Pennsylvania Investment Observer

Saving for the long haul?

by Daniel J. Nestlerode

In this day and age we are required as Americans to take control and steer our own way through retirement. Company pension plans that had defined benefits are giving way to 401(k) plans. 401(k) plans are employee sponsored and with a good plan an employer will allow for some matching. In contrast, pension plans were provided by the company (a.k.a. the employer) and they provided you a steady income in retirement. 401(k)s put the ball in the employee's court. In addition, there is even talk of allowing us to have private accounts for social security. As more and more of the responsibility for our future lies in our own hands, how are we measuring up?

Americans tend to wait until later to save for retirement. We have all been there: where short term obligations (kids, college, house etc.) out weigh the long term goals. Studies show that most people don't start thinking seriously about retirement until they are 45 years old. Yet, they don't start saving seriously until they are 55 or older (What I like to call playing catch up). One of the biggest advantages that we can give ourselves is to take advantage of time. The earlier Americans start saving, the more they can take advantage of compound interest that, over time, really pays dividends (pun intended). Many people believe that they need a lot of money to get started...wrong! Whether 25 or 45, the most important thing is to get started. How many people could set aside $25 a month just by skipping a couple of nights out or not stopping by Starbucks a few times a month? The easiest way to start is to set up what is called an automatic investment plan. This means having the money withdrawn directly from your checking or savings account before you can spend it on life's little luxuries. You will be surprised how much you don't miss it and how it can add up over time. Once you get comfortable with one level, ratchet it up to say $40 or $50. (Especially if you get a raise, you won't miss what you never had.) An IRA or a Roth IRA can be set up my most people to save for retirement using automatic investing.

As mentioned above, one main way to save for retirement is an employer plan. This can be a 401(k), a 403(b), Simple IRA or Sep IRA. The main thing is use what you have. If you have an employer plan and they offer matching, try to put away enough to get the full match. (This means you double your money without lifting a finger.) One more very important thing, once money goes into a retirement plan DON'T TAKE IT OUT for reasons other than retirement. Penalties (usually taxation with a 10% penalty on your income tax for early withdrawal-before you are 59 1/2) are in place to discourage this practice but it doesn't seem to be working. A recent survey by Hewitt Associates, a human resources firm, showed that 45% of individuals participating in 401(k) plans opted to cash out of their retirement plan after leaving their job. Let me give you some free advice: Don't be one of them. A rollover is easy to do and you can thank yourself at retirement. On a side note, you can avoid needing to raid your retirement by setting up an emergency cash reserve in a non-retirement cash account, like a money market. Try to keep about three months expenses in the account so you have a nest egg if the floor falls out from under you or your employer. This way you won't need to pull money from retirement for expenses.

I guess the short and long of it is to start and start now. It's your responsibility to make sure you can enjoy your retirement.

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