Your 401k isn’t enough

One of the things that White points out is that your 401k probably isn’t enough to retire on:

“Unless they are the tiny percentage of the workforce that has long job tenure at a company that still offers an old-fashioned pension, most of those 38 million Boomers born between 1946 and 1956 who are scheduled to retire between 2011 and 2020–nearly one-quarter of the workforce–will have to stay on the job another eight to 10 years to achieve a 401(k) balance equal to at least 10 times their salaries near retirement.”

Americans aren’t saving enough, and employers aren’t required to put in that much. In fact, according to White, U.S. employers contribute less to retirement than just about every other developed nation — and even some developing nations (Mexico has us beat, as does Poland and Slovak Republic). White advocates a  mandatory retirement contribution from employers. When I pointed out in my review that this idea (plus the idea of having the government cover more education expenses for higher education) was radical, White took exception:

“I’m not sure why you think my reform is radical, given that we are the richest nation on earth. Australia is one of eight countries that has a mandatory  401(k) style system and seven of them are more generous than ours; the average employer contribution rate is 7.25% of pay, Denmark’s is 11.8 percent, Hungary’s is 8%, Mexico’s is 6.5%, Poland’s is 7.3% and the Slovak Republic’s is 9%. In the United Kingdom, 55% of the population is covered by a regular pension compared to only 17% in the U.S.”

While I, personally, don’t think the idea is so radical, I know that many here in the U.S. would think that such reform is radical. The fact that we are the richest nation on earth does little to impress upon us as a society what we could do with that to make life better for everyone. Instead, our mind set is so incredibly individualistic that we continue to pursue policies that have been resulting in a widening gap between rich and poor, and the extinction of the middle class, for nearly three decades.

Health care reform

Another necessity, in addition to meaningful mortgage reform, retirement reform and changes to how we pay for higher education, is health care reform. Costs are getting out of control. But that won’t change, White says, until lobbyists no longer have the power they do over legislators. Citing data from the Center for Responsive Politics, White points this out about the guy in charge of health care reform:

“Nothing will change in Congress until we shut down K Street, the center of lobbying activity in Washington, D.C. The man who killed the “public option”, Sen. Max Baucus, raised a whopping $11 million since 2005 and doled out $9 million to his colleagues so that they would vote his way. Only Sen. Orrin Hatch collected more than Baucus from Big Pharma.”

What do you think? Are we going to be stymied in a quest for meaningful reform due to lobbying interests?

Image source: Daylife

Post from: EveryJoe

Jane White: Your 401k Isn’t Enough

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Post from: EveryJoe

Saturday Staples: Personal Finance Posts

Times are tough-there is no doubt about that. If you have a retirement account that you are able to “borrow” from you may find yourself tempted to do just that to make it through a financial hardship. Unlike a savings account you are required to repay your 401(k) or face stiff penalties. Many people can and do borrow and repay retirement loans yet here are a few reasons why “borrowing” from your retirement should be your last resort.

• You will still have debt. There are many reasons why borrowing from one place to pay off debt in another is not successful. Granted in some instances -if you can grossly lower your interest rates AND you actually pay off the debt you may come out ahead, but that is not often the case. If you borrow from your 401(k) you may be able to reduce high interest debt but you must still pay back the borrowed money. The only thing you change is the interest rate and who you owe. Since there are other negatives to borrowing from your 401(k), reducing debt is likely not strong enough to offset these negatives.

• Your will put your retirement account on hold. Until you repay the amount you have borrowed you will not be able to contribute to your retirement account. If your regular contribution is $400 per month and it takes you two years to repay your loan, you have missed out on $9,600 of retirement contributions in addition to the interest you would have earned.

• Leaving your job will cost you. And it will cost you big time! If you leave your current job you will be required to repay the amount you borrowed in full within 60 days or pay the taxes and penalties of an early distribution.

• You could end up in a higher tax bracket. Many people take advantage of being in a lower tax bracket due to their retirement contributions. If you take out a 401(k) loan your payments are taken out post-tax and cannot be claimed as a tax deduction.

• You might end up worse than you started. If you are experiencing a true financial hardship, perhaps risk losing your home or your job you do not want to throw good money after bad. Unless you can truly see the end of the hardship in the near future you are better off leaving your retirement money where it is and exhausting any other options available to you. If you try to save your home and fail, you have not only lost your home but also any money saved for retirement. If you withdrawal money to repay debt yet end up filing bankruptcy you have again lost money that otherwise could have remained safe for retirement.

If you find yourself considering withdrawing money from your retirement account it would be wise to thoroughly investigate your options, research the penalties and consider any other available remedies before you risk losing your hard earned money.

Trisha Wagner is a freelance writer for DepositAccounts.com where you can compare rates of deposit accounts from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and savings accounts.

image source: sxc.hu

Post from: EveryJoe

Don’t Treat a 401(k) Like a Savings Account

If you currently save in an employee-sponsored retirement plan, how would you feel if you stopped getting a tax break on your contributions? What if your employer stopped matching because they lost their tax break to do so? On top of that, what if you were forced to contribute 5% of your pay into government bonds regardless of age?

These are very interesting “home” questions.  The meager savings rate we have in this country is due in large part to the tax benefits of a retirement account. If those are taken away, that could pose very real problems. Of course, the solution to the fact that people would inevitably stop saving in the small ways they are right now is to force retirement savings. I have to agree with Jeremy when he points this out:

In addition to the elimination of tax breaks, the plan calls to make contributions mandatory. Now, I’m all for encouraging people to save money, but making 5% mandatory doesn’t sit well. We already have a mandatory retirement contribution that we all make, and it’s called Social Security.

The good news is that few lawmakers are consideringthis seriously. But the fact that it is “out there” is worrying. And with concerns about the deficit, a plan like this would be a convenient way to force a little more money into federal coffers. And who knows? If the idea does gain traction, it could be slipped into a bill aimed at a retirement account plan pushed by President John McCain or President Barack Obama. (See more on their economic proposals here.)

Now is not the time to relax our vigilance. Indeed, the sheer amount of stupidity coming out of both parties with regard to economic issues that affect personal finance requires that we start paying attention.

image source: sxc.hu

Post from: EveryJoe

Is There a Battle Heating Up Over Your Retirement Account?

I’m a couple of years away from retirement. Should I put it off for a couple more years?

Over the past couple of decades the concept of “retirement” has been changing. We have largely shifted from a pension-based retirement society to one that relies more on personal investment accounts like 401(k)s and IRAs for retirement income. This has also been resulting in earlier retirement ages. However, WREX news points out that an AARP poll shows that some are thinking about putting off retirement now, due to the economy.

With the stock market doing what it’s doing, many people are experiencing statement shock as they see that their retirement accounts are losing money. But, as Patrick points out, withdrawing money from your retirement account really isn’t the best solution. And, it may not be in your interest to retire just yet, either.

You should look at your personal finance situation to see where you are at. Chances are that the stock market will recover in the next few years, so if you can work for a couple more years, it might actually be beneficial for you to put off retirement. That way you can still earn an income while you wait for your retirement account to recover. Additionally, it you might consider continuing your retirement account contributions. Your money will buy more while it’s cheap, and that could benefit you later — provided you have chosen solid investments that are likely to recover.

Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.

Post from: EveryJoe

Ask the Piggy Bank: Should I Put Off Retirement?

While there are ways to avoid penalties on the money taken out for 401k retirement accounts, it still reduces the overall money you save for retirement in the end. The 401k is preferred because it is easier to access that Roth accounts and pension plans.

MSN Money reports on a study done on the subject by that Center for American Progress:

“They don’t necessarily pay penalties. But the penalty is that they have fewer retirement savings,” said Christian Weller, an author of the study.

As economic conditions grow bleaker, the number of people dipping into retirement money will only rise, he added.

Post from: EveryJoe

Americans Turn to Retirement Accounts for Income

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Post from: EveryJoe

More Personal Finance Tips

Many people, in times like this, violate the main rule of investing: “buy low, sell high.” Instead, they freak out and sell low. A measured and calm approach to your 401(k) — and other retirement plans — is what is needed.

First, look at your allocation and compare it to your goals. You may need to do some shifting around, but in general if you have some good value investments, coupled with a few (carefully chosen) growth investments, you should be okay. If you are diversified in your investments you should be okay.

Next, consult with a licensed (fee-based) financial planning expert about your goals and your allocations.

Remember: over time the stock market tends to gain. If you have chosen careful investments, you should be able to ride out the downcycle. Just don’t expect to be making great gains in the next few months — or even years.

Have a personal finance question? Email the Piggy Bank.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional.

Post from: EveryJoe

Ask the Piggy Bank: What Should I Do With My 401(k)?