Simple Solutions
Shortcuts to managing your finances that are guaranteed to save you time and money.
From Kiplinger's Personal Finance magazine, September 2005
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Retire hassle-free
Frustrated because you're not saving enough for retirement?
Simple solution: Let someone else do it for you.
Like many Americans, Amy Sadaune, vice-president of human resources for First Community Credit Union, in Houston, has her employer deposit a portion of her income into a 401(k) plan so she captures her company's generous matching contribution. But Sadaune doesn't stop there. She also takes advantage of the credit union's new Step Ahead program to boost her contribution by one percentage point a year automatically until she hits the legal maximum (it's $14,000 this year for people under age 50, an amount that will continue to rise). "I don't have to think about it," says Sadaune, 37, who hopes to retire in about 20 years.
Programs like Step Ahead, offered by Principal Financial, help employees overcome the twin nemeses of retirement saving: inertia and procrastination. Unlike traditional 401(k) plans, which rely on workers to make their own decisions, autopilot 401(k)s make all the critical choices.
Eligible employees are enrolled in a plan automatically, and they automatically contribute a higher portion of their income each year. The money is invested for them in a suitably diversified portfolio, such as a life-cycle fund or a target-date retirement fund. Employees who want to make their own investment choices may do so.
If your company's retirement plan doesn't offer an autopilot option, you can still take some simple steps to make the most of your retirement savings.
Sign up. Currently, 82% of eligible workers participate in their company's 401(k) plan. Account balances average less than $25,000.
Capture the match. Contribute at least enough to get your employer's matching contribution. The usual match is 50 cents on the dollar on the first 6% of your salary, but employees typically kick in just 5%, leaving free money on the table.
Keep it simple. If you have the opportunity, invest in a target-date retirement fund. The closer your anticipated retirement, the more conservative the investments.
Roll it over. With an account balance of at least $5,000, you have two choices if you quit or retire: Leave your money in your employer's plan or roll it into an IRA. In either case, your money will continue to grow. Balances of less than $5,000 will be rolled over automatically to an IRA. You won't be hit with a tax bill and an early-withdrawal penalty (if you're younger than 59½).
Max out. Contribute the maximum amount to your 401(k), and you'll be among an elite group that includes only about 10% of workers.
Play catch-up. If you are 50 or older, you can contribute an additional $4,000 to your 401(k) this year, for a maximum of $18,000. Next year, the limit for all workers increases to $15,000, plus $5,000 in catch-up contributions for those 50 and older.
-- Mary Beth Franklin