Get Smarter About Your Retirement
Sunday, August 20, 2006
NEW YORK -- The professionals who managed your pension fund used to ensure you'd be ready for retirement. That was their job. At many companies, pensions are no longer a promise, which means you might need to do the work of a professional retirement fund manager yourself.
Of course, you probably never took a class on money management or personal finance. You may find the personal finance section of bookstores and libraries a bewildering forest. And besides, you already have plenty of work at your real job.
You also lack one of the great advantages most of the professionals have: With each new worker, a corporate pension plan puts away a little more money, with a much longer horizon. The only beneficiary of your plan is you, so the horizon is much more solid.
You can do a few simple things to be smarter about your retirement. If you're reading this, the chances are great that you're already doing them. But if people you know could be making smarter plans for retirement, collar them. We're making big mistakes when it comes to retirement planning, and the sooner we fix them, the better off we'll all be. The person you badger today may thank you with an expensive dinner 20 years from now.
· Are you passing up your company's 401(k) plan? A pension bill President Bush signed Thursday will automatically enroll workers in their company's 401(k); you'll have to work to drop out, not opt in.
That's expected to help participation, which is anemic. One-third of all eligible employees failed to contribute to their work 401(k) plans in 2004, according to a study of its plan participants by the Vanguard Group Inc., a mutual fund company that runs employee contribution plans. The 2004 numbers are the most recent that are available.
While you may think you can't afford to be part of your company's plan, remember that if you can put away just 1 percent of your salary, you should. After all, your employer is basically offering you a tax shelter. If you invest even 1 percent of your income in the 401(k) plan, that's 1 percent you won't have to pay taxes on. And if your employer matches even a small part of your 401(k) contribution, it's offering you extra money, with no current tax consequences.
· Do you know the limit on the percent of your salary you can contribute? There is a dollar limit to your contributions, but the percentage you can contribute may be higher than you think. If you're one of the rare people who can afford to contribute more than 15 percent to your 401(k) plan, don't assume that's the limit. You may be allowed to contribute more.
Under the law, the 2006 pretax contribution limit is $15,000, but if you're older than 50, you can make an additional catch-up contribution of $5,000 per year. Only 9 percent of participants in funds administered by Vanguard saved the maximum amount allowed under the Internal Revenue Code.
· Are you betting the house? Vanguard found that 13 percent of participants had their entire account invested in fixed-income securities; 21 percent held all-equity portfolios. About one-third of Vanguard plans offering company stock had a concentrated position exceeding 20 percent of plan assets.
· Are you considering your funds' costs? Half the people who buy funds directly look at costs, according to a survey by the Consumer Federation of America. But only 30 percent of people who buy through a work plan and 33 percent of those who buy through a professional look at costs, their survey found.
· Have you checked out your planner? The Consumer Federation found that 28 percent of mutual fund owners who bought most of their funds from a financial services professional said they relied totally on that professional's recommendation without doing any research. None.
"Telling these investors to compare costs, risks, investment strategies and past performance of the funds they are considering may be sound advice, as the recent mutual fund sales scandals make clear, but it is advice that seems unlikely ever to be widely heeded," said Barbara Roper, the Consumer Federation's director of investor protection.
A more realistic approach, she said, was to educate investors on how to choose and work with a financial professional. To that end, the Consumer Federation is urging the Securities and Exchange Commission to make it a top priority to develop a uniform, plain-English, up-front disclosure document that investors can use to determine what services financial professionals provide, how they're compensated (for instance, are they dependent on commissions they get from selling a fund?), potential conflicts of interest, legal obligations and any disciplinary records.
Until that happens, you can check whether your planner is a Certified Financial Planner at http:/