Heed retirement alarms
Self-reliance is a necessity, not an option
Cox News Service
January 22, 2006
More than ever, paying for your retirement has become a do-it-yourself project.
Social Security is still there, but it is no longer an untouchable, rock-solid commitment from our American government.
From the private sector, IBM's decision to freeze its huge pension plan and beef up its 401(k) plan is a signal as sharp as a traffic cop's whistle: Don't count on us.
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None of this means American workers have been cast adrift. Social Security will survive for most living Americans. For one thing, the system is not as sick as some factions make it sound.
And a portion of the working population will get the pensions they have come to expect. But IBM is not alone in curtailing pension benefits. Among troubled industries, both airlines and steel companies are backing off from pensions.
Among healthy companies, Verizon Communications froze the pensions of 50,000 managers a few weeks before IBM's action. Others are sure to follow.
From a business standpoint, it just makes sense. As IBM noted in its announcements, 401(k) plans provide a "more predictable cost structure" than pensions.
That means more predictable for IBM. The rest of that thought is that workers now are holding the bag if their investments behave, well, unpredictably. Want enough income to retire comfortably? That's your problem.
In defense of IBM, it will indeed make its 401(k) more sturdy. To start with, the company will open an account for each employee and will make mandatory deposits of 1 percent to 4 percent of the employee's pay in the account. In addition, the company will match as much as 6 percent to 10 percent.
But the overriding truth is that self-reliance — long considered an American virtue #151; is becoming a commandment.
If you have a 401(k), you had better nurture it. Here are some ways to do just that:
Get into the game. If your boss offers a 401(k) and you haven't joined, do it now. The first step is the hardest. To be plain, if you put it off, you may never get around to it. In addition, the longer your investment grows, the faster it will grow. At 8 percent, say, $100 will become $108 after one year, $116.62 after two years, about $126 after three, and so on. After 10 years, your small stake would become nearly $216.
That's what the experts mean when they talk about the magic of compounding. Add more $100 contributions and let them grow for more years, and you're talking about real money.
Put in every last dollar you can. For 2006, the maximum pretax contribution allowed by the government is $15,000, plus an additional $5,000 for workers 50 and older. Companies establish a maximum percentage of your gross pay that you can contribute. You might be limited, for example, to 15 percent of your pay. Either way, strive to put as much as you can afford.
At a bare-bones minimum, put in enough to obtain all the matching contribution your company will make. The midrange company contribution is 3 percent of an employee's salary. Consider that match a freebie Ñ yours to lose if you don't put in your share.
Review your investment choices. In general, you get higher returns if you accept higher risks. Stocks do better than bonds; bonds do better than money market funds or savings accounts. On the other hand, the stock market might collapse, but your bank accounts probably will not.
The younger you are, the more market risk you can afford to take. If you're 20 years from retirement, you have plenty of time to live past any stock market collapse. Even if you are close to retirement, most experts suggest keeping some percentage of your investments in stocks. The reason: Safer, more conservative investments often get overwhelmed by inflation.
On the other hand, you have to consider your emotional ability to handle risk. If your investments make you nervous, you're probably in the wrong investments.
Get some good advice. That could mean reading a good book, such as guru Jane Bryant Quinn's latest, "Smart and Simple Financial Strategies for Busy People." More companies have begun offering at least generic advice about investing. Often you can find more detailed suggestions at the Web site of whatever company manages your company's 401(k) plan. If you have already accumulated substantial assets, it may be time to hire a financial planner and get one-on-one help.
Don't cash out when you change jobs. You have other choices, which may include leaving the money where it is, rolling it over into an individual retirement account or transferring it to the 401(k) of your new employer. The worst choice is to take the money and spend it.
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