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 The
last thing you want to do with your retirement savings is
to leave it on autopilot.
But in today's fast-paced
world, where you practically need to take a week off from
work to sort through and choose among credit-card offers and
long-distance deals, you might be tempted to let your retirement
savings slide.
Could be a big mistake. Sometimes you
have to bird-dog those retirement accounts.
If you don't, you may be saving a whole
lot less for the future than you could be.
"I think people should be involved
in overviewing their assets for a number of reasons,"
says Susan Burns, a certified financial planner and president
of Snug Harbor Financial Planning Inc. in Marshfield, Mass.
Making
a plan
First, she says, you should map out a plan to figure out
what your retirement goals are and how to accumulate the money
to achieve those goals. Once you have gone through that complex
process, it pays to review and monitor the investments you
have made -- but not compulsively.
"People need to be careful if they
obsess too much over day-to-day fluctuations in the market,"
Burns says. "True success is defining how you want to
live and what your goals are, and managing your progress by
evaluating how you're on track with those goals."
Don't make the mistake of throwing money
into a retirement account and forgetting about it. You can
tinker with retirement accounts (increasing your contributions
when you get a raise, moving money around within the 401(k)
options you are given). You have quite a few choices.
'Autopilot'
savings
H.K. "Bud" Hebeler, a retired aerospace engineer
who runs a retirement-planning Web site called Analyze
Now, likens retirement savings to an airplane on autopilot:
You're not at the controls all the time, but you'd better
check periodically to make sure you're headed in the right
direction.
One time when you are especially likely
to take your hands off the controls of your retirement savings
is when you change jobs, especially if you move a long distance.
Let's say you have just changed jobs,
and you had a 401(k) account with your former employer. There
are a number of things you can do:
- If the balance of the 401(k) is less
than $5,000, your former employer can make you withdraw
it.
- If the balance is $5,000 or more, you
can keep the money where it is.
- You can "roll over" the balance
into your new employer's 401(k) plan if one is available.
When you complete a 401(k) rollover, the money goes directly
from one account to the other and you continue to reap the
tax advantages.
An advantage to rolling over your 401(k)
from the old plan to the new employer's plan is that the money
is more visible and you're less likely to forget about it,
Burns says. You can borrow against it, too. And maybe your
new employer's plan offers better choices or lower administrative
charges.
But there might be advantages to keeping
the old 401(k) where it is.
"I think you have to look at the
selection of plans available," Burns says. Perhaps your
former employer's 401(k) plan offers a multitude of choices,
including a dynamite investment fund that's growing like kudzu,
while your new employer's plan offers nothing comparable and
has higher administrative expenses to boot. Or your old 401(k)
is invested in a well-managed mutual fund that isn't accepting
new customers.
In those cases, it might make sense to
keep the money in the former employer's plan. You won't be
able to contribute more money to the account you had with
the old employer, though.
Keep in mind that if your employer offers
lousy choices in 401(k) investments, you can always point
out the problem and make suggestions.
Roll
over into an IRA
Another option is to roll over the 401(k)'s balance directly
into a "conduit" IRA.
You might want to roll over the 401(k)
into a conduit IRA if your new employer doesn't offer a 401(k)
plan, or a plan is offered but you don't like the investment
choices.
"If you can do better than the investment
choices you have in your 401(k), go ahead and roll it over
into an IRA," says Alec Abbott, a registered investment
adviser with Squar Milner Financial Services in Newport Beach,
Calif.
A conduit IRA has some important limitations.
It can be only a traditional IRA and should contain nothing
but the proceeds from one 401(k) account. An IRA set up this
way can be rolled over into a 401(k) later, perhaps when you
take a job with yet another employer. You won't have that
option if you add regular IRA contributions to an account
containing money rolled over from a 401(k).
When rolling over, it's best to make sure
that you don't touch the money; it should be transferred directly
from one institution to the other without going through your
hands. Otherwise, taxes will be withheld and you'll have to
pay a penalty if you don't establish the new account within
60 days.
Dangers
of going for the money
You can also cash out the old 401(k) if you're willing to
pay taxes and penalties. Experts don't recommend that you
spend your retirement money before you retire, but an emergency
such as long-term unemployment might force you to.
Hebeler, operator of Analyze Now, worries
that most workers aren't saving enough for retirement. He
says that the $2,000 annual limit on IRA contributions isn't
enough to ensure a comfortable retirement income, even when
added to Social Security benefits.
"You've got to save more than $2,000
a year unless you have an incredible pension," he says
-- and that counts out the vast majority of workers.
The $2,000 maximum annual contribution
limit on IRAs has existed for decades. Meanwhile, the limit
on contributions to 401(k)s roughly keeps pace with inflation.
In 1999, you can contribute up to $10,000 to a 401(k).
"I really think the government ought
to put a number like $10,000 or $30,000 or some number in
between there and make that the same number for every kind
of plan out there," Hebeler says.
-- Posted: Oct. 22, 1999
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