Cashing In on 401(k)s

Cashing in on 401(k)s

Daniel Sabedra is following this advice. Like most 401(k) investors, Sabedra, 59, wasn't able to save through a 401(k) throughout the past quarter century. The Davison, Mich., resident, who serves as a general manager at a truck equipment distributorship, notes that his firm only started its 401(k) in 1992. Moreover, like most investors, Sabedra was dinged by the recent bear market--his account lost around a quarter of its value.

To make up for lost ground, Sabedra didn't change his investment strategy. Instead, he says, "I'm just trying to save as much as I dearly can." Because of his employer's plan rules, Sabedra has been allowed to stuff away only around 7 to 10 percent of his salary each year. But recently, he has supplemented his 401(k) with savings in IRA s and outside accounts to the point where he is close to setting aside 23 percent of his annual salary.

This is a smart move. T. Rowe Price recently crunched the numbers and found that saving 15 percent a year--or even better, 25 percent annually--is what's needed to meet one's retirement goals. That is considerably more than the average person saves.

Utilize catch-up savings options to boost your savings rate. Stephen Utkus, who heads up the Vanguard Center for Retirement Research, notes that "if you're in your 40s and 50s and have already saved three or four times your income, you're not going to have much difficulty" meeting your retirement goals. But if you're in your 50s and you've amassed only one or two times your salary, you've got some work ahead, he says.

Fortunately, Uncle Sam allows workers 50 and older to make up for lost time through so-called catch-up provisions for both IRA s and 401(k)'s. In 2006, older boomers are allowed to stuff an additional $5,000 into their 401(k)'s, over and above the federal 401(k) annual cap of $15,000. Even workers who feel they're on track to meet retirement goals would be wise to take advantage of these catch-ups.

Take Steve Rowlan, an environmental engineer who lives in Charlotte, N.C. Rowlan turns 50 this year. While he's confident that his 401(k) is large enough to meet his retirement needs, Rowlan still plans to take advantage of the catch-ups. Why? The way he figures it, he's earning more than he ever has in his career. Therefore, it makes sense "to defer as much as I possibly can to keep the tax man away," he says.

Don't take unnecessary risks in your 401(k). Karen McIntyre, a financial planner in Spring House, Pa., says a big mistake some older boomers make is swinging for the fences at the end of their careers in hopes of making up for lost time. But if you load up on risky stocks, "you may end up doing more damage than good," she says.

Think about it: If you're 60 and have only $136,000 saved up, it would take annual gains of 36 percent to turn that $136,000 into $625,000 in just five years. Good luck trying to find that magic bullet. And good luck avoiding major losses.

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