Financial Advice



Saving and investing wisely is not an easy achievement. How much do you need to save for retirement? Where should you put your money? There are thousands of financial advisors who offer differing opinions on these matters. But if there is one utterly clear maxim of saving for retirement it's this: contribute at least enough money to your 401(k) to maximize your employer's contribution.

Much to my shock and dismay, 39% of 401(k) participants don't follow this totally noncontroversial advice, according to a new study by Financial Engines, via the NY Times Bucks blog. That's crazy. Here's why maxing out your 401(k) is the biggest financial no-brainer you'll ever encounter. More from

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When your company promises to match some contribution to a 401(k), it's like giving you a raise. Refusing the match is like telling your company that you don't want extra money. Imagine an example where you make $1,000 per paycheck. Now imagine if your company agrees to match 50 cents per dollar up to 6% of your 401(k) contribution per paycheck. That means you can put up to $60 per paycheck into your 401(k) and your company will also contribute $30.

Did you see what just happened? You got a 3% raise. Sure, you had to contribute $60 of your gross income as well, but this money just becomes savings -- something you will surely need some day anyway. Unless you are one of the few people who believe Social Security alone will be sufficient to allow for a pleasant, comfortable retirement at a reasonable age.

Moreover, that $60 you contribute doesn't reduce your take home pay by 6%, because it's taken pre-tax. For example, let's say after all taxes are taken, your income would normally have been 30% lower. If you didn't contribute to your 401(k), your after-tax income would be $700. If you contribute $60 pre-tax, however, your after-tax income is $658 -- only $42 less, instead of $60. This is the second reason why it's so great to contribute to a 401(k): you can delay taxes on that money, so you won't feel like you're saving as much as you actually are.

Let's reflect on this scenario where you contribute to your 401(k) as described above. Your after-tax income declines by $42, but you save $90. This is one of the best deals you'll ever get, and it's virtually impossible to beat.

Let's consider poor reasons not to contribute enough to receive your full employer match:

I Want More Freedom Investing

Maybe you don't like your employer's 401(k) plan. You hate mutual funds. You think you can do better on Scottrade. Good luck with that. In the example above, imagine if you decided to shun your 401(k) and invest $42 (the difference in after-tax income) from each paycheck yourself instead. You would need an investment that would more than double your money -- even if you saved your 401(k) as pure cash. The return would have to be 114% to get $90.

I Worry About Losing Money in the Market

Investing is hard, so this is a fair point. But you would have to do incredibly poorly to lose more than you gain from your 401(k) match. For that $90 savings to decline below your $42 contribution, it would have to decline by more than 53%. Even from the Dow's peak prior to the financial crisis to the bottom it hit in early 2009, the market lost less than 50% -- and that's about as bad as it gets. Moreover, you can generally diversify your 401(k) holdings to include stocks, bonds, and cash.

I Can't Afford to Contribute That Much

Saving isn't a financial constraint: it's a choice. Unless you're living very near the poverty line, then it's possible to find ways to cut expenses. And slicing 4% off your take home pay won't require most people to dramatically change their lifestyle. Go out to dinner less often or wait until a movie comes out on video to see it. Move a few miles further out of town to get a cheaper rent. Remember, you aren't actually lowering your income by contributing to a 401(k); you just don't spend as much of your money immediately. In fact, you're actually implicitly increasing your income by maximizing your employer's match.

I Don't Want My Savings Tied Up

If you need to get at your 401(k) money for some reason before you retire, you will get hit with a penalty and be forced to pay taxes on it immediately. That means the money is essentially tied up. But this isn't a good reason to fail to contribute up to your full employer match.

First, some 401(k) plans allow leeway for when a true emergency hits, where the penalty won't apply. Second, even if a penalty does apply, will it really be greater than your employer match? In the example above, a 10% penalty tax would apply beyond the usual income tax that you would have paid anyway on the income that you contributed. For the example, that penalty would be $9, and you would also need to pay something like $9 in taxes on the employer's contribution. But your employer contributed $30. So again, even if you try to get at your money early, you're still $12 ahead by maximizing your employer contribution.

If you don't already contribute enough to your 401(k) to maximize your employer match, then you should. It's easily the smartest, easiest financial decision you'll ever make. You may want to ultimately save more than that through other methods, but this is the bare minimum saving that you should do.

The Million-Dollar Retirement Plan

Achieving millionaire status is a noteworthy financial goal. But saving $1 million doesn't necessarily mean you are ready to retire or that you will be able to afford a lavish retirement lifestyle. Here's what it takes to save that amount over a working career and how much income you can expect a $1 million nest egg to provide in retirement.


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Making your first million. Many people should be able to save $1 million for retirement if they start saving early enough. A worker who saves $5,500 per year beginning at age 30, gets a $1,500 401(k) match each year, and earns 7 percent annual returns will have $1,014,640 by age 65. However, someone who waits until age 40 to start saving will have to tuck away closer to $14,000 a year to reach $1 million by age 65, assuming the same 401(k) match and investment returns.

Those who do not get an employer 401(k) match or don't consistently save in a 401(k) plan will need to save even more on their own. "You may have to adjust for time frames when you were not contributing to your 401(k), such as when you are saving for a house or you change jobs," says Mark Fuller, president of Fuller Wealth Management in Broomfield, Colo. "Life happens, and you have got to be able to make some mid-course corrections along the way." Excessive fees and investment costs, 401(k) waiting periods and vesting schedules, and taking early 401(k) withdrawals or loans can also make it more difficult to become a millionaire. "It sounds easy and it sounds good on paper, but in actuality it is tough for people to do," says Doug Kinsey, a certified financial planner for Artifex Financial Group in Oakwood, Ohio. "People need to really keep their transaction costs to a minimum. If you shave off a couple of points a year in expenses, that goes a long way toward saving a million for retirement."

What $1 million will generate. We associate the word "millionaire" with luxury. Spread out over a 30-year retirement, $1 million will likely make you comfortable in many parts of the country, but not especially wealthy. "I have clients who have got a million dollars in retirement and they don't feel wealthy," says Jay Hutchins, a certified financial planner for The Wealth Conservatory in Lebanon, N.H. "It's not enough that you can put it in the bank and draw half a percent of income and live off it. You have to invest it and you have to take on risk." If you draw down 4 percent of your $1 million nest egg each year, you will receive about $40,000 annually for 30 years, before adjusting for inflation. To that amount you can add any Social Security or pension income you expect to receive. But you will likely need to subtract taxes, especially if most of your savings is in tax-deferred accounts including 401(k)s and IRAs, and account for inflation.

Making it last. You may have to adjust your withdrawal strategy in retirement as new expenses arise or cut back on discretionary spending such as travel or entertainment in years when your investments perform poorly. There's also inflation, will can erode your spending power in retirement. Most people have one major source of inflation-adjusted income: Social Security. Other strategies for staying ahead of inflation include holding Treasury inflation-protected securities, a government bond that promises a rate of return above inflation, certain inflation-adjusted annuity products, some exposure to stocks or stock-based mutual funds, and owning real estate. "If you're living off $50,000 a year today, once you factor inflation in there, you're going to need more in retirement," says Fuller. Depending on what you estimate your expenses will be in retirement, he says, "you need to make it a goal to have a seven-figure portfolio when you retire."