Thursday, November 12, 2009

Matchless Strategies

For many us, the employer match to our 401(k) plans has gone, or in some cases reduced to a mere shadow of its former generosity. They are expected to return but it will take years before they return to their former levels - if they ever do.

This presents the person planning for retirement (perhaps predicting a retirement income would be a better description) with a dilemma. They are at first troubled by their own human nature.

Many of us have never made the attempt to increase our contribution to make up for the shortfall. Few of us max out these accounts, relying in the employer's match to give us three, possibly more, percentage points of pre-tax income contribution. If your employer stopped putting 3% (of free money) into your account, you risk missing your projections by up to $100,000 over a thirty year career.

To make up for this shortfall, we will need to increase our contribution by at least this much. In the short-term, this will mean taking home less. If your partner has a plan that continues to match, be sure they are contributing enough to receive it.

One or both of you could make up the increase by dividing the increased contribution. This might have a less of an impact on your take home pay.

This can also be done gradually, increasing your contrbution as you receive pay raises or bonuses (using them to offset any yearly income decrease as a result of your increased contribution). But it shouldn't be ignored.

This might also mean adopting increased exposure to more risky investment strategies. Many people are using a far-too conservative approach to their investments for retirement and often too soon. As I said "more risky". Adding a more aggressive fund or two and using the increased contribution to fund it might be the best option to recovering that lost ground quicker. Not always but in the long-term, it might be a risk worth considering.

And while you are making sacrifices, something that everyone seems resigned to do, start getting your financial house in order. A pay decrease shouldn't extend your credit balances on penny. In fact, a little austerity now could go a long way just ten-years down the road. Prepare your entire liability plan to be eliminated by the time you retire. A 30-year mortgage with fifteen viable work years left spells trouble in retirement.

I'm not saying there won't be debt scenarios that are unavoidable, but a mortgage shouldn't be one of them - and neither should outstanding credit debt. With no clear and concise picture of the cost of health care, the ability of Social Security to pay you what you think you have coming, and the performance of that 401(k) as you near retirement, carrying debt in light of this cloudy future can be the storm you were unprepared to deal with.

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