If you work at a company that offers a 401(k)
plan, especially if the plan offers matching contributions, that
401(k) plan may be the most important part of your retirement
investment plan. But should it be the only part?
In 2009, the maximum annual 401(k) contribution
is $16,500, not including employer matching contributions. If
you are at least 50 years old, you can contribute an additional
$5,500 in 2009, if permitted by the plan. Your plan may impose
lower limits to ensure that it complies with nondiscrimination
rules.
Yet, if you're over 40 and haven't started
saving for retirement, even these large annual contributions may
not be enough to reach your retirement goals. Or, if you have
been saving regularly, recent stock market declines may have drastically
reduced your savings. Here are five questions to help you decide
whether your 401(k) plan is the only plan you'll need for retirement:
- What kind of lifestyle
do you want to fund in retirement? You'll find general
rules of thumb indicating you need anywhere from 70% to over
100% of your preretirement income during retirement. How much
you'll need depends on your individual circumstances. If, for
example, your mortgage will be paid off and you plan to stay
home and watch your grandchildren during retirement, 70% of your
preretirement income may be sufficient. If, on the other hand,
you plan to travel extensively, 100% may be a better number.
- How much can you count
on from Social Security? Social
Security benefits were never designed as the sole source of retirement
income, but they still are a valuable source of income. Those
with lower incomes will find that Social Security replaces a
higher percentage of their preretirement income than those with
higher incomes. For 2009, the maximum Social Security retirement
benefit for a worker retiring at full retirement age is $2,323
per month, with the average benefit totaling $1,153.
- How much does your
employer contribute to your 401(k) plan? The $16,500 maximum
contribution to your 401(k) plan does not include employer contributions.
Employer-matching contributions vary by plan, but a typical match
is 50 cents for every dollar contributed, up to a maximum of
6% of your pay. However, due to these tough economic times, many
employers are reducing or eliminating matching contributions.
If your employer offers a match, make sure you take full advantage
of it. A generous matching contribution can contribute substantially
toward your retirement.
- What are your average
returns on your 401(k) investments? You
can only invest in investments offered by your 401(k) plan. But
within those parameters, select investments that match the long-term
nature of your investments and that will help grow your retirement
funds over time. This is especially important now that stock
market declines have substantially reduced most 401(k) balances.
- What other sources
of income can you count on in retirement? If you already have
other retirement assets, you might not need to count as heavily
on your 401(k) plan. Other potential sources of retirement income
might include a defined-benefit pension plan, individual retirement
accounts (IRAs), an inheritance, or other investments.
