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Saving Early, and Enough, to Retire

By Michelle Singletary
The Washington Post

Without a doubt, many employees who have access to a retirement plan at work contribute some money to it.

Hewitt Associates, a human resources consulting company, examined the saving and investment behavior of more than 2.5 million employees in 2003. It found that in 2003, 401(k) plan participation rose to nearly 70 percent, from 68 percent in 2002.

While the percentage of participation is good, contribution levels aren't. Whether you think Social Security will be bankrupt in the future or trust that this federal safety net will be around for decades, the fact is that most of us should contribute more to our retirement plans if we want to retire comfortably. And I'm not even counting the people who don't have access to a workplace retirement plan.

But if you are eligible for a 401(k) or similar retirement plan, you've got to figure out how to spare some more money to save for your old age.

I know it's hard to save, especially when what you're saving for could be 30 or 40 years down the road. It may be all you can do to pay your rent or car note every month.

One easy place to start is the matching contribution your employer may offer in your 401(k). You've got to contribute at least enough to get the match, typically 3 percent. That's the consequential easy money.

If you take advantage of your employer's matching contribution, you can increase your retirement savings by as much as 50 percent, according to David Wray, president of the Profit Sharing/401(k) Council of America.

According to estimates by Wray, an employee earning $30,000 a year who does not save 6 percent of pay from age 25 to age 65 is losing out on $230,000, the amount the employee would have earned with a 3 percent employer match and average account earnings of 8 percent per year.

Aon Consulting, a human resources consulting firm, surveyed 130,000 employees participating in 401(k) plans and found that those who missed the match in 2003 left a combined $89 million of employer contributions on the table. That's free money, folks.

To combat both the lack of 401(k) participation and low contribution levels, some companies and financial experts have come up with one solution that I think could really make a difference.

Increasingly, employers are signing folks up for 401(k) plans automatically. Under an autopilot program, employers will automatically withhold a certain percentage of an employee's pay. Employees, usually new hires, can opt out, but they have to go out of their way to do so.

The Profit Sharing/401(k) Council of America found in one survey that 8.4 percent of plans have automatic enrollment. It is most popular in large plans (24.2 percent) and least common in small ones (1.1 percent). Ordinarily, employers will set the default contribution percentage at 3 percent of an employee's pay.

In addition, some retirement plan services are offering to personalize investment picks in your 401(k) portfolio. Employees no longer have the excuse that they don't invest because they can't figure out what to invest in. It's done for you.

NYLIM Retirement Plan Services, a division of New York Life Investment Management LLC, has introduced a service featuring an analysis that will show employees the gap between what they are currently saving and which investment decisions would likely provide enough income to retire comfortably. In many cases, the analysis will indicate that the employees need to save more.

For example, a 35-year-old making $40,000 per year who is just starting to save for retirement will need to sock away about 15 percent of his or her salary per year, assuming a replacement ratio of 70 percent of projected final salary, NYLIM points out.

Right now, the average retirement plan participant contributes just 5.3 percent of his or her income annually, according to NYLIM.

Other companies offering 401(k) services are rolling out automatic account rebalancing and the option for plan participants to automatically have deductions increased on a specified date each year.

I like this automatic trend. And more companies ought to be doing it. Frankly, some workers, for their own good, need to be automatically rescued or they face a poor retirement.

Consider this: When Allstate asked people how they viewed their retirement preparedness, most of those interviewed (regardless of age, gender, education, income or geography) identified with the television program "Survivor."

Just participating in your 401(k) isn't enough. Like the contestants on this reality show, you have to play smart to win.



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