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My Employer is Eliminating 401(k) Matches

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!

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I Need Money! Should I Cut Back on My Retirement Plan Contributions?

graph_barThe phrase “perfect storm” has been used more recently than when the movie was out! Here in the United States, we’re being hit with rising costs, falling home prices, volatile stock prices, the subcrime (oops, make that subprime) mortgage crisis, and talk of a possible recession.

Recently, we discussed why cashing out a 401(k) is one of the worst things to do in response to these tough times.

Today, we want to discuss cutting back on contributions to a retirement plan. Two to three months ago, the word was that people weren’t reducing the investments they make for their golden years.

Even now, the overwhelming majority of people aren’t making any changes. However, there is evidence that more people are considering (or are) cutting back.

It’s certainly understandable – insurance, groceries, gas, taxes all keep going up. Investing less in a 401(k) is a way to put more dollars into a paycheck now.

3 reasons not to cut back on your 401(k)

#1 – Contributions are made with pre-tax dollars – Assume you’ve been contributing $1,000 a year to your 401(k). You stop making contributions so one would think that would mean $1,000 more in your paychecks over the course of the year. But you have to account for taxes – if you’re in the 30% tax bracket, you’ll owe $300 in taxes on this $1,000. So you’ll only net $700 by stopping your contributions.

#2 – Money accumulates tax-deferred
– With your retirement plan, money is compounding on money on top of more money. And since you don’t pay any taxes on it until you take it out, all of your money keeps working for you, rather than paying a part of it every year in taxes (and therefore having less money to accumulate on top of).

#3 – Employer match – Employers match as much as 100%, up to some limit. So say, for example, you contribute 3% of your salary and your employer matches that. It’s like found money … your employer is guaranteeing you a 100% return on your initial investment.

Now granted, this is part of your overall compensation. However, we often look at our tax refunds as found money, when it is just a return of an overpayment. This is truly found money – the employer is giving you money as long as you invest up to the maximum. It’s your choice.

Cutting back could cost you $53,551

Consider a fictional 30-year old woman who has been investing 3% of her $50,000 salary, with her employer matching it 100%. Money is tight, so she decides that she will stop investing for three years. This $125 invested for just three years, and then left alone until she retired (at age 62) would have grown to $53,551, if she earned just 6% on her money.

So if she invested just 3% of her salary for the next 3 years, it would grow to 108% of her salary when she retires.

A small amount of money now makes a huge difference in the long term. So at least try to keep investing as much as your employer matches because you get a huge boost in your portfolio by hitting that target.

Until next time, here’s to your bigg success!

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