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RegionObama TransitionDaily Digest
Steve Decker cleans up in front of BankNorth on Wednesday.
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More Snow
The Berkshires received several inches of snow this morning, but not enough to close schools, unlike yesterday's sleety mess. Temperatures will drop into the 20s this afternoon. A few more snow showers are expected through the weekend. |
Duff'em If You've Got'em
 North Adams Regional Hospital went smoke-free Monday — so did all its sister sites, from Sweet Brook to Northern Berkshire Family Practice to the Women's Exchange. No ashtrays, no smoking: No butts about it. |
Wanted: Eagle Eyes
MassWildlife's annual eagle count runs Dec. 31 to Jan. 14. Anyone sighting one of the regal birds in Massachusetts is asked to participate.
Send date, time, location and town of eagle sightings, number of birds, whether juvenile or adult and observer's contact information to Mass.wildlife@state.ma.us. |
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What's PlayingSales FliersColumnists | Independent Investor
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Other StuffMars Rovers Mark 5 Years
 Spirit and Opportunity have been trekking the red planet for half a decade. Spirit hit the 5-year mark on Sunday; Opportunity will on Jan. 24. |
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Independent Investor: Today's 401(K) DilemmaBy Bill Schmick - February 21, 2008
iBerkshires Columnist
 | | Bill Schmick |
Can I afford Not to Contribute?
By now most companies have probably sent a memo or e-mail reminding us that it's time to decide how much we plan to contribute to our 401(K), 403(B) or 457 plan for this year.
Most likely many of us will stall until the last day and then contribute as little as possible or nothing at all. What is it about saving that bothers us so much?
Consider my choices this year. My employer is offering to match me dollar for dollar on the first 3 percent of my paycheck I contribute and a further 50 cents per dollar on the next 2 percent of my income I put into the plan.
Essentially, I'm being offered a raise for saving and yet I hesitate. Why would I turn down free money? Answer: Because I can't spend it right away, that's why, and I have to put an equivalent amount away for what seems like a long time without touching it.
Like so many other American workers, I tell myself I can't afford it but maybe that's not entirely true.
The maximum contribution this year for these tax-deferred contribution plans is $15,500 ($20,500 if you're over 50). Like an IRA, I will only pay ordinary income taxes on the money in my 401 (K) when I withdraw it at retirement. Any withdrawals prior to age 59 1/2 are subject to a 10 percent penalty tax although there are some hardship exceptions.
Unlike an IRA, automatic payroll deductions take money out of my pay before I even see it so I won’t be tempted to spend it.
So this year, before making my decision, I crunched some numbers. I immediately realized that the more money I put into my plan the less tax I'll pay in 2008, which means my take home pay will go up.
Let's say you make $36,000 a year and pay 5 percent of that into your company's retirement plan. You've just reduced your taxable income by $1,800. When tax time rolls around, you would use $32,200 as your starting point for computing the government's annual cut and that means getting some "real" money out of this deal in the form of lower taxes.
I also found out that many plans allow you to dip into your savings in the event of a family emergency. Hardships like high unreimbursable medical expenses, educational fees and tuition, payments to prevent eviction or mortgage foreclosure and down payments on first time primary residences are allowed. Loans are another available option.
You can actually borrow from yourself at a fixed rate and repay the loan with after tax payroll deductions. I compared that with the benefits of maintaining my taxable savings account yielding 4 percent in a local bank. No contest, my 401(K) plan wins hands down especially when I consider the investment options.
Most plans offer a smorgasbord of investments, mostly mutual funds, which are professionally managed by portfolio managers. I can pick from a variety of stock, bond or money market funds that invest in thousands of companies, securities and other investment opportunities. In a savings account, I'm on my own and any gains I might make are immediately taxable as well.
Finally, I did a "what if" exercise. Assuming for a moment I was 25 again and making $40,000 a year. I contributed $10,000 a year to my 401(K) earning 10 percent annually. At age 65, there would be nearly $4,870,000 in my plan but if I put off participating by even five more years, that sum dropped to $2,990,000.
So here I am, pencil poised above the maximum contribution line on my 401(K) application and still I hesitate. Sure, I recognize the benefits but how much can I really afford?
And then I recalled a speech last year by the chairman of the Federal Reserve before Congress. He warned that this nation was heading toward a retirement brick wall in Social Security benefits and he isn't the first Fed chief to sound that alarm. I pictured myself with no Social Security, spending my golden years on welfare. Shuddering, I reconsidered my question. Maybe it isn't how much I can afford to contribute but rather can I afford not to, given the state of the nation's retirement dilemma?
Bill Schmick is a registered investment adviser and portfolio strategist with Berkshire-based Dion Money Management, managing more than $800 million for middle class Americans from coast to coast. Direct your inquiries to Bill at 1-877-850-7942, Ext. 146 (toll free), or e-mail him at wschmick@dionmm.com. |
| Great article Thank you for your help. | | from: Conner | on: 02-22-2008 |
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| Nice article. I am sending it to my son to read so that he understands how much more he can make if he starts saving early. Thanks. | | from: Bill - NA | on: 02-21-2008 |
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