Retirement Guy. 5 Simple Ways To Save More

Copyright 2010 Consumers Union of U.S., Inc.All Rights Reserved

Consumer Reports Money Adviser

July 2010

SECTION: Pg. 15 Vol. 7 No. 7

LENGTH: 710 words

HEADLINE: RETIREMENT GUY. 5 SIMPLE WAYS TO SAVE MORE: Here’s how to keep at least one recession-inspired resolution.

Seems like nary a week goes by without a new survey on how our attitudes toward retirement planning have changed since the downturn. Millions of us are vowing to save more, spend less, reduce our reliance on credit, and, in general, do all the prudent, party-pooper stuff we should have been doing in the first place.

In a March report from the Society of Actuaries, for example, nearly three-quarters of survey respondents admitted they should save more money. That’s easier said than accomplished, of course, especially in a time of high unemployment and low or no raises for those of us lucky enough to have a job. But here are a few ideas to consider before the impulse wears off.

1 Focus on your 401(k). The conventional advice from people like me is to put at least enough into your 401(k) to get the full employer match. That’s good as far as it goes, but these days I wouldn’t stop there. Because 401(k) investing is so automatic, it offers those of us who are inclined to dither about money decisions an easy way to overcome our indecisiveness.

So unless the investment choices in your 401(k) are truly dreadful, or you have reason to believe that your company plan is run by pirates, it should probably be your primary savings vehicle and you should fund it to the max if you can possibly afford to. The limits are $16,500 for anyone up to 50; $22,000 for those 50 and older. Incidentally, if you do think your 401(k) administrators are engaging in financial shenanigans, you should contact the nearest office of the Employee Benefits Security Administration, part of the U.S. Department of Labor.

2 Start a spousal IRA. A so-called nonworking spouse can still open an IRA based on the working spouse’s income. Whether it’s fully, partly, or not at all deductible will depend on the working spouse’s earnings and whether he or she is covered by an employer’s plan. Current IRA maximums are $10,000 per couple; add an extra $1,000 for each of you over 50. This is all explained in IRS Publication 590, “Individual Retirement Arrangements,” available at www.irs.gov.

3 Moonlight to fund an SEP-IRA. Even if you don’t qualify for a regular, deductible IRA, you can open a Simplified Employee Pension IRA if you have self-employment income. And it might be worth starting a little business just for this urpose. One reason SEPs are attractive is that they let you put away and deduct more money than conventional IRAs do: up to $49,000 or 25 percent of your compensation, whichever is less. (The 25 percent is actually based on your net earnings, making it a trickier calculation than it first appears. But your tax software or a capable preparer can handle it.) The rules on SEPIRAs are detailed in IRS Publication 560, “Retirement Plans for Small Business.”

4 Scrutinize your Social Security statements. Another way to save more is to lose less. Each year the Social Security Administration should be sending you a statement showing your past earnings and likely future benefits. Your first impulse might be to file it away with a quick glance at best, but it’s worth taking a few minutes to make sure it properly reflects your earnings record, which will help determine your eventual benefits.

Though Social Security probably won’t be your sole source of retirement income, you might as well not lose anything you have coming. Plus, it might be your only source of inflation-adjusted income. Most traditional corporate pensions provide fixed benefits, notes Stanley F. Ehrlich, a fee-only financial planner in Westfield, N.J., and they can lose spending power every year you’re retired. (More about inflation in a future column.) If you detect what you think is an error, contact Social Security pronto. Instructions are on page 3 of the statement.

5 Don’t forget your nonretirement accounts. Not all of your retirement money has to be in a strictly defined retirement account, like a 401(k) or an IRA, of course. In fact, it’s wise to have some cash that you can withdraw without tax penalties, preretirement, if you need it. A good way to build those accounts is with irregular income like bonuses, inheritances, tax refunds, and even whatever money you can save by brown-bagging your lunch now and then. It all adds up, and one of these days may come in handy.

LOAD-DATE: July 12, 2010

Next