Fixing Your 401(k) - Part 2

Problem #1 - Participation

How much are you putting into your 401(k) or Retirement Plan at work? Do you even participate?

According to Gregory Crawford in a memo to President Bush in 2005 "The Looming Retirement Disaster", 50% of all workers participate.
http://findarticles.com/p/articles/mi_hb5266/is_200504/ai_n20432510/
Of the ones which do, only 10% put in the maximum allowable contribution. (Currently
$16,500. Employees who are 50 or older may contribute an additional $5000 for a max of $21,500.)

According to Financial Engines (http://corp.financialengines.com), Daisy Maxey tells us in her 2008 article that we aren't saving enough. Jackson Life also did a survey asking people on the street what they put into their 401(k) plans and the results were shocking.

Salary Avg % of Salary Contributed $ Amount/Year
$25,000 5.0% $1250
$50,000 6.0% $3000
$75,000 8.1% $6075
$100,000 9.2% $9200

All of those amounts fall far short of the maximum allowable contribution, and probably won't be enough to retire and make it last for 25 years or more.

Let's say you make $75,000/year and put in the average of $6075. Lets also say you contribute for 20 years, get an average return of 8%/year and your employer matches your contribution dollar for dollar up to 4%. Sounds pretty good so far, right?

After 20 years, you would have saved $431,901. Still sounds good, doesn't it?

OK, now lets shift into retirement mode and start to withdraw 5% for income. 5% on $431,901 is
only $21,595 per year! Remember you had been earning $75,000 per year. Also we haven't even accounted for inflation, market volatility, or any events - college for kids, vacation trips, home repairs, buying cars, etc. (Did someone say "Walmart"?)

Dave Ramsey says we work too hard to retire in poverty. He also believes, as many advisors do that people need to be putting in 10%-15% of your income. The beauty of the 401(k) is that your contributions are pre-tax.

If we use the same example at $75,000/year and put in 15%, our contribution now is $11,250/year. That is a difference of $5175/year from $6075. That sounds like a lot ($432/mo),
but remember this is pre-tax. http://retire.hartfordlife.com/sites/retire/paycheck_calculator.html

Using the paycheck calculator, the difference in monthly take home pay is $311, which is a tax advantage to you of $121/month.

Does it make a difference later? Let's see. http://www.helpmy401k.us/investment-tools.htm
Over 20 years, we put in an extra $103,500, and our saved total is now $683,672. Now if we draw out 5%, our annual income is $34,183, or an extra $12,589/year!

For more information, please contact me at www.deanvoelker.com.