Your 5-minute guide

to saving your retirement

By MSN Money staff

Spend less and save more. That’s what the experts advise if you’re getting a late start on retirement savings. Chances are you’ll also have to work longer than you expected.

Don’t despair and don’t panic. Many Americans are in the same boat, but there are still ways to catch up.

First, get an idea of your expected post-retirement expenses. Start with MSN Money’s Retirement Expense Calculator. If you are new to investing or want to brush up on what you already know, there are short online courses in MSN Money’s New Investor Center.

The basics: Social Security

The next step is to look into Social Security. You’ll probably get benefits, but they likely won’t fund a comfortable lifestyle. A third of current retirees rely on Social Security for at least 90% of their income, and the average monthly check is $1,007. (See “Could you survive on Social Security?“)

• Figure out what your future benefit will be by checking your annual Social Security statement. If you’re in your 50s or younger, anticipate that the amount will be smaller than the estimate. A reduction in future benefits may be one way Congress tries to keep Social Security solvent beyond 2041. (See “Your free financial report card.”)

• Don’t be tempted to start collecting at age 62. You’ll get a smaller monthly check for life — 20% to 30% less — than if you wait until you’re fully eligible. For most folks, that’s not 65. For anyone born after 1937, retirement age increases by two months per year until it stabilizes at age 66 for people born between 1943 and 1954. After another gradual increase, it’s 67 (at least for now) for folks born in 1960 or later. See the Social Security Administration’s Retirement Planner.

• You’ll get a larger Social Security check if you don’t start collecting as soon you’re eligible. Benefits increase 6% to 8% each year you delay until age 70.

Just do it — now

Now that you know what the government will likely kick in, turn your attention to trimming expenses and boosting your savings. Start with MSN Money’s Retirement Income Calculator and see “8 money moves you must make at 50.”

• Make a list of essential expenses and put retirement savings in the No. 1 spot. (See “55 and haven’t saved a dime? Yikes.”)

• Reduce spending wherever you can and, most importantly, pay off credit card debt. (See “Living ‘poor’ and loving it” and “Your 5-minute guide to budgeting.”)

• Take advantage of benefits available to retirees by exploring senior discounts at aarp.org and other Web sites. In addition, seniors can get help paying for food, utilities and other essentials. Use the Eldercare Locator.

• Maximize your contribution to your employer’s tax-deferred retirement plan. Then make the maximum contribution to an IRA. If you’re self-employed, consider a Keogh plan in addition to an IRA. (See “The vanishing safety net.”)

• Federal law allows older workers to play catch-up. Those 50 and older can put an extra $1,000 into an IRA (for a total of $6,000 in 2008) and an extra $5,000 into a 401(k) or similar tax-deferred employer plan (for a total of $20,500 in 2008). (See “Saving strategies for the over-50 crowd.”)

It’s Time to Rethink Our Retirement Plans

Let’s fix what isn’t working, before the next financial crisis.

By ROGER W. FERGUSON JR.

While our nation has experienced other financial crises, the current one is the first to occur when so many Americans bear so much responsibility for their own retirement savings. Never before have those savings been as exposed to the markets, as workers are now experiencing acutely. While stocks will eventually recover, we should take time to rethink how Americans achieve lifetime financial security — and the mechanisms in place to help them do it.

Traditional pension benefits can no longer be relied upon when global competition and rapid technological change challenge the ability of even the greatest companies to make good on future commitments. Moreover, Americans switch employers and even careers several times over the course of their working lives.

Yet the 401(k)s and other accounts that have replaced those pensions are not producing sufficient retirement savings. According to the McKinsey Global Institute, two-thirds of Americans between the ages of 54 and 63 have not saved enough for retirement. It’s not that 401(k)s are bad, it’s just that they were conceived as supplementary retirement vehicles, not as a holistic retirement system.

A new approach, combining the best of traditional pensions and new savings vehicles, is needed. Here are the elements:

- Automate participation and savings. Automatically enrolling employees in plans, then hiking savings with pay raises, overcomes the inertia that results in nearly a quarter of workers eligible for an employer-sponsored retirement plan not signing up. Automatic enrollment plans should mandate employer and employee contributions, and the percentage amounts of each. That’s the approach some higher-education retirement plans follow. It may be one reason why 35% of faculty feel very confident in their retirement income prospects, compared with 25% of working Americans, according to the TIAA-CREF Institute.

- Give workers the information they need. Most of us need advice that is objective — from an adviser who receives no sales commission and thus has no incentive to push particular products — and tailored to our individual goals. Retirement plans must include such advice for everyone who signs up.

- Guarantee an income floor. Many retirement accounts focus on accumulation, but fail to include a payout mechanism to ensure retirees will not outlive their savings. Retirement plans should provide that by automatically converting all or a portion of the account balance to a low-cost annuity at retirement.

- Encourage health-related savings. According to the Employee Benefit Research Institute, a couple that retires today will need from $200,000 to $635,000 to pay out-of-pocket health-care costs (above Medicare). Few private-sector employers offer workers an account to save for such costs. Last year’s agreement among the Big Three automakers and the United Auto Workers to establish tax-free trusts for worker health is an approach gaining favor among academic institutions. Now Congress needs to enable people with these accounts to leave any unused balance to heirs. This will encourage people to hold on to their savings until the last years of their lives, when health-care money is most needed.

- Diversify risk. If you had all your retirement in stocks, your account lost about 40% in recent weeks. If you had a mix of stocks and fixed-income holdings, you’re down about 20%. Individuals need to properly diversify, and rebalance their accounts regularly to maintain a prudent mix of assets.

Taken together, these measures offer a way to convert our patchwork of individually owned accounts into a stronger retirement system. All are achievable, provided that policy makers, public officials and companies seize the opportunity this crisis presents to help ensure that workers will have the retirement savings they’ll need.

Mr. Ferguson, a former vice chairman of the Federal Reserve, is president and CEO of TIAA-CREF, which manages retirement savings for 3.6 million individuals and 15,000 institutions. He is also a member of President-elect Obama’s Transition Economic Advisory Board.

Some Firms Suspend Their 401(k) Match

By JILIAN MINCER

As the economy worsens, a growing number of small businesses are suspending their 401(k) match, and, in some instances, closing the retirement plans altogether.

While only about 15% to 20% of small businesses offer a 401(k) plan, many added them in recent years to attract and retain workers and to help business owners save for retirement. But the economic downturn and higher health-insurance costs are forcing companies to cut back on retirement benefits.

“It’s a cash-flow issue,” says Patrick M. Shelton, a partner at Benefit Plans Plus LLC, a third-party administrator of retirement plans in St. Louis. “The companies don’t have money to meet payroll and medical insurance, so they’re cutting back on 401(k) plans.”

The small business market — companies with fewer than 500 workers — had been one of the fastest-growing segments of the defined-contribution market.

‘Critical’ Benefit

A 2007 survey of small businesses by Fidelity Investments found the plans were very important to workers. Almost 70% of the employees said a retirement plan “was critical or very important for businesses to attract and retain employees.” The study also found that 49% of employees who had retirement plans said they wouldn’t move to companies without them.

But as the economy has worsened, more businesses have changed their retirement plans. “We’re definitely seeing that small business exit, and we expect to see it continue through 2009,” says Mr. Shelton of Benefit Plans Plus. “I think the first six months of next year will be off for everyone.”

Mr. Shelton says he has seen 12 plans terminated in 2008 compared with six for all of 2007. The hardest-hit companies are those in the housing-construction, mortgage and trucking industries.

Wells Fargo & Co. also has seen a slight increase in small business 401(k) plan closings.

“It’s not a huge or significant increase, but it’s more than we consider normal,” says Laurie Nordquist, executive vice president Wells Fargo Institutional Trust Services. She says the trend was apparent at the beginning of the year, “even before we had the equity-market volatility in September and October.” In some instances, the companies are closing the plans because of a reduced work force.

“We are seeing a slight uptick in plan terminations by businesses who can’t afford the plans or are going out of business,” says Laurie J. Shultz, vice president, Emerging Markets Segment for the Retirement and Investor Services division of Principal Financial Group Inc.

“The businesses only have so much money for benefits,” she says. “The No. 1 benefit for attracting and retaining employees is medical benefits.”

Ms. Shultz says it’s much more common to see a business suspend the match than close the plan. The current economy could result in a slowdown in the creation of new plans. Ms. Shultz says there’s no change currently “in new startup plans, but what we are seeing in our pipeline is a slight downturn.”

Saving Money

Many more companies, large and small, are opting to suspend the company match this year to save money, including General Motors Corp. and Ford Motor Co., which recently announced they would eliminate the 401(k) match for salaried workers.

A survey released in October by consulting firm Watson Wyatt found that 2% of employers already have reduced their 401(k) or 403(b) match. An additional 4% plan to take the action in the next 12 months.

Shaun T. King, an investment adviser at Hickok & Boardman Retirement Solutions in Burlington, Vt., says, “We’re definitely seeing companies cut back on the amount of the match they put in.”

Companies, he says, are looking at ways to decrease costs. But once a 401(k) plan is set up, he says, most of the cost can be shifted to the employees.

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What Small Business Owners Need to Know About 401(k)’s

by Matthew Bandyk

email article related articles/topics view full story Even sole proprietors without employees can get in on 401(k)’s to plan retirement

Running a small business can be a life-consuming process, so sometimes small-business owners miss the forest for the trees. Maybe that’s why only about 16 percent of businesses with fewer than 50 employees in the United States have 401(k) plans. Small-business owners are so focused on developing their businesses that some do not realize that those assets can grow at a much faster rate for their retirement under the right plan. An October survey by ING DIRECT’s ShareBuilder401k, which designs 401(k) plans for small businesses, found that “not enough employees” was the top reason cited by small-business owners as to why they do not have a 401(k) plan. That’s despite the fact that even sole proprietorships with no other employees can have 401(k)’s.

Of course, that’s not to say that small-business owners can’t use other retirement plans like IRAs. But there are some unique benefits to 401(k)’s. In 2001, Congress changed the laws in a way that allowed self-employed people to put more money into their 401(k)’s. Today, a business owner under 50 with a 401(k) can invest up to $46,000 a year into the account, with up to $15,500 ($20,500 if over 50) coming from his or her own income, and then up to 25 percent of the business’s profits under the “profit sharing” provision. Regardless of the size of the profits, the total amount cannot exceed $46,000 (or $51,000 if you’re over 50), but that can make a huge difference. That $46,000 “can drop you a tax bracket,” says Stuart Robertson, general manager of Sharebuilder401k. “That is a great tax shelter for these folks.”

But if, like many small-business owners, you’re not very familiar with 401(k)’s, what do you need to know before you get your own plan started?

Know the difference if you have any employees. If you’re in business all by yourself, you’re blessed with a simpler 401(k). First, if you have no employees and less than $250,000 in assets in your 401(k), you don’t have to fill out compliance paperwork. Congress upped this limit from $100,000 “to make it easy for small-business owners not to get hung up on the IRS,” says Eric Wikstrom of Integrated Wealth Strategies LLC. Having employees also means the proprietor must pay a higher administrative burden for the plan. That’s because 401(k)’s are regulated so that they can’t be “top-heavy”—the benefits of the plan cannot be too weighted in
favor of the company’s top brass.

Carefully consider the array of investment options. Speaking of those administrative costs, if you use a financial institution, broker, or consultant to design your 401(k) plan, be careful about what they may be charging you. Some offer a “closed” menu of funds or other investments for you to put your money. Not only does that limit your options, but sometimes the mutual fund is paying the third party for the favored treatment. That means as a shareholder in that fund, you’re footing that bill, which means less money for retirement. Look for brokers who are “open” and do not have such restrictions on what funds are available.

Make sure a third party is experienced. If you’re using a someone else to set up your 401(k), make sure they know what they’re doing. They may not be particularly focused on 401(k)’s, so ask just how many they have set up before. If it’s just a few, I wouldn’t want to deal with them,” says Richard Meigs, president of 401khelpcenter.com.

Understand the Roth account. You can put all, or none, of your $15,500 (or $20,500 if you’re over 50) into a Roth 401(k). The difference between the regular 401(k) and the Roth account is that the traditional account holds money that is tax-deferred; it comes from your pretax income, and is taxed only when the money is distributed upon retirement. The Roth account is tax-free—the money comes from your after-tax income, and is not taxed again. The fact that tax rates are historically quite low today has made the Roth account much more attractive, because the expectation is that taxes will be higher in the future, says Meigs. But that doesn’t mean you have to put everything in the Roth. “If you think taxes are going to increase, or if you think you’re going to be in a higher tax bracket, I would put some in your Roth and some in your traditional, as a hedge,” explains Robertson.

Ask yourself how much control you want. For some entrepreneurs, the traditional 401(k) may be too limiting. “There are lots of financial institutions that will let you set up [a 401(k)], but you have to invest in just the vanilla options—mutual funds, stocks, bonds,” says Wikstrom. “In my opinion, they don’t offer true self-direction.” Some people choose to pursue a “selfdirected” 401(k), which lets you invest your money in almost anything you choose, such as real estate. That’s one you set up yourself, which can make things difficult for a novice investor but offers you more freedom.

Central banks slashing

rates as investors flee

It

Global pullback could affect currency markets

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Central banks around the world are moving to further slash interest rates as they seek to contain the damage from the bursting of the biggest credit bubble in history.

The Federal Reserve is poised to cut its benchmark rate for the second time in two weeks at a pivotal meeting in Washington on Wednesday, and the European Central Bank yesterday suggested that it would do the same next week. South Korea announced a dramatic rate cut yesterday, by three-fourths of a percentage point.

Governments worldwide have already approved massive bailouts and stimulus packages to halt financial meltdowns. But the trouble spots in the United States and abroad continue to multiply. Yesterday, there were growing signs that the U.S. Treasury Department was close to extending its $700 billion rescue program to cover the ailing auto industry.

Analysts said governments are trying to manage what has become the biggest threat to the global financial system — a massive pullout by panicked investors from any holding they see as remotely risky. From consumers to multibillion-dollar hedge funds, investors are cashing out to cover losses or guard against further damage by moving into safe havens such as U.S. Treasurys.

Rate cuts, however, are not packing their usual punch. Normally, when central banks cut rates, it becomes cheaper for businesses and consumers to borrow money. But now, with banks and other financial institutions experiencing a severe crisis, lenders have been reluctant to extend credit at any price.

The pullback by investors, known as deleveraging, is extending massive losses on global stock markets; the Hong Kong stock market on Monday had its biggest one-day percentage drop since 1989, and Tokyo’s Nikkei fell to its lowest level in 26 years.

Officials are growing increasingly concerned that the pullback is affecting currency markets, with economists warning of a growing disequilibrium in global exchange rates.

Although confidence may be shaken in the American economy, foreign investors still see the U.S. dollar as more reliable than most other currencies, with the rush to the dollar sending its value soaring against the euro, the British pound and a host of emerging-market coins in recent weeks. As currencies weaken in emerging markets including Brazil, Mexico and South Korea, corporations in those countries that have foreign loans or other bets in dollars are being slammed as debts suddenly become more expensive to pay back.

In Japan, the reverse is happening. Investors are burrowing into the yen, rapidly driving up its price against both the dollar and the euro.

For much of the past decade, investors have borrowed yen — at Japan’s very low interest rates — to buy positions in other currencies in emerging economies such as South Africa and Brazil, where yields have been far higher. The financial crisis has soured many of those bets. Investors are rushing back to the security of the yen and, in the process, driving up the currency’s value.

Just as the surge in the dollar is making Ford and General Motors cars more expensive overseas, the gain in the yen is doing the same to Sony televisions and Canon cameras just as global demand for them dwindles.

The yen’s swing has been so sharp that the Group of Seven industrialized nations warned yesterday of “possible adverse implications for economic and financial stability.” That statement hinted at a possible joint intervention in currency markets to stabilize the yen, in a move similar to actions taken by central banks in 1995 and 1998.

As early as Wednesday, the International Monetary Fund is set to rule on the creation of an emergency program to rush hard currency to emerging markets that have been burning through billions of dollars’ worth of reserves in recent weeks to defend their currencies. The pool of money available, sources close to the talks said, could be augmented by contributions from nations sitting on trillions of dollars in cash reserves, such as Japan, China and the oil-rich Gulf states.