IF YOU'RE YOUNG and your company just adopted a cash-balance plan (or you just adopted your company), you may have come away from the previous page breathing a sigh of relief. After all, younger employees tend to do much better than their older colleagues when it comes to these new programs.
But the truth is, even if your employer is being generous with your cash-balance distribution, the growth of your balance is usually limited to a fixed-income-caliber return — say 5% to 6% a year. And at that rate over the long term, you can forget about that fancy retirement home in Key West.
Here's an example. Suppose you earn $60,000 and your company makes a generous cash-balance contribution to your account of 8%, or $4,800, in your first year of employment. That's not bad, especially after you call up your friend and discover that his company — which has a 401(k) — only matched his 3% contribution. Since he also earned $60,000, his 3% savings, plus the 3% match, came to just $3,600.
But while your savings are put into an account earning 6% interest, he's free to put his into a stock-based mutual fund that averages 10% annually. Using the compounding calculator, you can see that his $3,600 would grow to more than $24,000 over the next 20 years, while your $4,800 would just top $15,000 at that 6% rate. As you can see, the freedom a 401(k) offers to chase better returns isn't a benefit to be scoffed at.
So what do you do? First of all, remember that if your company is contributing 8% of your salary, the least you could do is pony up 3% or 4% to spread among your tax-advantaged and taxable options. After all, you should have salary to spare if you aren't making any of your own contributions to your company retirement plan. If you're lucky enough to work for a company that offers both a cash-balance plan (or a pension) and a 401(k), be sure to max out your 401(k) contributions. Then, look into a Roth IRA if you qualify. If your AGI is too high for that, there's always a nondeductible IRA.
Bottom line? Your retirement strategy should be a multipronged attack. This means that you'll likely participate in 401(k)s, IRAs, ESOPs, cash-balance plans and pensions before you kiss your working days goodbye. But the important thing is to save steadily. You can easily arrange for automatic monthly withdrawals of $50 or more from your bank account to an IRA or other savings account. Chances are, once you've set up the account, you won't even notice that the money is missing.
IF YOU'RE YOUNG and your company just adopted a cash-balance plan (or you just adopted your company), you may have come away from the previous page breathing a sigh of relief. After all, younger employees tend to do much better than their older colleagues when it comes to these new programs.
