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The importance of 401(k) plans to your retirement strategy

The importance of 401(k) plans to successful retirement preparedness was borne out by a survey American Express conducted in June 2002 among 2,000 working adult men and women who had recently left or lost their jobs. One finding was that 30 percent of those surveyed had not invested for retirement in their companies’ 401(k) plans.

Here is a list of recommendations based on the results of the survey:

Participate in the plan. Workers are encouraged to join their employers’ plans and take advantage of the tax benefits. Contributions can lower your income taxes, and the money also grows tax free until you withdraw it at retirement.

Don’t leave money on the table. When employees do not take advantage of the company match – especially when it is immediately vested – they are leaving money on the table.

Don’t underestimate the time value of money. Money invested over time may add up to a much larger sum. The American Express survey found that younger workers (ages 18 to 34), who had the most to gain, were far less likely than older workers to invest in their 401(k)s, losing the benefits of compounding.

Don’t underestimate the importance of starting to save. The survey found most of those not investing in their 401(k) plans made less than $50,000. Even if you can only save $50 or $100 a month, it’s still worthwhile. Your 401(k) contributions can be automatically deducted from your paycheck.

New job? Don’t cash out your 401(k). The American Express survey showed one out every 10 workers who changed jobs took a lump-sum cash payment from their 401(k)s, incurring a 10 percent early withdrawal penalty, plus state and federal income taxes.

Don’t let inertia drive your retirement savings. The American Express survey found that one out of every four workers left retirement assets invested in their former companies' plans. Another choice when changing jobs is to roll your 401(k) into an IRA. IRAs allow you to:

• choose and diversify your investments.
• provide continued tax-deferred growth potential.
• consolidate your retirement accounts for easier tracking and control.
• convert to a Roth IRA down the road.
• be the owner of your retirement savings account. With 401(k)s and other qualified plans, you are a participant and bound by the rules of the plan.

Money rolled into an IRA can potentially keep growing tax-deferred. Among survey respondents, 16 percent of those changing jobs rolled their 401(k)s into an IRA, and almost all said they would make the same decision again. Compare that to those who cashed out. More than half of that group expressed regret and said they would not make the same decision again.

Do the math. Have you ever calculated how much money you’ll need for retirement? Given increased life expectancy for many Americans and the weakened economy, it is a good idea to calculate how much money you need to save each year in order to meet your retirement goals.

Get help. Learn what your options are for retirement savings, especially if you find yourself changing jobs or nearing retirement. We encourage you to talk to a knowledgeable financial advisor. For more information, click here, or call the IRA Solutions Center toll-free, (866) IRA-ADVICE.

October 24, 2002

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