How'm I doin'?

Back in the 1980’s the mayor of New York City was an affable fellow by the name of Ed Koch. His best known catchphrase was “How am I doing?”, which in New York-ese came out in a mere three and a half syllables as “How’mIdoin’?” He must have done pretty well because he was re-elected twice.

 

Sometimes it is hard to know how well we are doing financially. These aren’t things we like to freely discuss with others. ING has provided a way of comparing us to…well, other people who have found their website.  If you would like to know how your finances compare to those of the same age, income, gender, and marital status, hie thee to www.ingcompareme.com and see how you do. 

Before you trot over there, it would be advisable to know how much you have in your retirement accounts, how much other savings you have, and the asset allocation of your investment accounts. What’s that last thing? Your asset allocation is simply the percentage of your assets that are in the following categories: cash, bonds, individual stocks, domestic mutual funds, international mutual funds, target date mutual funds, and other. If you don’t have this information handy, that’s okay. You can guess, or admit that you don’t know, and still be able to see how others like you have allocated their assets. 

Other helpful information to have: your mortgage balance and monthly payment, credit card balances, and your monthly budget in fairly round numbers. After comparing yourself to others like you in savings, spending, investing, debt, and planning, you can print out a nice little report.

A couple of things to remember – the information that ING provides to you in this exercise is based on the input of other people just like you. It is human nature to perhaps round up the amounts one reports or to be optimistic in general. That’s okay, as long as we are all aware of this. Also, this exercise is no substitute for actual financial planning. Just because you compare favorably to your peers does not mean that you have done everything that you can or should do in the area of financial planning. 

So, how are you doin'?

Don't short change your 401(k)!

401(k) retirement savings plans offer the best chance that many folks have to contribute towards their own retirement. Therefore it is critical that you contribute as much as you possibly can to your 401(k). How much is that? Well, of course, that answer is the same as the answer to most questions about personal finance: It depends.

Here is how most plans work: You, the employee, sign up to have a specified percentage of your pre-tax earnings put into a special account that will be invested and grow so that you can afford to retire someday. This percentage can be anywhere from 1% to 10% in most cases, although Doc has seen some plans that allow for a 20% contribution.

There is a maximum limit for most individuals of $16,500 for 2011 ($22,000 if you are over 50). This means that if you earn more than $165,000, you might have to do some calculating. However, if you are earning that much, you can probably afford the services of a fee-only personal financial planner to help you with this and other things.

The true beauty of the 401(k) plan is that, in most cases, your employer also makes a contribution on your behalf. Typically, an employer will contribute 50 cents for each employee dollar contributed up to 6% of the employee’s salary. Again, your plan may vary. Check with your employer and your HR department. So, if you earn $40,000 per year and have a typical plan, you can contribute $4,000 (10% of salary) to your 401(k) and your employer will contribute $1,200 (50% of 6% of $40,000).

So what happens to that $1,200 if you do not contribute at least the $2,400 per year to claim your stake in it? I don’t know. One thing is for sure, though: you will never see a penny of it. If you do not contribute enough to your own retirement plan to earn the match from your employer, then that money is still your employer’s, not yours. This is part of your overall compensation, money that you are able to earn, but if you do not contribute your share, than your employer will keep those funds for his/hers/its own purposes. Got that? It’s important. It is your compensation and it is up to you to claim it.

WSJ article related to this topic

If you took a look at the Wall Street Journal linked above, you saw that a lot of people do not contribute as much as they can to their 401(k) accounts, thus missing out on a significant benefit. Do not make this mistake. And don’t be harsh on your employer; they have to look out for their best interests, too. Since 2006, most employers have taken advantage of a law that says they can automatically enroll employees in a 401(k) plan. Typically (a frequently used word when describing 401(k) plans), this number is 3%. So a lot of people come to their first day of work, sign a bunch of papers and save 3% of their pre-tax earnings and call it good. The Employee Benefit Research Institute has found that people are more likely to go with the 3% default contribution than to contribute as much as they need, or even as much as required to claim their full amount of compensation.

But you can do better. First, find out how much your employer contributes. Then, contact your HR department and make sure that you are contributing AT LEAST enough to maximize the employer’s matching contribution and take full advantage of the compensation available to you. It is your money, but you will not have access to it until you take the action necessary to claim it.

For public employees who have 403(b) plans, this is one of the ways in which most of us are not similar to our 401(k) holding counterparts. However, your employer may offer additional ways to save pre-tax earnings, and you should definitely look into those.

Once more, it is your money. Get your hands on it. 

Why you want a 401(k)

You know all of those forms and things that your employer puts in front of you on the first day of work and then about once a year thereafter? Chances are that some of those forms have to do with something called a 401(k) plan.

A common employee benefit is a retirement savings account known as a 401(k) account, named after the section in the Internal Revenue Service codebook that defines said account. 401(k)s provide most working folk a way to save for the time in which they will no longer be working (aka retirement) in a tax-deferred manner (aka something that saves you money now) and, in many cases, with a supplement from your employer (aka free money). 

Most of us plan to retire. Actually, I think we all plan to retire. I mean, who really plans to either drop dead on the job or just keep working through the throes of the final moments? The generally accepted retirement age is 65, although that is gradually being ratcheted up to 67. Life expectancy in these United States is currently just shy of 79 years. You do the math. Will you have enough saved by the time you are 67 years old to sustain you for 12 years? And what if you are a healthy, contrary, stubborn sort who lives longer? How are you going to pay for that? What if, for reasons beyond your control, you have to retire before you reach 67? It happens. All the time. 

Hopefully Social Security, or whatever is left of it, or whatever form it assumes between now and the time you retire, will help. Personally, I’m not counting on this, and I advise you monitor it closely. Depending on whom you listen to, Social Security will run out of money sometime between 2025 and 2060. It seems that the system designed by the folks in charge at the time is heavily dependent on an ever-growing work force and, given birthrates and other such information, we’re not making Americans at the same pace as we used to make us. So, Social Security will suffer. Like I said, I am not counting on this particular program to keep me rosy during my golden years.

Maybe you are counting on getting a pension from your employer. I would check very carefully with my employer if I were you. Without going into excruciating detail, the types of pension plans that many of our grandparents and maybe even our parents were able to depend upon are kind of like dinosaurs. Most employers have decided that the risks of managing other peoples’ retirement funds were too much for them to handle.

Or maybe your last name is Rockefeller or Gates or something like that and you will one day inherit gazillions and you don’t need to worry about this stuff. In that case, thank you for stopping by. Please purchase something from Amazon before you exit the blog; perhaps a house. For the rest of us, do you really expect your parents to provide for you after they’re gone? Do you think it will happen? Do you want to stake your future existence on their ability to provide for you beyond the grave?

So who does that leave? Ummm, that would be you and me. For all practical purposes, you are responsible for funding all of those years between when you quit working and when you quit breathing.

Which brings us back to 401(k) plans. For most of us, this is the most available and accessible way to save for retirement. You want one, you know you do. Stay tuned and learn more.

(P.S. For those of us working in the public sector, the equivalent of a 401(k) is a 403(b) account. There are differences, but the similarities are greater. If you can have one, you want one. Trust me.)