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My Employer is Eliminating 401(k) Matches

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retirement Companies are responding aggressively to the bad economic news. Layoffs, hiring freezes, and salary freezes have been some of the most common actions so far.

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Now, more and more employers are looking at eliminating the matching of 401(k) contributions. According to a survey by Watson Wyatt, the global human resources and financial services firm, things are changing quickly. In October, 2% of firms said they had already cut back on these matches and 4% said they planned to. Two months later, in December, 3% had already made the cut and 7% said they intended to.

And these are large companies. Established brands that we all know. Motorola, FedEx, Kodak, and Starbucks just to name a few.

They’re usually using the word “suspend” rather than “eliminate” when they announce these cuts. But it raises a question:

If my employer stops matching my contribution to my
401(k), should I still keep making contributions myself?

It forces us to save

This is perhaps the biggest reason to keep making contributions. Financial planners have said for years that we should pay ourselves first. Investing it before we get it, as we do with our 401(k), is the best way to make sure that happens.

Most people report that they don’t really miss the money. It’s like the taxes that are deducted from our paychecks – the government knows most of us won’t miss the money if we don’t see it.

Of course, there are ways to set up an automatic deduction from our checking or savings account for investments outside of a 401(k). That’s really close to having it deducted from our paycheck, but it’s not quite the same. That little variation can make a bigg difference for some people. You have to judge that for yourself.

Higher limits

The next best option to a 401(k) for most people would be an IRA because contributions may also be deductible. You should check with your financial advisor about the specifics of your situation.

Because you invest before paying taxes, it’s as if the government is making part of the contribution for you. For example, if you made a $1,000 contribution to one of these retirement plans and you’re in the 25% tax bracket, you would pay $250 less in taxes. So, in essence, you’re only out of pocket $750.

With either plan, you don’t pay taxes on the money you earn on your investments until you pull it out. Deductible and deferred – that’s a pretty powerful combination.

Where the 401(k) gains favor is that it has higher maximum limits – your contributions to your 401(k) can total up to $16,500 in 2009 ($22,000 if you’re over 50). You can’t contribute more than $5,000 to an IRA in most cases.

If my employer cuts or eliminates my 401(k) match, are there
reasons to fund my retirement through another vehicle?

A lot of 401(k) plans offer fairly limited investment options and you may pay lower fees in a plan that’s not a 401(k). 

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The bigger issue

It’s not like we don’t already have a sense of it. But recent months have reinforced this paradigm. We can’t count on anyone or anything for any part of our financial future. We must take full control of our own finances. We have to build our own safety nets to make sure we are financially secure.

How much will you have at retirement?

It really boils down to three factors:

  • how much we invest
  • how much we earn on our investment (after all fees and taxes)
  • how long it is invested

From these three factors, we see that we have three options if we don’t want to retire on less money:

1st – We can try to earn more on the money we invest.
That involves taking more risk and we don’t have much appetite for that right now. So this probably isn’t going to fly with most of us.

2nd – We can postpone our retirement.
This buys us more time. People who are really close to retirement right now may not have much of a choice. They may have to do this. But if you still have some time on your side, there may be a better way.

3rd – We can increase our contributions.
Look at your budget and see if there is any way you can make up for the investment your company was making.

If your employer reinstates matching contributions, you can stop contributing at the increased rate and enjoy the extra money in your budget … or …

… you can keep making your higher contributions to give your retirement a kick!

To all our readers in Australia, happy Australia Day! And we hope our friends in India enjoy Republic Day!

And thank you so much for spending time with us today. Join us next time when we discuss extreme multi-tasking. Until then, here’s to your bigg success!

 

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00316-012609.mp3

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Think Want, Need, Must About Your Money

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Pyramid want need must

Today we’ll discuss a simple, yet effective, way to make sure you’re spending your money how you intend. Divide your spending into three categories – wants, needs, and musts.

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These Forgotten Costs Often Sink Us

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sunken_boat We try not to make financial decisions in a vacuum. We strive to factor in all the relevant pieces before making a major purchase. But there are some costs that we often fail to factor in that can make a significant difference.

We often fail to factor in future flows of money.

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We expect a certain percentage pay raise. So we spend money as if it has already happened. It’s especially important in times like these that we don’t spend money before we know we have it.

Another thing we often do is count on a bonus. If it doesn’t materialize, we’re in trouble as we learned from Clark Griswold in Christmas Vacation. We sure don’t want our brother tying up our boss!

What about increased insurance costs? Is it likely that you’ll pay more for health insurance next year? How about insurance for your house or car? Insurance costs can rise significantly from year to year.

Do you have a variable rate mortgage? Have you considered a projected increase in the rate and the associated increase in your mortgage payment?

Have you thought about what might happen with recurring expenses? Cable bills, power bills, and water bills all seem to rise from year to year.

Affording it now isn’t good enough

You may finance a major purchase. Sure it’s only $100 a month. You can cover it now. But if it stretches your budget to its limit, it’s likely you won’t be able to cover it next year. You’ll start sinking and soon end up underwater, in a financial sense. You’ll run out of money before you run out of month!

It’s important to have a safety net – spending less than what you make each month.

A tool businesses use

We often don’t think about it this way, but we all run an organization – our households. Just like any organization, we have inflows and outflows of money.

Reasonably sophisticated business people work from a budget. Yes, the “b” word. Many people do treat budgets like a dirty word. But they’re a great tool.

And they’re especially important if you don’t have any money left over at the end of the month. It’s important to understand why. You can use Quicken, Excel or any number of ways to create your budget.

Many business people don’t just budget for one year. They look at projections over three years or more. These budgets don’t have to be elaborate – just plot out your main sources of inflows and outflows.

The power of the tool

Once you have a budget set up, you can look at “what if” scenarios. For example, what if:

  • you don’t get a pay raise
  • you (or your spouse) lose a job
  • the cost of health insurance (or any other cost) rises more than you expect?
  • you make this major purchase?

When you create a budget, you’re applying Stephen Covey’s “begin with the end in mind” and “put first things first” (from The 7 Habits of Highly Effective People) to your finances. You’re considering all your costs – both now and in the future. Then you can see the impact of major purchases on your overall finances so you make the best decision going forward.

You can run your finances intentionally, rather than ad hoc. You can prepare for contingencies so you survive no matter what. Then you can shift your focus to thriving!

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Get the tips and tools you need to be a BIGG success!
Subscribe to the Bigg Success Weekly – it’s FREE!

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Thanks for stopping by today. Next time, we’ll discuss how assumptions we make about time leave us overextended. Until then, here’s to your bigg success!

 

Direct link to The Bigg Success Show audio file:
http://media.libsyn.com/media/biggsuccess/00266-111708.mp3

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Are You Throwing Money Away by Owning Your Home?

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toss_moneyWe all know that the three essentials for living are food, clothing, and shelter. We definitely rent our food. Do we rent or own our clothing? Hmmm.

Part of the American dream is to own your own home. And there are good reasons to do so. For instance, a Federal Reserve study[pdf] shows that the average family that owns a home has a net worth of nearly $625,000 while families who rent have a net worth of just a little over $54,000.

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Homeowners on the move

We’ve seen an interesting statistic bantered about, but we haven’t been able to pin down a reliable source. If this statistic is true, American homeowners move once every five years or so, on average.

So we thought we’d consider what that does to the buy vs. rent equation. We’ll use some averages and national statistics to create an example. However, what really matters is your own situation and your local real estate market. Only you, working with your financial advisors, can determine what’s in your best interest.

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marylynn When I was younger, one of my bosses in radio told me that I was just throwing away money by renting. I remember thinking that it made sense. I’d reached an age where maybe I should consider buying. So I did. As often happens in the radio business, less than a year later, I lost my gig. So I had to sell my house to move to a different market. I lost a lot of money by buying. If only I had had a crystal ball!

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Putting buy vs. rent to the test

We created a fictional purchase to see if we would be better off renting or owning a house for five years. We assumed that:

  • We put 20% down (approximately $63,000).
  • We financed the rest with a 30-year mortgage
  • The interest rate would be 6.50%, slightly above the current rate.
  • Our house would appreciate 4% per year, slightly below the recent average.
  • Property taxes would cost us 1% of the value of the home.
  • Insurance would run 0.50% of the value of the home. (Renters and homeowners have to insure the contents. We have the added burden of insuring the building.)
  • Repairs & maintenance would consume 1.50% of the value of the home.

Over the first five years, 83% of our total mortgage payments would go for interest. In other words, for the most part, we’ve traded renting property for renting money. If the interest rate is higher, the portion that would go to interest would also be higher. Of course, the reverse is also true.

During this period, we would pay $2,171 per month as “rental costs” for our home. We call them rental costs because they have no value once they’re paid. They only allow us to keep owning. So if we could rent a similar property for less than this, we would be better off renting instead of buying.

Of course, if we had made a down payment of less than $63,000, our cost would go up because we would be paying even more interest.

Where’s the break-even?

We also looked at how it would take before we would break-even. After all, it costs money to sell a house. We would have to pay commissions to our realtor, closing costs, and the like. We assumed these costs would total 8% of the selling price.

Given our assumptions, we looked at what would happen if we sold after one year. Our house would now be worth $326,560. From that, we would pay $26,125 in selling costs. After a year, our mortgage balance would be $248,392.

So we would be able to take out $52,043 in cash. But remember, we invested $63,000. So we lose about $11,000 if we sell after one year.

But that’s not the whole story …

We haven’t yet considered the opportunity cost of tying up that $63,000 in a house. Because if we didn’t invest it in this house, we could have invested in something else. We assumed we could have earned 6% by investing in some portfolio of financial assets.

That would have returned nearly $3,800. So by buying this house and selling it in a year, we would put ourselves in the hole nearly $15,000.

Even after 2 years, we’d still be about $3,500 behind, given our assumptions. Of course, one of those assumptions is that real estate prices are rising. It’s almost certain they will in the long run, but will they rise in the next year or two? They may not in some markets.

What’s the bottom-line?

We concluded that if we didn’t plan to own a house for at least two years, we’d rather rent. We also saw that the longer our holding period, the better we would do. For instance, in the last five years of the mortgage, only 15% of the mortgage payment would go to interest. It seems like buy-and-hold is rewarded in real estate investing.

How to get around it …

We have two friends who have been able to get around the short-term ownership problem. One of them is in the military, so he moves frequently. He only buys a house that he knows would make a good rental property. If he gets transferred, he hires a local property manager and rents it out. Until he decides where he wants to retire, he plans to hold a number of his houses.

Another friend doubled-down on this strategy. He moved quite frequently as he climbed the corporate ladder. Not only does he own houses in a number of cities, he bought additional rental properties, so he has a diversified portfolio across a number of cities. Now he’s retired living off the rents!

So you can get around the disadvantages of short-term ownership by having an alternative exit strategy!

Next time, we’ll discuss how a toy that you probably played with as a kid can help you manage your time. Until then, here’s to your bigg success!

 

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