Retirement Made Easier: Remove Temptation


Recently the Obama administration announced plans to make saving for retirement easier. Their underlying principle: removing temptation.

But there’s no need to wait for the new rules to take effect. You can make the key moves on your own to keep your retirement plans on track.

The trick to any long-term investment strategy is to get started, to keep at it and to make minor adjustments as needed (rather than big changes to catch up).

But excuses get in the way.

Signing up for a 401(k) doesn’t seem like the top priority when you start a new job. A raise looks like a chance to spend more rather than to boost your retirement savings. And an income tax return looks like a windfall for funding your next vacation.

So the administration is making it easier to avoid these pitfalls.

One step is to make it simpler and faster for employers to set up automatic enrollment for 401(k)s and simple IRAs, another form of workplace retirement investment.

Instead of waiting for new employees to sign up, the employer will automatically enroll them. (The Administration is also asking Congress to allow companies that don’t offer 401(k)s to automatically enroll employees in IRAs.)

While employees can opt out, experience at companies that currently use automatic 401(k) enrollment shows they generally don’t. Automatic enrollment is credited with increasing employee participation rates to more than 90%, from 70%.

The administration will also make it easier for employers to automatically increase an employee’s 401(k) contributions over time.

Many employees, whether they enroll on their own or are signed up automatically, quickly move 401(k) or IRAs to the backburner, rarely revisiting their accounts to keep contribution levels up to date.

The penalties can be severe. The Retirement Income Calculator shows that if at age 30 you started contributing $5,000 a year to a 401(k) you could have $930,511 when you turn 65, assuming an 8% annual return.

If you increased your annual contributions by 3% each year to match inflation, the nest egg would rise to $1,292,920.

So, don’t wait for your employer to make annual contribution increases automatic. Do it yourself.

In another change, the administration will allow taxpayers to automatically use refunds to buy U.S. Savings bonds. Taxpayers already can have refunds directed into IRAs or other types of savings.

By keeping the refund from passing through your checking account, you avoid the temptation to spend it. Each year, more than 100 million taxpayers receive refunds, which average around $2,000. Investing that amount every year for 35 years, and increasing it by 3% a year, could produce a nest egg of more than $500,000.

Still another change will allow employees who leave their jobs to put cash, like that for unused vacation time, into 401(k)s or similar plans. Again, investing these funds rather than spending them can boost retirement income.

Finally, the administration has put together simple, plain-English documents showing employees how best to handle assets in 401(k)s and similar plans when they leave their jobs. Many employees take cash withdrawals that trigger taxes and penalties, rather than leaving the accounts alone or rolling them over to new tax-sheltered accounts like IRAs.

While departing employees often have the right to keep their 401(k)s, rolling over to an IRA can be advantageous because IRAs offer more investment choices. Most of the big brokerage and mutual fund companies have Web sites explaining 401(k) rollovers. T. Rowe Price (Stock Quote: TROW) has extensive materials on its site, for example.

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