plan features include better educational materials and mobile technology. In a sign that workers, especially Millennials, crave easy and relevant information that will help them better manage their money, the bank said participants accessing educational materials via mobile devices soared 41% in the first half of the year.

The number of companies offering advice online, via mobile device or in person rose 6% and participants accessing this advice rose 8%. A third of those are Millennials, which suggests a generation that widely distrusts banks may be coming around to the view that they need guidance—and their parents and peers may not be the best sources of financial advice.

Millennials have largely done well in terms at saving and diversifying. They are counting more on personal saving and less on Social Security than any other generation, the report found. They seem to understand that saving early and letting compound growth do the heavy lifting is a key part of the solution. Despite its flaws, 401(k) plans have become the popular choice for this strategy.

Yet this generation is saddled with debt, mostly from student loans and credit cards, and most likely to tap their 401(k) plan savings early. Millennials are also least likely take advantage of Health Savings Accounts, or HSAs, which allow participants to set aside pre-tax dollars for health care costs. Health savings account usage jumped 33% in the first half, Bank of America found. But just 23% of Millennials have one, versus 39% of Gen X and 38% of Boomers.

Still, the trends are encouraging: employers are making saving easier and workers are signing up. That alone won’t solve the nation’s retirement savings crisis. Individuals need to sock away 10% to 15% of every dime they make. But 401(k)s, which typically offer employer matching contributions, can help. So any movement this direction is welcome news.

Related:

How can I make it easier to save?

How do I make money investing?

Why is a 401(k) such a good deal?

MONEY Retirement retirement planning

22% of Workers Would Rather Die Early Than Run Out of Money

Dan Kadlec @dankadlec

Oct. 22, 2014

transparent piggy bank with one silver coin inside — Dimitri Vervitsiotis—Getty Images

Yet many of the same folks are hardly saving anything for retirement, study finds.

A large slice of middle-class Americans have all but given up on the retirement they may once have aspired to, new research shows—and their despair is both heartbreaking and frustrating. Most say saving for retirement is more difficult than they had expected and yet few are making the necessary adjustments.

Some 22% of workers say they would rather die early than run out of money, according to the Wells Fargo Middle Class Retirement survey. Yet 61% say they are not sacrificing a lot to save for their later years. Nearly three quarters acknowledge they should have started saving sooner.

The survey, released during National Retirement Savings Week, looks at the retirement planning of Americans with household incomes between $25,000 and $100,000, who held investable assets of less than $100,000. One third are contributing nothing—zero—to a 401(k) plan or an IRA, and half say they have no confidence that they will have enough to retire. Middle-class Americans have a median retirement balance of just $20,000 and say they expect to need $250,000 in retirement.

Still, Americans who have an employer-sponsored retirement plan, especially a 401(k), are doing much better than those without one. Those between the ages of 25 to 29 with access to a 401(k) have put away a median of $10,000, compared with no savings at all for those without access to a plan. Those ages 30 to 39 with a 401(k) plan have saved a median of $35,000, versus less than $1,000 for those without. And for those ages 40 to 49 with 401(k)s, the median is $50,000, while those with no plan have just $10,000.

Clearly, despite its many drawbacks, the venerable 401(k) remains our de facto national savings plan, and the best shot that the middle-class has at achieving retirement security. But only half of private-sector workers have access to a 401(k) or other employer-sponsored retirement plan, according to the Employee Benefit Research Institute. Those without access would benefit from a direct-deposit Roth or traditional IRA or some other tax-favored account, but data show that most Americans fail to make new contributions to IRAs, with most of those assets coming from 401(k) rollovers. One exception: a growing number of Millennials are making Roth IRA contributions.

Most people do understand the need to save for retirement, but they don’t view it as an urgent goal requiring spending cutbacks, the survey found. Still, many clearly have room in their budget to boost their savings rates. Asked where they would cut spending if they decided to get serious about saving, 56% said they would give up indulgences like the spa and jewelry; 55% said they’d cut restaurant meals; and 51% even said they would give up a major purchase like a car or a home renovation. But only 38% said they would forgo a vacation. We all need a little R&R, for sure. But a few weeks of fun now in exchange for years of retirement security is a good trade.

Of course, the larger problem is that a sizeable percentage of middle-class Americans are struggling financially and simply don’t enough money to stash away for long-term goals like retirement. As economic data show, many workers haven’t had a real salary increase for 15 years, while the cost of essentials, such as health care and college tuition, continues to soar.

Given these economic headwinds, it’s important to do as much as you can, when you can, to build your retirement nest egg. If you have a 401(k), be sure to contribute at least enough to get the full company match. And if you lack a company retirement plan, opt for an IRA—the maximum contribution is $5,500 a year ($6,500 if you are 50 or older). Yes, freeing up money to put away for retirement is tough, but it will be a bit easier if you can get tax break on your savings.

Why is a 401(k) such a good deal?

Which is better, a traditional or Roth IRA?

MONEY Family Finance psychology of money

Why You Almost Never Dream About Money

Dan Kadlec @dankadlec

Oct. 17, 2014

woman sleeping at night — You're more likely to be dreaming about cats than checkbooks. rubberball—Getty Images

If your sleeping hours are filled with visions of your financial life, you're in the minority. Here's what that means.

In your sleep, do you dream about money? Surprisingly, most people do not—at least not literally. And if you believe the thoughts that enter your head while you sleep actually mean something, this may suggest we’re shockingly content.

Dream analysts say that winning the lotto or a boat, or getting a bonus aren’t even among the top 50 most common thoughts in slumber. Money is nowhere to be found on a state-by-state chart of popular dream symbols. The dream map is dominated by things like “family” in Texas, “cats” in New York, “pigs” in Nebraska, and “sex” in perhaps the most honest states Missouri and New Hampshire.

We each have three to nine dreams per night, and most of us think about money everyday. Yet up and down the list of most common nighttime visions are things like dancing, school, guns, drugs, movies, and food. Nothing about greenbacks. Zilch. “This shows that people place more importance on the quality of their real happiness,” says dream expert Anna-Karin Bjorklund, author of Dream Guidance. “If you never dream about money, chances are your happiness is not related to feeling powerful or having the means to acquire material possessions.”

That’s good, right? Our subconscious is telling us that our pets and friends and experiences are what we really care about—even if we’re carrying a credit card balance and haven’t earned a decent raise in five years. To a degree this confirms much of what polls have shown since the Great Recession: a broad rediscovery of basic values and things that money can’t buy.

But before we congratulate ourselves on being phenomenally high-minded, we need to dig a little deeper. For one thing, materialism creeps onto the dream list in the form of “beach house” in Alabama; in the fourth richest state in America, Connecticut, “shopping” and “malls” make the top-five list. “Cruise ship” sneaks onto the list in Florida.

Besides, dreams are rarely literal—and thankfully so because on the list of popular dream subjects we find cheating, adultery, cemetery, and murder. If you dream about doors opening or being given the keys to an important room—that may be dreaming about a cash windfall, says dream expert Kelly Sullivan Walden, author of It’s All in Your Dreams. And, she says, “If you’re stressed about money in your waking life, you might find yourself dreaming of a leaky faucet, animals fighting over food, or your teeth falling out.”

Got that? How you view whatever you are dreaming is far more important than the dream itself. “If you have a dream where someone is stealing your vegetables, this could indicate that you feel what you’ve been planting has been taken away,” says Bjorklund. According to dream expert Lauri Loewenberg, author of Dream On It, financial stress also shows up in dreams as:

Drowning (debt)
Bleeding (savings disappearing)
Falling (diminishing financial security)
Getting lost (directionless career)
Calling 911 but no one answers (poor financial advise)

“Dreams are symbolic and speak to us in metaphors,” says Loewenberg. “If you want to look for your dreams to help you with your financial situation, they will, but they may not use money to get the message across.” So maybe a good deal of our subconscious nighttime adventures are about money after all. We just don’t know it.

MONEY Retirement retirement planning

Why Americans Can’t Answer the Most Basic Retirement Question

Dan Kadlec @dankadlec

Oct. 15, 2014

141014_RET_FEARRETIREPLAN — marvinh—Getty Images/Vetta

Workers are confused by the unknowns of retirement planning. No wonder so few are trying to do it.

Planning for retirement is the most difficult part of managing your money—and it’s getting tougher, new research shows. The findings come even as rising markets have buoyed retirement savings accounts, and vast resources have been poured into things like financial education and simplified investment choices meant to ease the planning process.

Some 64% of households at least five years from retirement are having difficulty with retirement planning, according to a study from Hearts and Wallets, a financial research firm. That’s up from 54% of households two years ago and 50% in 2010. Americans rate retirement planning as the most difficult of 24 financial tasks presented in the study.

How can this be? Jobs and wages have been slowly improving. Stocks have doubled from their lows, even after the recent market tumble. The housing market is rebounding. Online tools and instruction through 401(k) plans have greatly improved. We have one-decision target-date mutual funds that make asset allocation a breeze. Yet retirement planning is perceived as more difficult.

The explanation lies at least partly in an increasingly evident quandary: few of us know exactly when we will retire and none of us know when we will die. But retirement planning is built around choosing some kind of reasonable estimate for those two variables. But that’s something few people are prepared to do. As the study found, 61% of households between the ages of 21 to 64 say they can’t answer the following basic retirement question: When will I stop full-time work?

Even the more straightforward retirement planning issues are challenging for many workers. Among the top sources of difficulty: estimating required minimum distributions from retirement accounts (57%), deciding where to keep their money (54%), and getting started saving (51%).

Those near or already in retirement have considerably less financial angst, the study found. Their most difficult task, cited by 33%, is estimating appropriate levels of spending, followed by choosing the right health insurance (31%) and a sustainable drawdown rate on their savings accounts (28%).

For younger generations, planning a precise retirement date has become far more difficult, in part because of the Great Recession. Undersaved Baby Boomers have been forced to work longer, and that has contributed to stalled careers among younger generations. The final date is now a moving target that depends on one’s health, the markets, how much you can save, and whether you will be downsized out of a job. Americans have moved a long way from the traditional goal of retirement at age 65, and the uncertainty can be crippling.

Nowhere does the study mention the difficulty of estimating how long we will live. Maybe the subject is simply one we don’t like to think about, but the fact is, many Americans are living longer and are at greater risk of running out of money in retirement. This is another critical input that individuals have trouble accounting for.

In the days of traditional pensions, many Americans could rely on professional money managers to grapple with these problems. Left on their own, without a reliable source of lifetime income (other than Social Security), workers don’t know where to start. The best response is to save as much as you can, work as long you can—and remember that retirees tend to be happy, however much they have saved.

How much of my income should I save for retirement?

Can I afford to retire?

MONEY Retirement

Here’s the Only State Where Retirees Have Enough Income

Dan Kadlec @dankadlec

Oct. 9, 2014

Just one state plus the District of Columbia have typical retirees with more than 70% of pre-retirement income. Traditional pensions and low cost of living make a difference.

The problems retirees encounter trying to secure lifetime income know no bounds: In 49 states those past the age of 65, on average, fall short of a widely accepted benchmark for minimum income in retirement, new research shows.

Financial advisers generally agree you need at least 70% of pre-retirement income to maintain your lifestyle after calling it quits. Many say 80% to 85% is a more appropriate target.

But even using the lower bar, Nevada is the only state where the typical retiree has sufficient income to live comfortably in retirement, according to a study from Interest.com, a division of Bankrate, a financial information provider. The District of Columbia also makes the cut. But every other jurisdiction in the nation falls short, underscoring the scope of the retirement income crisis in America.

Nationally, the median income for those who are 65 and older equals just 60% of the median income for those aged 45 to 64, the study found. In Nevada, median income for those past 65 is 71%. In Washington D.C., the figure is 74%. States that get close to the minimum retirement income level are Hawaii (69%), Arizona (68%) and Mississippi (68%). At the bottom are Massachusetts (49%) and North Dakota (49%).

The national rate represents a jump of 10 percentage points over the past decade. But that is not as encouraging as it may appear, reflecting trends where older Americans stay on the job longer and young workers fail to see significant wage gains. The share of Americans working past 65 has been increasing for 20 years and reached 18.9% this May, one of the highest levels in the last half century.

Washington D.C. tops the retirement income list in large measure because of its huge population of retired federal employees, many of who have generous traditional pension plans. Nevada (along with Arizona and Mississippi) benefits from a low cost of living; the costs of food, housing, utilities, transportation and medical care in Reno, Nev., are just 67% of such costs in Washington D.C.

Hawaii is one of the most expensive places on Earth to retire. But it measures up well in this study because the state has a strong traditional pension culture. It may also help that wealthy people choose it as their retirement destination. At the bottom, Massachusetts (like much of the Northeast) has long suffered from a high cost of living while North Dakota recently has seen its cost of living soar amid an oil boom in that state.

MONEY Family Finance Financial Planning

Here’s What Millennial Savers Still Haven’t Figured Out

Dan Kadlec @dankadlec

Oct. 8, 2014

Bank vault door — Lester Lefkowitz—Getty Images

Gen Y is taking saving seriously, a new survey shows. But they still don't know who to trust for financial advice.

The oldest millennials were toddlers in 1984, when a hit movie had even adults asking en masse “Who you gonna call?” Now this younger generation is asking the same question, though over a more real-world dilemma: where to get financial advice.

Millennials mistrust of financial institutions runs deep. One survey found they would rather go to the dentist than talk to a banker. They often turn to peers rather than a professional. One in four don’t trust anyone for sound money counseling, according to new research from Fidelity Investments.

Millennials’ most trusted source, Fidelity found, is their parents. A third look for financial advice at home, where at least they are confident that their own interests will be put first. Yet perhaps sensing that even Mom and Dad, to say nothing of peers, may have limited financial acumen, 39% of millennials say they worry about their financial future at least once a week.

Millennials aren’t necessarily looking for love in all the wrong places. Parents who have struggled with debt and budgets may have a lot of practical advice to offer. The school of hard knocks can be a valuable learning institution. And going it alone has gotten easier with things like auto enrollment and auto escalation of contributions, and defaulting to target-date funds in 401(k) plans.

Still, financial institutions increasingly understand that millennials are the next big wave of consumers and have their own views and needs as it relates to money. Bank branches are being re-envisioned as education centers. Mobile technology has surged front and center. There is a push to create the innovative investments millennials want to help change the world.

Eventually, millennials will build wealth and have to trust someone with their financial plan. They might start with the generally simple but competent information available at work through their 401(k) plan.

Clearly, today’s twentysomethings are taking this savings business seriously. Nearly half have begun saving, Fidelity found. Some 43% participate in a 401(k) plan and 23% have an IRA. Other surveys have found the generation to be even more committed to its financial future.

Transamerica Center for Retirement Studies found that 71% of millennials eligible for a 401(k) plan participate and that 70% of millennials began saving at an average age of 22. By way of comparison, Boomers started saving at an average age of 35. And more than half of millennials in the Fidelity survey said additional saving is a top priority. A lot of Boomers didn’t feel that way until they turned 50. They were too busy calling Ghostbusters.

MONEY Retirement pension benefits

California Judge Rules That There’s Nothing Sacred About Pension Promises

Dan Kadlec @dankadlec

Oct. 2, 2014

A bankruptcy judge rules that bondholders are on equal footing with pensioners in California, sending tremors through the cash-strapped pension world.

In a shot heard round the pension world, a California judge has ruled that in municipal bankruptcies, public employees are no more protected than bondholders. The ruling opens the door for financially strapped towns across the state to cut pension obligations by filing for bankruptcy.

This is just the latest blow to public pensioners. A federal judge ruled similarly in Detroit. The giant California Public Employees’ Retirement System had argued as part of the closely watched case in Stockton, Calif., that different laws applied and required that public pensioners in California be paid in full before anything went to creditors.

But U.S. Bankruptcy Judge Christopher Klein decided against CalPERS, an influential institution that has been leading efforts to preserve defined-benefit pensions nationwide. The Stockton decision, coupled with rulings like the one in Detroit, has public pensioners in every struggling municipality across the country fearing for their retirement security.

CalPERS essentially argued that it was above bankruptcy law because of its statewide charter. For its part, Stockton wants nothing to do with reneging on promises to police and other public employees, arguing that they would leave and the town would not be able to function. But Judge Klein ruled that public pensions are just another contract, and adjusting contracts is what bankruptcy is all about. He came down on the side of Franklin Templeton Investments, a mutual fund company that had about $36 million of Stockton’s debt.

Like many private businesses in decades past, Stockton and other municipalities lavished unrealistic pension guarantees on employee unions while times were booming. The private sector began its reckoning first as autoworkers and airline employees, among others, were forced to take benefit concessions. Now teachers, police and other public employee unions are feeling the sting of flagging finances—part of the fallout of the Great Recession.

The Stockton ruling is a harsh reminder of how frail the retirement system in the U.S. has become. Scores of both private and public pensions are underfunded, and Social Security is scheduled to become insolvent in 2033. The system is not going to disappear. But change will come and almost certainly result in benefit cuts for some. Young workers are especially vulnerable because they have not paid much into the system yet and have many years left to save for themselves. So take a cue from the Stockton case and start saving now.

MONEY Retirement 401(k)s

Here’s the Least Understood Cost of a 401(k) Loan

Dan Kadlec @dankadlec

Oct. 2, 2014

401(k) loans aren't always a terrible choice. But make sure you keep saving at the same rate during the loan payback period.

A loan from your 401(k) plan has well-known drawbacks, among them the taxes and penalties that may be due if you lose your job and can’t pay off the loan in a timely way. But there is a subtler issue too: millions of borrowers cut their contribution rate during the loan repayment period and end up losing hundreds of dollars each month in retirement income, new research shows.

Academics and policymakers have long fixated on the costs of money leaking out of tax-deferred accounts through hardship withdrawals, cash-outs when workers switch jobs, and loans that do not get repaid. The problem is big. Some want more curbs on early distributions and believe that funds borrowed from a 401(k) should be insured and that the payback period after a job loss should be much longer.

Yet most people who borrow from their 401(k) plan manage to pay back the loan in full, says Jeanne Thompson, vice president of thought leadership at Fidelity Investments. A more widespread problem is the lost savings—and decades of lost growth on those savings—that result when plan borrowers cut their contribution rate. About 40% of those with a 401(k) loan reduce contributions, and of those a third quit contributing altogether, Fidelity found.

To gauge the impact, Fidelity looked at two 401(k) investors making $50,000 a year and starting at age 25 to save 6% of pay with a 4% company match. Fidelity assumed that at age 35 one investor stopped saving and resumed 10 years later. At the same age, the other investor cut saving in half and resumed five years later. Both employees earned inflation-like raises and the same rate of return (3.2 percentage points above inflation). At age 67 they began drawing down the balance to zero by age 93.

The investor who stopped saving for 10 years wound up with $1,960 of monthly income; the investor who cut saving in half for five years wound up with $2,470 of monthly income. Had they maintained their savings uninterrupted each would have wound up with $2,650 of monthly income. So the annual toll on retirement income came to $2,160 to $8,280.

Nearly one million workers in a Fidelity administered 401(k) plan initiated a loan in the year ending June 30, the company said. That’s about 11% of all its participants and part of rising trend, the company says. The typical loan amount is $9,100 unless the loan is to help with the purchase of home—in that case the typical amount borrowed is $23,500.

These figures are generally in line with data from the Employee Benefit Research Institute, which found that the typical unpaid loan balance in 2012 was $7,153 and that 21% of participants eligible for a loan had one outstanding. The loans were relatively modest, representing just 13% of the remaining 401(k) balance.

Workers change their contribution rate for many reasons, including financial setbacks and a big new commitment like payments on a car or mortgage. But cutting contributions to make loan payback easier may be the most common reason—and the least understood cost of a 401(k) loan.