“Personal Finance: Making up the match on 401(k)s - Philadelphia Daily News” plus 1 more

Personal Finance: Making up the match on 401(k)s - Philadelphia Daily News

Posted: 22 Aug 2010 04:20 AM PDT

Posted on Sun, Aug. 22, 2010

Americans are busy squirreling away savings more aggressively than in decades, but not necessarily in their 401(k) plans. And that has observers wondering whether employees are shortchanging their retirement savings.

During the recession, many companies stopped giving employees the matching funds that previously persuaded people to save for retirement in workplace savings plans. As a result, some people stopped putting savings in their 401(k) plans.

"My fear is that there will be an impact," said Pamela Hess, director of retirement research at Hewitt Associates Inc. "We know that company matches are a big enticement to save."

Research shows that people are creatures of habit, Hess added. Once they stop saving, "they get used to having the extra money in their paychecks" and procrastinate about saving again.

She expects companies to reinstate matching money once they are more confident about the economy. But the process is taking longer than during past recessions. After the 49 percent downturn in the stock market in 2000-02 and a mild recession, most companies restarted matching employee contributions within six months, Hess said. Now, businesses are in no hurry, but 80 percent said in a Hewitt study they would restore matches.

Don't stop now

"They are cautious," she said, but cannot afford to give up now.

According to Hewitt, 30-year-olds who earn $50,000, save 6 percent of their pay each year until retirement, and get a 3 percent raise annually will end up with about $1,098,000 if they get a 3 percent match from their employer throughout their working lives and earn 7 percent on their 401(k) investments. But if those same people lose their match and give up saving in the 401(k) for just one year, their nest egg will drop to about $1,053,000.

Those who stay with their usual 6 percent contributions, despite the absence of a match for a year, should accumulate about $1,083,000.

Consequently, financial advisers provide this advice to people who have lost their matches:

If you have a 401(k) that does not charge excessive fees and provides solid mutual funds, stay with it if it helps you continue your usual saving behavior. Better yet, increase your contributions to make up for the loss of your employer's match.

But if you think the fees are high and the mutual fund choices weak, consider using a Roth IRA for retirement savings, said Deerfield, Ill., financial planner Sue Stevens.

There are trade-offs.

Compare and contrast

Although you can save as much as $16,500 a year ($22,000 if you're 50 or older) in a 401(k), a Roth IRA limits you to just $5,000 a person - or $6,000 if you're older than 50. Many people need to save more than $5,000 a year, especially if they are trying to catch up. If you are married, each spouse can put as much as $5,000 into a Roth IRA if one is working, but even $10,000 a year might not be enough. (Try the "ballpark estimate" at www.choosetosave.org and check contribution limits at www.irs.gov.)

Consequently, Stevens said, people who need to do significant saving could use Roth IRAs to the max, as well as a 401(k). Anything you put into a 401(k) gives you an immediate tax break, so you do not have to dip as deeply into your pocket to come up with money to save. The Roth IRA does not give you that benefit. But a Roth offers a benefit in retirement that is better than a 401(k): Anything you remove from a Roth IRA during retirement is yours, free and clear. On the other hand, when retirees remove money from a 401(k), withdrawals are taxed.

Still, do not procrastinate if you are considering a Roth IRA. Sheryl Garrett, a financial planner and founder of the Garrett Planning Network, suggests opening the IRA immediately, setting it up so money is removed automatically from each paycheck and deposited in mutual funds.

Gail MarksJarvis is a personal-finance columnist for the Chicago Tribune. E-mail her at gmarksjarvis@tribune.com.

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Eileen Ambrose: Personal Finance - Baltimore Sun

Posted: 17 Aug 2010 04:40 AM PDT

The Baltimore Sun's Eileen Ambrose has been writing on taxes, retirement, saving for college and other personal finance issues since 1999. Got questions? She'll try to find answers. She also contributes to the blog Consuming Interests.

August 22, 2010

Money tips to make back-to-school affordable

SHOPPING When buying school supplies and clothes, make saving a family affair, says Mike Allen, a father of seven and president of Shopping-Bargains.com. Parents and children should make an inventory of what they need, set a budget and shop together. Teach kids to be price-conscious by letting them keep the savings for coming under budget. "It's a life lesson," Allen says.

March 14, 2010

PERSONAL FINANCE

Personal Finance

Sunday, August 22, 2010