Fixing Your 401(k) - Part 7

Problem #6 - Education

Of all the issues we have been discussing that are plaguing 401(k) plans right now, the biggest is EDUCATION on how it works. Why? Very simple. If proper education was taking place, it would help to solve the other issues, and reduce the liability each employer and plan sponsor currently faces.

Jackson Life did a survey of several passers-by and asked them questions about 401(k)s. (Source Rollover Rx, Jackson National Life Insurance) If you have ever watched Jay Leno do his "Jaywalking" bit on the Tonight Show, you have a pretty good idea of how it went.

Here are a few actual responses when people were asked about education offered by their employers for their 401(k) plans.

"I wasn't aware of any education."
"Don't participate in this. Its on a webinar."
"Information meetings are inconvenient to attend. I'm too busy."
"I think there is on line stuff, but I don't think anyone uses it."
"What can you tell me about it?"

I have personally talked to several clients who tell me that when there are "meetings", the advisor simply hands out his card and runs thru a quick power point presentation, then asks if there are any questions. This is usually met with blank "deer in the headlights" looks.

Education must be done on an INDIVIDUAL BASIS. Everyone's situation is different.
John, the 49 year old manager is in a different spot from Brandon, the 24 year old sales rep, who is new to 401(k) investing - although Brandon needs to know he is in a great place to get started now. Kim, the 35 year old customer service rep, may be thinking about borrowing against her plan, and Sue, the 42 year old customer service manager, is new to the company and wants to know how much she should invest, and what funds to pick.

How can you address individual situations in a "webinar" or "power point"?

A survey done by The Spectrum Group (www.spectrem.com - Source Jackson Life, Rollover Rx) tells us that 85% of employees want professional advice, however only 37% of employers offer any real contact with an advisor. That is not good for the employees, or the employer/sponsors, who are exposing their companies to liability and potential lawsuits. http://accounting.smartpros.com/x40690.xml

So what should you be doing?

Let's review the Problems I've covered so far.

Problem Current Situation Solution
Participation We don't participate & Start participating in your plan don't contribute enough. and max it out.

Portability Too many cash out when Roll the old 401(k) to the plan with
changing jobs. your new job, or to an IRA.

Loans Heavy tax consequences Set up an savings fund of 3-6 mos
and penalties. expenses. Don't borrow on 401(k)

Investments We try to 'advise' ourselves. Diversify. Get professional advice.
Its your money, your future.

Education Not enough advice by Find an advisor you can work with.
employers.

Here are 3 key questions you & your advisor should be asking.

1. Do I have enough money to live through at least 25 years or more in retirement?
How can I make my money last for the rest of my life?

2. Will my savings & income keep up with rapidly rising costs?

3. How can my savings be protected against declines in the stock market?

Let me end with this quote from one of my favorite songs.
"Working so hard to make it easy......got to turn....turn this thing around - Right Now!
Its your tomorrow. Right Now! Its everything." (Van Halen - Right Now)

Bet you never thought you'd see a Van Halen reference in an article on retirement!

Get started on your plan - Right Now! Meet with your advisor today and get started on Improving Your Financial Health. For more information, please contact me at http://www.helpmy401k.us. You can also follow me on Twitter - http://www.twitter.com/DeanVoelker

Fixing Your 401(k) - Part 3

Problem #2 - Portability

OK, after taking a few days off for the Memorial Day weekend, I am back. There are still a few more problems to tackle with 401(k) plans as a retirement tool. Today's topic is Portability.

Question: When you left your last job, what happened to your 401(k)?

Follow Up Questions: How many times does the average worker change jobs during their
working years? And what percentage of people cash out their 401(k)s?

In Gregory Crawford's memo to President Bush in 2005 "The Looming Retirement Disaster",
the average worker will change jobs 5-8 times during their working years. And Jobradio.fm says that 1 out of 5 will likely change in 2009. http://jobradio.fm/2009/01/07/changing-jobs-1-in-5-say-they-will-in-2009/

The era of the "gold watch" after a long, loyal career is pretty much OVER. People may change for any numbe of reasons, but whatever the reason is, it may have a dramatic effect on retirement savings. There can be waiting periods to participate in a 401(k), the new employer
may or may not offer a plan, and there are interruptions in employer matching contributions.

And on average, this happens 5-8 times for the typical worker over their working life.

How many people simply cash out all or part of their 401(k)? According to Gregory Crawford,
an astonishing 55%. If you are younger than 59 1/2, you are subject to taxes plus a 10% penalty by the government. Without education, or belief that the market will come back, many people convinced that this is the right thing to do "before they lose any more."

How exactly does this affect our savings?

In the last post, I showed how a worker earning $75,000/year for 20 years, putting in $6075 per year (8.1%) and getting a 4% match and an 8% average return would have saved
$431,901 in 20 years.

Using the same scenario, lets have this worker change jobs 3 times, with the last 10 years at the same job. We have just cut our savings down to $136,724. (Source Jackson Life - Rollover Rx). And if we take 5% income from that, we now have an income of $6836/year.

For more information, please contact me at www.helpmy401k.us

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.

Fixing Your 401(k) - Part 1

Did you know that over 50% of Americans have a 401(k) plan? For many of us it is our primary funding source of retirement savings. For some, it may be the only source of savings. http://www.gallup.com/poll/16564/Many-Consumers-Lack-Rainy-Day-Fund.aspx

401(k) Plans can be great for helping to fund your retirement - - IF you are saving enough and don't fall into some common traps. I love 401(k)s and have a passion for helping companies and indviduals get more from their plans. With that in mind, I am going to address 5 major issues with 401(k) plans in my next several posts.

Around 1985, 401(k) plans passed pensions as the Primary Retirement Vehicle, as the New York Times states in a recent article.
http://roomfordebate.blogs.nytimes.com/2009/03/25/so-much-for-the-401k-now-what/?scp=4&sq=401k%20passed%20pension&st=cse

Pensions had been dying for a long time, mostly due to cost. 401(k)s require employees to contribute to their own retirement savings. Many companies provide a matching contribution of some sort, although in recent times, those have also been cut back.
http://www.nytimes.com/2008/12/21/your-money/401ks-and-similar-plans/21retire.html?_r=1&scp=5&sq=401k%20passed%20pension&st=cse

How did 401(k)s come into being?

In 1978, the Tax Reform Act passed (Provision Internal Revenue Code Section 401(k)), which allowed employees to receive a portion of their income as tax deferred compensation. Ted Benna
http://pipl.com/directory/people/Ted/Benna then created the first 401(k) in 1979. Also in that year, Johnson & Johnson, Honeywell, and Pepsico established 401(k) plans for their employees.

In my next post, we will look at the first serious issue which needs to be addressed in 401(k)s -
PARTICIPATION.

For more information, please contact me at http://www.helpmy401k.us/.