Your 401k match is gone. Now What?
 
Did you receive a company wide email lately that went something like this:
 
In these tough economic we are looking to remain as efficient and lean an organization as possible, without elimination of additional positions. The company’s 401(k) matching contribution will be suspended until business improves…
 
As an employee what are you going to say? Of course you’ll be thankful to have your job vs. 401(k)match.
 
It is no secret companies are cutting expenses drastically to stay open and keep employees. The 401(k) match is a big target. The wave of reductions and eliminations in matching contributions started as a domino effect. Small companies it has happened more quickly. Once one large company took a swipe at the matching contribution, it was easier for other’s to follow. Shareholders like the message that everyone in the company is making a sacrifice in order to save talented employees and reduce expenses.
 
While this may seem like a minor change, it should be addressed as part of your financial plan. Questions to ask yourself:
  • Do you need your 401(k) to be your automatic savings mechanism? (Are you a disciplined saver or would you spend it?)
  • If your putting less than $6,000 into your 401(k) is it your best option?
  • What is your tax benefit? Do you need the income tax savings?
  • How close are you to reaching retirement/financial independence?
 First, if you are not a disciplined saver keep the 401(k) so you keep up the automatic saving. To slowly increasing your savings put a reminder on your calendar to increase your contribution 1% on your birthday. (Stop reading now if you are not a good saver.)
 
If you are putting away less than $6,000 and don’t see this amount increasing much, then a regular IRA may be a better option for several reasons.
  • More investment options. Most 401(k) programs have a set number of funds to which you are limited. An IRA significantly expands your pool of available investments and mutual funds. This provides better access to great money managers, potentially giving you a significant advantage over your 401(k).
  • IRA contributors have 15 1/2 months to make a contribution for the calendar year. For example in 2009, you can make contributions to an IRA from January 1, 2009 – April 15, 2010.
  • You will have the same income tax benefit in your IRA as your 401(k) if you contribute less than $6,000, as your contribution is not taxable income. (Your withdrawals will be taxable.)
Let’s not forget about the Roth IRA. If you are not a fan of taxes and believe that when you retire either your tax bracket will be higher and/or in general taxes will be higher this may be another option. The Roth IRA is paid with after-tax dollars today and all withdrawals are tax free, as you will not be taxed on the growth of the account upon withdrawal.
 
First check if you qualify for a Roth IRA account in 2009.
 
Married combined modified adjusted gross income (MAGI) must be below $166,000. This phases out between $166,000 and $176,000. $176,000 or more and you are ineligible.
 
Individual MAGI must be below $105,000. This phases out between $105,000 and $120,000. More than $120,000 is ineligible.
 
If your eligible for the Roth IRA you have a few options.
  • Save in your 401(k) or IRA to receive a tax benefit today and fully fund a Roth IRA account for $5,000 (50+ $6,000) for tax free withdrawals later. Win today and in the future with taxes.
  • If you only save $5,000 or less you can decide to save taxes today via your 401(k) or IRA, or pay the taxes today and have not tax worries when it comes time for withdrawing in retirement.
 
This is a lot to think about. You must take the time to understanding how your 401(k) match being gone can impact your savings mechanisms for retirement and your overall financial plan. One small email from the big boss can change a lot.
 
Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated
 

If only our financial lives had glaring guiding stars in our daily journey. My grocery store is advertising that they are helping us eat better with the guiding stars. Between one and three stars appear below items to tell shoppers the nutritional value of a product (www.hannaford.com). Why shouldn’t my financial life have guiding stars? For the record, Hostess cupcakes and Ben and Jerry’s receive no stars. I thought dairy was good for me!

So here are my guiding stars on scale of 1-3 for your financial evolution, with 3 stars being things that will be the best for your financial evolution. It’s just a taste of stars, I’m sure I’ll add more at some point.

Aim for the stars.

3 stars

  • Understand your sustainable lifestyle expense. What do you need to live each month?
  • Laid off – rollover your 401k into an IRA with more investment options.
  • Determine how much you will need to retire and how the market turmoil impacts your retirement date.
  • Hold a state of your finances meeting with your spouse and write down your goals for the remainder of 2009.

2 stars

  • Determine if you need long-term care insurance.
  • Max out your 401k or retirement plan.
  • Go to work for a college so your kids tuition is free.

1 star

  • Refinance your mortgage to a lower rate.
  • Make an extra mortgage payment.
  • Consolidate credit card debt and work towards paying it off (read Dave Ramsey’s Total Money Makeover for another star.)
  • Work together as a family to reduce two ongoing monthly expenses .
  • Make one better financial choice each week. (Keep morning coffee and bring lunch!)

Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated.

Yes, I said windfall. First it was daycare expenses, then traveling sports teams, tutors, computers and clothes. Finally it was time for the big expense. College. Wondering if you will ever retire? You are not alone.

The Baby Boomers are in a different place than previous generations. Families are attempting to save for retirement while dealing with exorbitant college costs, as well as the challenges (sometimes financial) of aging parents. This is coupled with trying to save for their own retirement, which unlike previous generations does not include a pension.

While this is a big dilemma for most couples, I focus on the absolutes.

Where you cannot impact change:

  • Cost of college and that you did or didn’t save enough for the expenses.
  • Developing issues with aging parents.
  • The downturn in the financial markets.
  • How much you have saved previously for retirement.

What you can impact:

  • How much debt you will personally take on to pay for college.
  • Children’s college choice.
  • What you can afford to do for take care of parents.
  • How you can load up your retirement savings once college is over.

These items, taken one by one are manageable. I am going to focus on the last one. How you can capture the true windfall available when the kids are out of college.

In order to put junior through college you’ve paired down on your own expenses, creating a lower sustainable living expense or developing a reduced budget. Once college is over if you continue to live at this lower sustainable living expense you can put all the savings you were putting towards college into your retirement savings.

  •  Junior’s college cost – $40,000
  • Junior’s financial aide – $20,000
  • Your contribution – $20,000

 Post college add this extra $20,000 to your existing retirement savings and suddenly you have a windfall. In five years you will have put away an extra $100,000. If you were contributing $30,000 a year that number jumps to $150,000. 

This opportunity for extra savings works because you are taking the discipline utilized to pay for college expenses to pay yourself for retirement. If you are not maximizing your 401(k), 403(b) or other employer-sponsored tax-deferred retirement accounts you have another bonus awaiting you. Now you can afford to maximize your 401(k) at a$16,500 maximum this year for those under age 50 and $22,000 for those over 50. This will reduce your overall taxable income and lower your taxes. 

If your 401(k) contribution is now $10,000 larger for your family in the 28% tax bracket, this represents a $2,800 reduction in taxes.  

Saving more and reducing your taxes. It’s a win-win windfall. 

Advisory Services offered through Axiom Advisors, LLC. A registered Investment Advisor Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer member FINRA/SIPC Axiom Advisors, LLC and Cambridge Investment Research, Inc. are not affiliated. 

Tomorrow I am officially ending my 4 1/2 year golf hiatus by starting a morning 9-hole golf league. My game is right where I left it years ago. Fairly straight, not very far though. Before the hiatus I was very much a beginner. My goal is to be able to play with anyone with confidence.  If I could stretch my drive to 200 yards I would be thrilled. Just like a financial plan, one step at a time. Maybe I should start with consistently playing the game first.

I promise no more asking my fellow golfers to turn around so they won’t see my drive. I only did that once, when my husband crawled out from under the rock I decided I shouldn’t do that again. After all the LPGA wouldn’t allow it.

I’ve heard golf is good for business and am curious if it is true. I would love to hear from people that benefited in their business from a round of golf. (This would be motivation.) I figure with readers seeking retirement some will be golf experts!

See you on the 19th hole!