Max Out On Your 401 - k - retirement savings plans

Kiplinger's Personal Finance Magazine, May, 1999 by Mary Beth Franklin

MAKE A PLAN

Although more than 80% of workers eligible to participate in a 401(k) plan do so, according to the Spectrem Group, few have taken the time to figure out how much they will need for retirement. "Most participants don't have established goals," says Tom Schlossberg, president of Diversified Investment Advisors, in Purchase, N.Y., a leading retirement-plan provider.

Ask yourself how you came up with the amount that you divert to the plan. Did it fit comfortably into your budget? Did you want to capture 100% of your employer's match? Both are great reasons, but is your contribution in any way tied to your retirement goals?

Taking the time to figure out how much you will need after your paycheck stops could mean the difference between a comfortable retirement or working a lot longer than you had planned. A typical goal is to retire with at least 80% of your preretirement income. That's your income the year before you retire--not today's income. If you are earning $50,000 now and have 25 years to go before retirement, assume your salary will increase about 3% a year. At that rate, you'll be earning close to $105,000 when you retire. So you would need to plan for a retirement income of about $84,000 a year.

It won't all have to come from your 401(k), of course. You'll get social security (call 800-772-1213 or visit the Social Security Administration's Web site at www.ssa.gov to get an estimate of how much you'll get). Add any pension or other employer retirement benefits you can count on. How much are you short? That's what you'll have to make up from your 401(k) account and other personal savings. Our retirement-planning calculator on the Internet, at www.kiplinger.com, can help you do the math. If you don't have access to the Web, ask your company's benefits office if it has a worksheet on this topic.

"Once you go through the process to figure out how much money you will need in retirement, then you can figure out how much of your salary you should be deferring in your 401(k) plan and how you should be investing that money to reach your goal," Schlossberg says. "For example, if you are having a hard time deferring 5% of your income and yet you need to set aside more to reach your goal with your current investments, maybe you should adjust your strategy to be more aggressive."

CHOOSE WHERE TO PUT YOUR MONEY

How do you choose among the various investment options inside your plan? The top two methods, according to a study by M&I Trust, an investment-advisory firm in Milwaukee: random guessing or simply dividing your assets evenly among all your fund choices. Ouch.

On the bright side, participants have gotten the message about the importance of investing in stocks for long-term growth. A recent study by the Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) found that in 1996 nearly two-thirds of 401(k) plan balances were invested in the stock market, including 44% in stock mutual funds and 19% in company stock. Ultra-conservative guaranteed investment contracts (or GICs, which offer a set return over a specific period) held just 15% of 401(k) assets.