Act now for a more secure retirement

Market downturn doesn't have to mean personal disaster, but you will need to save more

November 30, 2008|By Gail MarksJarvis | Gail MarksJarvis,Chicago Tribune

When it comes to your money, you might have had trouble finding any reason to be thankful.

With the stock market down sharply and many a bond fund hit by the credit crisis too, 401(k)'s and other savings have been brutalized in one of the worst financial disasters ever. Retirement might be looking like an unattainable dream.

But you can be thankful for what you can control. Consider the following:

* If you have a job, you can save more.

Let's say you are 45, make $50,000 a year and you've been saving 6 percent of your pay, but the cruel stock market has battered your 401(k). And say your employer will match the first 3 percent of pay you put into your retirement savings.

In that case, you will have about $727,700 at retirement if you average a 5 percent return on your money annually until retirement in 20 years. But if you decide to dig a little deeper into each paycheck and save 8 percent of your pay instead of 6 percent, you can end up with about $768,000.

* If you haven't been taking advantage of the free money your employer gives you, use your 401(k) to receive every penny.

It comes in the form of matching money in 401(k) plans. Say you have 30 years until retirement, make $50,000 and have been saving 2 percent of your pay. Perhaps you have accumulated $20,000 over your working years, but you've been leaving money on the table because your employer is willing to match everything up to 3 percent of your pay.

So try to increase your savings just a little and start saving the full 3 percent. By the time you retire, you will have about $352,200 if you earn 5 percent a year on your money. But if you hadn't done what you needed to do to get all the matching money, you would have ended up with about $264,600.

If you want to experiment with your own savings to see what a larger contribution will do, try this calculator from Fidelity:

* If you planned to retire at 62, work a while longer.

Each year you wait will add about 7 percent to your annual Social Security benefit. So if you were to make about $18,000 a year at 62 in Social Security benefits, you could almost double your benefit if you worked to 70. (Examine your benefit at

In addition, working could let you save more from each paycheck and allow you to pay off your mortgage before you retire. Further, working might keep you from spending anything you have saved so far. If you have health insurance at work, it would save you from having to spend about $15,000 a year on health insurance while you wait for Medicare to kick in at age 65.

Let's say you have $400,000 remaining in your 401(k) after the stock market mess, and you are 55 and will work until 66. And during that time, you decide to save the maximum allowed for someone over 50 in a 401(k). That's $20,500 this year. But let's say you have been saving just $10,000 a year. If during the next 11 years you invest $20,500 a year in the 401(k) and average a 5 percent return on your investments and your employer match, you will have about $1.06 million at retirement. If you had continued saving just $10,000 a year, you would have accumulated only about $890,000.

You could prop up your savings even more if each year you put $6,000 into a Roth individual retirement account. By the time you retire, that Roth could contain about $89,500 and every penny will be yours free and clear. Uncle Sam will tax the money you remove from the 401(k), but you won't be taxed on the Roth money. You might appreciate that greatly if taxes rise, as some expect.

* If you are wasting money on investments, stop.

You cannot control the stock market, but if you have a Roth IRA or some other savings outside your 401(k), you can control what you spend.

You pay a fee to invest in mutual funds. It's called an "expense ratio," and finding a fund that charges you about a third of a percent tends to be a better deal than the average fund that charges 1.4 percent.

You might think you get what you pay for in expensive mutual funds. But that's usually not the case. Analysts at Morningstar Inc. have found that cheaper funds tend to be the long-term winners.

If you put $10,000 into the average fund charging 1.4 percent of the assets and earn 10 percent on your investments over 20 years, you will end up with about $51,000. If you instead chose the fund charging 0.31 percent, you'd have roughly $63,000.

* If you are more than 10 years from retirement, you have a good chance to earn back what you lost.

Typically investors make back what they have lost in the stock market within 2 1/2 years from the worst point in a bear market. But there are no guarantees: After the severe bear market of 1973-74, the Standard & Poor's 500 recouped in about seven years. During the Depression, it took 13 years.

Contact Gail MarksJarvis at

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