Protect Your 401(K)

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Overview

A PAPERBACK ORIGINAL

Straightforward facts for all workers looking to protect their company 401(k) assets in a postĀ­Enron world

From Enron on down, recent high-profile bankruptcies have awakened American workers to the vulnerability of their 401(k) plans and left millions wondering what they can do to protect themselves. Protect Your 401(k) hits this market with practical, accessible answers, explaining ...

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Protect Your 401(k)

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Overview

A PAPERBACK ORIGINAL

Straightforward facts for all workers looking to protect their company 401(k) assets in a postĀ­Enron world

From Enron on down, recent high-profile bankruptcies have awakened American workers to the vulnerability of their 401(k) plans and left millions wondering what they can do to protect themselves. Protect Your 401(k) hits this market with practical, accessible answers, explaining everything from what a 401(k) is to how to take full advantage of matching programs, assert control over investment policy, and more.

In-depth enough to guide readers from starting a plan through taking distributions, yet plain-talking enough to be understood by all workers regardless of their backgrounds, Protect Your 401(k) covers:

  • Simple steps every worker should take first
  • How 401(k) plans work
  • Advanced strategies for really putting a plan to work
  • Warning signs of a 401(k) provider in trouble
  • How to get your money out safely
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Product Details

  • ISBN-13: 9780071407120
  • Publisher: McGraw-Hill Companies, The
  • Publication date: 6/14/2002
  • Edition number: 1
  • Pages: 196
  • Product dimensions: 5.50 (w) x 8.50 (h) x 0.45 (d)

Read an Excerpt

Chapter One. Pay Yourself First

While retirement may seem like a distant goal and amassing enough to live on when you don't make a six-figure salary may seem difficult, the sooner you get started, the better your chances of reaching your goals. Just because you may not retire to a villa in the south of France doesn't mean that you can't achieve financial security on your own terms.

For many people in today's workforce, investing in a 401(k) plan is the single best opportunity they have to achieve a financially secure retirement. It's a "get rich slowly" approach that gives you an opportunity, over time, to amass a substantial nest egg for your retirement.

For the first time in 20 years, Congress has vastly expanded the incentive to save. The new tax law, the Economic Growth and Tax Relief Reconciliation Act of 2001, really encourages people to participate in 401(k)s and to do everything they can to take control.

Despite this, nearly a quarter (24%) of the workers who have an opportunity to contribute to a company-sponsored retirement plan do not participate, according to the 2001 Retirement Confidence Survey conducted by Hewitt Associates, a global consulting firm. Of those who do contribute, more than half do not contribute enough to earn the maximum possible employer matching contribution.

When asked why they don't participate in the company 401(k) plan, the most common answer from employees is "Because I can't afford to." Frankly, this answer couldn't be more wrong. The fact is you can't afford not to!

The future is coming. When it gets here, you want to be ready. The steps you take now will lay the groundwork for the lifestyle you will enjoy when you retire. If you want to enjoy a future that is free from financial worries, you need to start saving today. Hewitt Associates reports that the average balance in an employer-sponsored retirement plan in the year 2000 was only $52,974. How far would that go in supporting you during retirement?

Pay Yourself First

To achieve long-term financial security, many financial experts recommend budgeting at least 10% of your yearly gross income toward that goal. Unfortunately, for some people who are just beginning to save, 10% is considerably more than they can afford, so they get discouraged and don't save anything. Of those who do save, the average 401(k) plan participant contributes only 6.5% of their gross yearly pay to the plan, according to Hewitt Associates.

If you aren't saving anything now, and you're overwhelmed at the thought of a 10% savings rate, start your personal savings program by setting a more realistic goal. Start by contributing just 1% of your gross annual income to your 401(k) plan. To frame this savings goal in terms of real dollars, calculate 1% of your gross yearly income and then divide by 12. If the cash value of 1% is more than you are able to save right now, reduce it to by half. Next, designate the proper dollar amount to be withdrawn from your paycheck and your 401(k) will make an automatic investment in your future every time you get paid. While a few dollars every month might not seem like much at first, over the long haul, every little bit adds up.

Initially, the dollar figure involved isn't nearly as important as the fact that you have made a commitment to the "pay yourself first" philosophy. It's all about prioritizing your life so that a financially secure future is your top financial goal. When it comes right down to it, you don't need to have any Wall Street investment expertise to make an investment in yourself. You simply need to keep in mind that an investment in yourself is the most important investment you can make.

By dedicating a percentage of your income toward saving for the future, you have made a conscious decision that your future is important. You have made a commitment that an investment in yourself comes before your membership at the health club, a day at the spa, or a night on the town with dinner and dancing. You have made a decision that saving for the future is more important than spending money on recreation today.

When your financial situation improves and circumstances permit, gradually increase the amount of money earmarked for your 401(k) plan and your savings will hit that 10% mark more quickly than you might think. Once you get to 10%, there's no reason to stop there. If you can afford to increase your contribution percentage beyond 10%, you may be able to retire early. If you choose to keep working to full retirement age, your 401(k) balance will be that much better off for every extra dollar that you saved. Rest assured that when you're relaxing on the beach somewhere 20 years from now, you won't be complaining that you have too much money in your 401(k) plan.

Now, the next step is to reduce your expenses and, thereby, increase the amount of money you have available to invest.

Sweat the Small Stuff!

If you're like most people, you tend to think about money in a grand sense. You view your personal finances on a macro scale (the cost of a house, the cost of a car, the cost of an expensive vacation) instead of on a micro scale (the price of lunch, the cost of a pack of cigarettes). This is a bad habit, because in planning for the big stuff, you overlook total cost of all the little items that nibble away at your pocketbook everyday.

While most Americans are overextended on their mortgage and drive a car they can't really afford, these major expenses, despite the enormous drag on finances that they represent, aren't what keeps us living paycheck to paycheck. It's the small stuff. That $1.50 per day spent on coffee, the $5.50 on lunch, and the $3.50 for a magazine quickly add up to hundreds of dollars a month and thousands of dollars a year. Don't forget about banking and ATM fees. Pay attention to those fees and avoid them whenever possible.

While a few dollars a day might seem insignificant in light of your mortgage or car payments, just $2 a day adds up to $744 per year. If you can save just $10 a week from your grocery bill and put it in your 401(k) plan instead, you've just found another $520. Add that to the daily cost of a fast-food lunch, and you've got several thousand dollars that can go into your 401(k) this year, and the year after.

That's it. No magic tricks, no get-rich-quick schemes. Just live within your means. To make this happen, you need to review your finances, put together a prudent financial plan, and stick to it.

H1For some people, just the mention of the word "budget" conjures up images of spending limitations and being unable to afford life's little (and big!) luxuries. This self-defeating image couldn't be further from the truth. Yes, it is true that careful management of your finances may stop you from making purchases that you can't truly afford and racking up big debts, but the real truth about budget is something the most consumers simply overlook. Budgets are a tool for growth!

Every successful company in the country, from General Electric and Wal-Mart to the local restaurant and the corner gas station, has a budget. The companies that operate within their budgets succeed. Those that do not, fail. Now, putting that in terms of your personal life, think about yourself as the CEO of your future. Your life is a business that you run. You have income and you have expenses. You have long-term goals and short-term needs. If you plan well and stick to your budget, you will significantly increase your chances of success. Unsuccessful investors don't plan to fail; they just fail to plan.

Budgeting does not require fancy spreadsheets or expensive software. It begins with a humble pencil and paper. For one week, carry a pencil and paper with you and keep track of how much money you spend. Write it all down-not just every dime, every penny. Whether you spend 60 cents for a donut or $11.23 for groceries, write it down.

At the end of the week, take out your piece of paper and add up the numbers. You'll be amazed at where all of your money has gone. If you take a good look at that list, you're likely to notice that you spent a significant amount of money on items that you didn't need and/or you'd be willing to do without. When you add up the numbers, you will truly develop a newfound awareness of how extraneous purchases drain away your hard-earned dollars.

To truly take control of your future, you need to take a close look at your lifestyle.

Do you really need a cell phone? How about that pager? Generations of families survived without pagers. Is your monthly long-distance telephone bill out of control? Do you spend too much money on fast food? How much is that cable bill? How about those magazine subscriptions? Do you clip coupons? Do you look at the price on the sign in front of the gas station before you pull in and fill up? Is the cost of that membership in the gym really worth it? Do you need to drive a gas-guzzling sport utility vehicle just to get to and from work?

It is quite likely that more than a few of your monthly expenses could be eliminated without making any detrimental changes to your lifestyle. Certainly, you have to strike a balance between enjoying your life today and saving for tomorrow, but a little prudence can go a long way.

Debra Pankow, Family Economics Specialist at North Dakota State University, compiled the following data for household expenditures for the average U.S. consumer unit (families, households, or individuals) for 1998. Since inflation has been virtually flat since then, the data should still be pretty close to the mark.

INSERT HOUSEHOLD EXPENSES CHART Fig. 1-1

While everyone has different needs, interests, and expenses, generally speaking, you would do well to spend less than the average in every category except "Pension." (Think of "Pension" as your 401(k) plan and other retirement investments.)

Credit cards are a consumer's worst nightmare. Next to house payments and car payments, monthly credit card payments account for the next most significant chunk of monthly expenses for many consumers. The high credit allowances that most cards offer are designed to convince consumers to rack up mountains of debt that will take years to pay off.

According to American Consumer Credit Counseling, Inc., a consumer with an $8,000 credit card balance making the minimum monthly payment at 18% interest will pay $15,432 in interest and take 25 years, 7 months to pay off the debt. That $8,000 purchase will cost you $23,432 by the time your balance is paid off. For the credit card companies, it's a great strategy that has paid big dividends.

Make a commitment to stop using your credit cards unless you already have the money to pay for your purchases in cash, but don't happen to have the cash with you at the moment. This way, you never buy anything that you can't afford and you never pay interest. Ideally, don't have more than two credit cards. The more cards you have, the more likely you are to use them.

Then, identify the cards charging the highest interest rates and pay them off first. If you can't afford to pay off the balances all at once, start by making a commitment to send in more than just the minimum required monthly payment. In the meantime, if you can get a lower interest rate by consolidating your credit card debt onto a single card, do it.

When You "Find" More Money, Invest It!

Once you've done everything you can do to live within your means, and hopefully well below, you need to remain constantly on the lookout for additional opportunities to increase the amount you save in your 401(k). Anytime you get a raise or earn a bonus is a prime opportunity to increase your savings. Since you were able to get by on your former salary, the additional income is "found" money. Adding this money to your monthly investment should be completely painless.

Perhaps the most important fact to keep in mind is that knowledge may be power, but action is everything!

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Table of Contents

Preface vii
Introduction: Americans' New Most Valuable Asset 1
1 Pay Yourself First 9
2 Increase Your Contributions 16
3 Take Full Advantage of Matching Contributions 27
4 Know How Your Plan Works 36
5 Become an Informed Investor 47
6 Use the Six Concepts of Successful Investing 59
7 Understand Your Investment Vehicle Choices 81
8 Build a Core Investment Portfolio 102
9 Know Where to Get Help 112
10 Know How to Get Your Money Out Safely 125
Conclusion: Pulling It All Together 141
Appendix A. Your Investment Policy Statement 144
Appendix B. The History of 401(k) Plans 151
Appendix C. Glossary of Terms 160
Index 173
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