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Thursday, February 26, 2009

Does Your 401k Need Help?

By David C Lewis, RFA

For most Americans who have not started planning for their retirement,individual 401k plans seem like a "good bet". One problem with this approach is the investor's reliance on employer matching for the plan. This could cause an employee to rely too much on the employer and not contribute enough to savings. Nothing will give you a wake up call like using a retirement calculator. You can find them on the internet from a variety of places. Retirement planning is hard, and it isn't something you just throw together without analyzing your needs and wants.

Because there are so many variables in preparing a financial plan for retirement, the process can be difficult, at best, even when you are using a professional advisor. Some of these variables are: the age at which you retire, the age at which you start your savings, the amount you save for retirement, how much your retirement savings earn over the years and into retirement, how much debt you have, if any, at the age you plan to retire, and the quality of your health entering retirement and how long you live after retirement.

You also need a way to account for fiscal irresponsibility on the part of Government (i.e. inflation) and what that will do to your retirement savings. On the internet there are dozens of retirement calculators available, sponsored by retirement organizations, investment companies and other businesses in the money management business that can help you do this. What most of the calculators will show you, is that for most people, even relying on Social Security, you will need a lot of retirement savings to maintain a near pre - retirement standard of living.

The economy will probably recover, and continue to grow. However with inflation at anywhere between three and five percent, you are going to be gaining and losing value in your investments based on how much your savings is being eroded.

Years ago our parents and grandparents, grew up in a time when a $50 a week wage was respectable income, and even during mid life that respectable income had quadrupled to $200 a week. But now, more than 50 years later, it would be foolish to expect to be able to live off $200 a week, and the $50 a week income is minor in today's economy.

If you make $500 or $1,000 a week, you can expect a similar phenomenon when you retire. A retirement calculator will show that you should have a retirement nest egg near $1 million dollars to retire comfortably in 20 or 30 years.

An online calculator showed that an adult starting with assets of $100,000 and adding $4,000 year to that would retire with almost $900,000 but end up broke by age 85.

Part of managing your income is setting aside savings and investing a part of it (note, not ALL of it) for your future. Even though it's difficult to forecast the future, it is necessary due to the nature of human beings and the requirement of long-range planning. There is a wealth of assistance available on the internet to get you started, and professional advisors ready to help when needed.

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