Category Archives: Retirement

Ideas for Saving Your 401(k) Account

A recent article on CNNMoney discusses some proposals to temporarily or permanently change some parts of 401(k) plans and your retirement. With a change in office coming (and a controlling Congress), I can see some of these happening. Even though the ideas may not be the best, I imagine some individuals will take advantage of these.

Temporary Removal of Hardship Withdraw Penalty

While running for President, Obama proposed to temporarily remove the 10% penalty for hardship withdraws from  IRAs and 401(k)s. You would be able to withdraw up to 15% of your plan or $10,000. However, don’t forget that you will still have to pay income taxes on the withdraw. They will automatically withhold 25%.

I personally do not have a 401(k), but I can see many individuals taking advantage of this. I think it is a wrong move because you will be selling investments when they are way down. As always, you want to buy low and sell high. This would be the opposite. It also just gives individuals the chance to blow some of their retirement money and put more of a burden on the government when these people end up solely reliant on Social Security during their retirement. I feel that people should be buckling down and just spending less. Many of these people that think they “need” to tap their retirement are still spending the same as they were before. A hardship withdraw should be a last resort.

Suspension of Required Minimum Distributions

For individuals over the age of 70 1/2, Obama has proposed suspending the required distributions for 401(k)s and traditional IRAs. If you do not already know, once you reach age 70 1/2, you are required to begin taking money out of these accounts. Since they are tax-deferred accounts, this ensures that the government will collect the income taxes from the account.

I really like this idea. It will allow retirees to keep their investments and not force them to sell just to take the distribution. It may also help with market conditions as it may cut down on sales of securities (which drives prices down). However, it will more than likely help increase the national debt due to reduced tax income for the government. I know most of you probably don’t care about that, but I think it is important. I don’t like the idea of the US going bankrupt.

The Automatic IRA

This idea has been introduced by a nonpartisan group and has been endorsed by Obama. This plan would require companies without a 401(k) to enroll their employees in a payroll deduction program. No matching contribution would be required and the employee would be able to opt out.

I’m not sure if this will help much unless the company offers some type of match. Sure, it will help people save, but what is stopping them from taking it right out or opting out? Not much. It just seems like a nuisance to me.

National Savings Plan

Several months ago, this type of plan got very little traction in Congress. However, a proponent of the plan was asked to testify on capital hill recently and would suggest it may be getting some support. There are many different ideas on this but the one mentioned in the article talks about a retirement savings account that would have a guaranteed 3% inflation-adjusted return.

I’m not sure how I feel about this one and I look forward to hearing how you feel. The inflation-adjusted return means that this would be the return after inflation is taken into account. A very basic example would be if you have 3% inflation and a 8% return, your inflation-adjusted return would be 5%. In any case, a 3% inflation-adjusted return is not the worst I have seen!

Can you think of any other ideas that would help you out financially when it comes to retirement?

Saving for Retirement in College?

You must be thinking to yourself, is this guy crazy? Why on earth should you save for retirement when you haven’t even started a career yet? The answer to that question is the miracle of compound interest. Compound interest is where you not only earn interest on your original investment, but you also earn interest on your interest. For example, if you put $1,000 into an account earning 5%, at the end of year one you will have $1,050. As long as you let the $1,050 in the account, at the end of year two you will have $1,102.25. In year two, you earned $50 on your original investment plus an additional $2.25 on the interest you received from year one. You may be thinking that this seems very minor, and for the first few years it is. However, as time goes on, interest keeps adding up and compounding. Let’s look at a more complex example to see more drastic numbers. If you start saving just $100 a month at the age of 18 and continue doing that until you are 65, you will have $621,238 assuming a modest 8% return. Over those 47 years, you would have invested only $56,400 of your own money and the rest was the result of compounding interest. However, the longer you wait to start investing, the less effective compound interest will be.

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